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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by Allmerica Financial Life Insurance and Annuity Company
("Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are collectively referred to herein as the "Contracts." The
following is a summary of information about these Contracts. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the contract's Variable
Account, known as Separate Account VA-K. The Assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in shares of an underlying
mutual fund.
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in a Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period the
value may be increased or decreased by a Market Value Adjustment. Assets
supporting allocation to the Guarantee Period Accounts in the accumulation phase
are held in the Company's Separate Account GPA.
Certain additional information about the Contracts is contained in a Statement
of Additional Information, dated July 8, 1996 as may be amended from time to
time, which has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Table of Contents for the Statement of
Additional Information is listed on page 3 of this Prospectus. The Statement of
Additional Information is available upon request and without charge. To obtain
the Statement of Additional Information, fill out and return the attached
request card or contact Annuity Customer Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, Massachusetts
01653 1-800-533-2124.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK
OR CREDIT UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER
FEDERAL AGENCY. INVESTMENTS IN THE CONTRACTS ARE SUBJECT
TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED JULY 8, 1996
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.............. 3
SPECIAL TERMS............................................................. 4
SUMMARY................................................................... 5
ANNUAL AND TRANSACTION EXPENSES........................................... 7
CONDENSED FINANCIAL INFORMATION........................................... 10
PERFORMANCE INFORMATION................................................... 11
WHAT IS AN ANNUITY?....................................................... 13
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY............................. 13
RIGHT TO REVOKE OR SURRENDER IN SOME STATES............................... 14
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND DELAWARE GROUP
PREMIUM FUND, INC........................................................ 14
VOTING RIGHTS............................................................. 17
CHARGES AND DEDUCTIONS.................................................... 18
A. Annual Charge Against Variable Account Assets..................... 18
B. Contract Fee...................................................... 18
C. Premium Taxes..................................................... 19
D. Contingent Deferred Sales Charge.................................. 19
E. Transfer Charge................................................... 22
DESCRIPTION OF THE CONTRACT............................................... 23
A. Payments.......................................................... 23
B. Transfer Privilege................................................ 24
C. Surrender......................................................... 24
D. Withdrawals....................................................... 25
E. Death Benefit..................................................... 26
F. The Spouse of the Contract Owner as Beneficiary................... 27
G. Assignment........................................................ 27
H. Electing the Form of Annuity and the Annuity Date................. 27
I. Description of Variable Annuity Options........................... 28
J. Norris Decision................................................... 29
K. Computation of Contract Values and Annuity Benefit Payments....... 29
GUARANTEE PERIOD ACCOUNTS................................................. 31
FEDERAL TAX CONSIDERATIONS................................................ 33
A. Qualified and Non-Qualified Contracts............................. 33
B. Taxation of the Contracts in General.............................. 33
C. Tax Withholding and Penalties..................................... 34
D. Provisions Applicable to Qualified Employer Plans................. 35
E. Qualified Employee Pension and Profit Sharing Trusts and Qualified
Annuity Plans.................................................... 35
F. Self-Employed Individuals......................................... 35
G. Individual Retirement Account Plans............................... 35
H. Simplified Employee Pensions...................................... 36
I. Public School Systems and Certain Tax-Exempt Organizations........ 37
J. Texas Optional Retirement Program................................. 37
K. Section 457 Plans for State Governments and Tax-Exempt Entities... 37
L. Non-individual Owners............................................. 37
</TABLE>
2
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<TABLE>
<S> <C> <C>
REPORTS................................................................... 38
LOANS (QUALIFIED CONTRACTS ONLY).......................................... 38
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT.............................. 38
LEGAL MATTERS............................................................. 38
FURTHER INFORMATION....................................................... 38
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................... 39
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT........... 40
APPENDIX C -- THE DEATH BENEFIT........................................... 43
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................... 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES.................................................................. 3
UNDERWRITERS.............................................................. 3
ANNUITY PAYMENTS.......................................................... 4
PERFORMANCE INFORMATION................................................... 5
FINANCIAL STATEMENTS...................................................... 8
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
3
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate and to which all or a portion of a payment
or transfer under this Contract may be allocated.
FIXED AMOUNT ANNUITY: an Annuity providing for annuity benefit payments which
remain fixed in an amount throughout the annuity benefit payment period
selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
Separate Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contracts invests exclusively in the shares of a corresponding series
of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment Contract.
UNDERLYING FUNDS: the Equity/Income Series, High Yield Series, Capital Reserves
Series, Money Market Series, Growth Series, Multiple Strategy Series, Value
Series, Emerging Growth Series, the International Equity Series, and the Global
Bond Series of Delaware Group Premium Fund, Inc.
UNDERLYING INVESTMENT COMPANY: Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, withdrawal, or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's Separate
Accounts, consisting of assets segregated from other assets of the Company. The
investment performance of the assets of the Variable Account is determined
separately from the other assets of the Company and are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY: an Annuity providing for payments varying in amount in
accordance with the investment experience of certain Underlying Funds.
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SUMMARY
INVESTMENT OPTIONS. The Contract permits net payments to be allocated among the
Sub-Accounts, the Guarantee Period Accounts and the Fixed Account. THE FIXED
ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
SIMILARLY, NOT ALL SUB-ACCOUNTS MAY BE AVAILABLE IN ALL STATES.
SUB-ACCOUNTS -- The Sub-Accounts are subdivisions of the Variable Account,
established as the Company's Separate Account, VA-K. The Variable Account is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, (the "1940 Act") but such registration does not involve the
supervision of the management or investment practices or contracts of Variable
Account by the Securities and Exchange Commission (the "SEC").
Each Sub-Account available under the Contract invests its assets without sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. ("DGPF"). DGPF is an open-end, diversified series investment company. The
Fund consists of ten different series: the Equity/ Income Series, High Yield
Series, Capital Reserves Series, Money Market Series, Growth Series, Multiple
Strategy Series, Value Series, Emerging Growth Series, International Equity
Series, and Global Bond Series ("Underlying Funds"). Each Underlying Fund
operates pursuant to different investment objectives, discussed below.
INVESTMENT IN THE SUB-ACCOUNT. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Funds. There can be no assurance that the investment objectives of
the Underlying Funds can be achieved or that the value of a Contract will equal
or exceed the aggregate amount of the purchase payments made under the Contract.
For more information about the Variable Account, the Company and the investments
of the Underlying Funds, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT
AND DELAWARE GROUP PREMIUM FUND, INC." The accompanying prospectuses of DGPF
describe the investment objectives and risks of each of the Underlying Funds.
Dividends or capital gains distributions received from an Underlying Fund are
reinvested in additional shares of that Underlying Fund, which are retained as
assets of the Sub-Account.
GUARANTEE PERIOD ACCOUNTS -- Assets supporting the guarantees under the
Guarantee Period Accounts are held in the Company's Separate Account GPA, a
non-unitized insulated separate account. However, values and benefits calculated
on the basis of Guarantee Period Account allocations are obligations of the
Company's General Account. Amounts allocated to a Guarantee Period Account earn
a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available seven Guarantee Periods ranging from three
to ten years in duration (excluding a four year Guarantee Period). Once
declared, the Guaranteed Interest Rate will not change during the duration of
the Guarantee Period. If amounts allocated to a Guarantee Period Account are
transferred, surrendered or applied to an annuity option at any time other than
the day following the last day of the applicable Guarantee Period, a Market
Value Adjustment will apply that may increase or decrease the account's value.
For more information about the Guarantee Period Accounts and the Market Value
Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT -- The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and minimum rate of interest. Additional excess interest may be
declared periodically at the Company's discretion. Furthermore, the initial rate
in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see Appendix A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
5
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TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Contracts permit
amounts to be transferred among and between the Sub-Accounts, the Guarantee
Period Accounts and the Fixed Account, subject to certain limitations described
under "Transfer Privilege."
ANNUITY BENEFIT PAYMENTS. The owner of a Contract ("Contract Owner") may select
variable annuity benefit payments based on one or more of certain Sub-Accounts,
fixed-amount annuity benefit payments, or a combination of fixed-amount and
variable annuity benefit payments. Fixed-amount annuity benefit payments are
guaranteed by the Company.
See "DESCRIPTION OF CONTRACT" for information about annuity benefit payment
options, selecting the Annuity Date, and how annuity benefit payments are
calculated.
REVOCATION RIGHTS. An individual purchasing a Contract intended to qualify as
an Individual Retirement Annuity ("IRA") may revoke the Contract within 10 days
after receipt of the Contract. In certain states Contract Owners may have
special revocation rights. For more information about revocation rights, see
"RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY" and "RIGHT TO REVOKE OR
SURRENDER IN SOME STATES."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Contracts, payments are not limited as
to frequency and number, but no payments may be submitted within one month of
the Annuity Date. Generally, the initial payment must be at least $600 ($1,000
in Washington) and subsequent payments must be at least $50. Under a monthly
automatic payment plan or a payroll deduction plan, each payment must be at
least $50. However, in cases where the contribution on behalf of an employee
under an employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Contract. In addition, the Internal Revenue Code imposes
maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGE. No sales charge is deducted from payments
at the time they are made. However, depending on the length of time that the
payments to which the withdrawal is attributed have remained credited under the
Contract a contingent deferred sales charge of up to 7% may be assessed for a
surrender, withdrawal, or election of an annuity for a commutable period certain
option or any period certain option for less than 10 years.
B. ANNUAL CONTRACT FEE. A $30 Contract Fee will be deducted from the
Accumulated Value under the Contract for administrative expense on the Contract
anniversary, or upon full surrender of the Contract during the year, when the
Accumulated Value is $50,000 or less. The Contract Fee is waived for Contracts
issued to and maintained by the trustee of a 401(k) plan.
C. PREMIUM TAXES. A deduction for State and local premium taxes, if any, may
be made as described under "Premium Taxes."
D. VARIABLE ACCOUNT ASSET CHARGES. A daily charge, equivalent to 1.25% per
annum, is made on the value of each Sub-Account at each Valuation Date. The
charge is retained for the mortality and expense risks the Company assumes. In
addition, to cover administrative expenses, the Company deducts a daily charge
of 0.15% per annum of the value of the average net assets in the Sub-Accounts.
E. TRANSFER CHARGE. The Company currently makes no charge to process
transfers. The Company guarantees that the first twelve transfers in a Contract
year will be free of any transfer charge. For each subsequent transfer the
Company reserves the right to assess a charge, guaranteed never to exceed $25,
to reimburse the Company for the cost of processing the transfer.
6
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F. CHARGES OF THE UNDERLYING FUNDS. In addition to the charges described
above, certain fees and expenses are deducted from the assets of the Underlying
Funds. These charges vary among the Underlying Funds.
SURRENDER OR WITHDRAWALS. At any time before the Annuity Date, the Contract
Owner has the right either to surrender the Contract in full and receive its
current value, minus the Contract Fee and any applicable contingent deferred
sales charge, and adjusted for any positive or negative Market Value Adjustment
or to withdraw a portion of the Contract's value subject to certain limits and
any applicable contingent deferred sales charge and/or Market Value Adjustment.
There may be tax consequences for surrender or withdrawals. For further
information, see "Surrender" and "Withdrawal," "Contingent Deferred Sales
Charge," and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant, Contract Owner or Joint Owner should die
before the Annuity Date, a death benefit will be paid to the beneficiary. Upon
death of the Annuitant (or an Owner if that Owner is also the Annuitant), the
death benefit is equal to the greatest of (a)the Accumulated Value increased by
any positive Market Value Adjustment; (b) gross payments accumulated daily at 5%
starting on the date each payment was applied, reduced proportionately to
reflect withdrawals (for each withdrawal the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (c) the death benefit that would
have been payable on the most recent Contract Anniversary, increased for
subsequent purchase payments and reduced proportionally to reflect withdrawals
after that date. If an Owner who is not also the Annuitant dies prior to
annuitization, the death benefit will equal the Accumulated Value of the
Contract increased by any positive Market Value Adjustment determined following
receipt of due proof of death at the Principal Office. If the Annuitant dies
after the Annuity Date but before all guaranteed annuity benefit payments have
been made, the remaining payments will be paid to the beneficiary at least as
rapidly as under the annuity option in effect. See "Death Benefit."
SALES OF CONTRACTS. The Contracts are sold by agents of the Company who are
authorized by applicable state law to sell variable annuity Contracts. These
agents are registered representatives of registered broker-dealers which are
members of the National Association of Securities Dealers, Inc., and whose
representatives are authorized by applicable law to sell variable annuity
Contracts. See "Sales Expense."
ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Contract Owner in
understanding the various costs and expenses that a Contract Owner will bear
directly or indirectly under the Contracts. The tables reflect charges under the
Contracts, expenses of the Sub-Accounts, and expenses of the Underlying Series.
In addition to the charges and expenses described below, in some states premium
taxes may be applicable.
7
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<TABLE>
<CAPTION>
CONTRACT YEAR
AFTER DATE OF
CONTRACT OWNER TRANSACTION EXPENSES PURCHASE PAYMENT CHARGE
----------------- ------------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7%
The charge (as a percentage of payments, applied to the amount 2 6%
surrendered in excess of the amount, if any, which may be 3 5%
surrendered free of charge) will be assessed upon surrender, 4 4%
withdrawal, or annuitization under any commutable period 5 3%
certain option or a noncommutable period certain less than 10 6 2%
years. 7 1%
more than 7 0%
TRANSFER CHARGE: None
The Company currently makes no charge for processing
transfers. The Company guarantees that the first twelve
transfers in a Contract year will be free of a transfer
charge. For the thirteenth and each subsequent transfer, the
Company reserves the right to assess a charge, guaranteed
never to exceed $25, to reimburse the Company for the costs of
processing the transfer.
ANNUAL CONTRACT FEE: $30
An annual Contract Fee, equal to $30, is deducted when
Accumulated Value is $50,000 or less. The Contract Fee is
currently waived for Contracts issued to a trustee of a 401(k)
plan, but the Company reserves the right to impose the
Contract Fee on such Contracts.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25 %
Variable Account Administrative Expense Charge 0.15 %
---
Total Annual Expenses 1.40 %
</TABLE>
DELAWARE GROUP PREMIUM FUND, INC.
<TABLE>
<CAPTION>
EQUITY CAPITAL MULTIPLE
SERIES ANNUAL EXPENSES INCOME HIGH YIELD RESERVES MONEY MARKET GROWTH STRATEGY VALUE
- ----------------------------- ------------ ---------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees.............. 0.60% 0.60% 0.59% 0.49% 0.70% 0.60% 0.58%
Other Series Expenses........ 0.09% 0.09% 0.12% 0.13% 0.10% 0.09% 0.22%
Total Series Annual Expenses
(After Expense
Reimbursement).............. 0.69% 0.69% 0.71% 0.62% 0.80% 0.69% 0.80%
<CAPTION>
EMERGING INT'L. GLOBAL
SERIES ANNUAL EXPENSES GROWTH EQUITY BOND
- ----------------------------- ------------- ----------- ----------
<S> <C> <C> <C>
Management Fees.............. 0.58% 0.65% 0.75%
Other Series Expenses........ 0.22% 0.15% 0.05%
Total Series Annual Expenses
(After Expense
Reimbursement).............. 0.80% 0.80% 0.80%
</TABLE>
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* Estimated after expense reimbursement
The investment adviser for the Equity/Income, High Yield, Capital Reserves,
Money Market, Growth, Multiple Strategy, Value and Emerging Growth is Delaware
Management Company, Inc. The Investment Adviser for the International Equity
Series and the Global Bond Series is Delaware International Advisers Ltd. The
investment advisers from the Series of the Fund have agreed voluntarily to waive
their management fees and reimburse each Series to limit certain expenses to
8/10 of 1% of the average daily net assets. This waiver will be in effect
through December 31, 1996. For the fiscal year ended December 31, 1995, before
waiver and/or reimbursement by the investment adviser, total Series expenses as
a percentage of average daily net assets were 0.85% for the Growth Series, 1.41%
for the Value Series, 1.47% for the Emerging Growth Series and 1.01% for the
International Equity Series.
8
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The following examples demonstrate the cumulative expenses which would be paid
by the Contract Owner at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. Because the expenses of the Underlying Series
differ, separate examples are used to illustrate the expenses incurred by a
Contract Owner on an investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If you surrender your Contract or annuitize* under a commutable period
certain option or a noncommutable period certain option of less than 10 years at
the end of the applicable period, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--- ----- ----- -----
<S> <C> <C> <C> <C>
Equity-Income................................... $ 83 $ 115 $ 147 $ 253
High Yield...................................... $ 84 $ 115 $ 148 $ 254
Capital Reserves................................ $ 84 $ 116 $ 149 $ 256
Money Market.................................... $ 83 $ 114 $ 145 $ 248
Growth.......................................... $ 84 $ 118 $ 152 $ 263
Multiple Strategy............................... $ 83 $ 115 $ 147 $ 252
Value........................................... $ 84 $ 118 $ 152 $ 263
Emerging Growth................................. $ 84 $ 118 $ 152 $ 263
International Equity............................ $ 84 $ 118 $ 152 $ 263
Global Bond..................................... $ 83 $ 118 $ 152 $ 263
</TABLE>
(b) If you annuitize* under a life option or any noncommutable period certain
option of 10 years or more at the end of the applicable time period or if you do
NOT surrender or annuitize your Contract, you would pay the following expenses
on a $1,000 investment, assuming an annual 5% return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--- ----- ----- -----
<S> <C> <C> <C> <C>
Equity-Income................................... $ 22 $ 69 $ 118 $ 253
High Yield...................................... $ 22 $ 69 $ 118 $ 254
Capital Reserves................................ $ 23 $ 70 $ 119 $ 256
Money Market.................................... $ 22 $ 67 $ 115 $ 248
Growth.......................................... $ 23 $ 72 $ 123 $ 263
Multiple Strategy............................... $ 22 $ 69 $ 117 $ 252
Value........................................... $ 23 $ 72 $ 123 $ 263
Emerging Growth................................. $ 23 $ 72 $ 123 $ 263
International Equity............................ $ 23 $ 72 $ 123 $ 263
Global Bond..................................... $ 23 $ 72 $ 123 $ 263
</TABLE>
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* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year
under an option including a life contingency or under any noncommutable
period certain option of 10 years or more.
Pursuant to requirements of the 1940 Act, the Contract Fee has been reflected in
the examples by a method intended to show the "average" impact of the Contract
Fee on an investment in the Variable Account. The total Contract Fees collected
under the Policies by the Company are divided by the total average net assets
attributable to the Policies. The resulting percentage is 0.09%, and the amount
of the Contract fee is assumed to be $.90 in the Examples. The Contract Fee is
deducted only when the accumulated value is $50,000 or less.
9
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CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1995 1994 1993 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SUB-ACCOUNT 201
Unit Value:
Beginning of Period................................................... 1.178 1.197 1.051 1.000
End of Period......................................................... 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of Period (in thousands)............. 48,305 38,591 25,086 4,208
SUB-ACCOUNT 202
Unit Value:
Beginning of Period................................................... 1.164 1.214 1.058 1.000
End of Period......................................................... 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of Period (in thousands)............. 37,818 31,735 22,281 4,571
SUB-ACCOUNT 203
Unit Value:
Beginning of Period................................................... 1.075 1.120 1.053 1.000
End of Period......................................................... 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of Period (in thousands)............. 19,818 20,476 16,752 3,828
SUB-ACCOUNT 204
Unit Value:
Beginning of Period................................................... 1.044 1.021 1.010 1.000
End of Period......................................................... 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of Period (in thousands)............. 11,568 13,998 5,483 1,387
SUB-ACCOUNT 205
Unit Value:
Beginning of Period................................................... 1.121 1.178 1.070 1.000
End of Period......................................................... 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of Period (in thousands)............. 35,204 29,100 20,802 4,534
SUB-ACCOUNT 206
Unit Value:
Beginning of Period................................................... 1.133 1.150 1.078 1.000
End of Period......................................................... 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of Period (in thousands)............. 37,203 33,332 22,046 3,145
SUB-ACCOUNT 207
Unit Value:
Beginning of Period................................................... 1.159 1.144 1.000 1.000
End of Period......................................................... 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of Period (in thousands)............. 21,612 18,761 6,139 182
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992
--------- --------- --------- ---------
SUB-ACCOUNT 208
<S> <C> <C> <C> <C>
Unit Value:
Beginning of Period................................................... 1.159 1.000 1.000 --
End of Period......................................................... 1.301 0.994 1.000 --
Number of Units Outstanding at End of Period (in thousands)............. 21,602 6,040 6 --
SUB-ACCOUNT 209
Unit Value:
Beginning of Period................................................... 0.989 1.007 1.000 --
End of Period......................................................... 1.358 0.989 1.007 --
Number of Units Outstanding at End of Period (in thousands)............. 13,410 6,197 50 --
SUB-ACCOUNT 210
Unit Value:
Beginning of Period................................................... 1.000 -- -- --
End of Period......................................................... -- -- -- --
Number of Units Outstanding at End of Period (in thousands)............. -- -- -- --
</TABLE>
- ------------------------
* The dates of inception of Sub-Accounts 201-206 were 4/8/92. The date of
inception of Sub-Account 207 was 10/7/92. The dates of inception of
Sub-Accounts 208 and 209 were 12/30/93 and 12/31/93, respectively. The date
of inception for Sub-Account 210 was 5/1/96.
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1996. However, the Company may
advertise "Total Return" and "Average Total Return" performance information
based on the periods that the Underlying Funds have been in existence. The
results for any period prior to the Contracts being offered will be calculated
as if the Contracts had been offered during that period of time, with all
charges assumed to be those applicable to the Sub-Accounts and the Underlying
Funds. Both the total return and yield figures are based on historical earnings
and are not intended to indicate future performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The "yield" of the Sub-Account investing in the Money Market Series refers to
the income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar, but when
annualized , the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment.
The total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $30
annual Contract Fee and the contingent deferred sales load which would be
assessed if the investment were completely withdrawn at the end of the specified
period.
The Company may also advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes of value of the
principal invested (due to realized and unrealized capital gains or losses),
11
<PAGE>
adjusted by the Sub-Accounts annual asset charges, and expressed as a percentage
of the investment. Because it is assumed that the investment is NOT withdrawn at
the end of the specified period, the contingent deferred sales charge is NOT
included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and quality
of the portfolio of the Underlying Series in which the Sub-Account invests and
the market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR 10 YEARS
ENDED OR SINCE
NAME 12/31/95 3 YEARS 5 YEARS INCEPTION
- ----------------------------------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
International Equity....................................... 5.32% 7.16% N/A 7.06%
Value...................................................... 15.15% N/A N/A 6.93%
Emerging Growth............................................ 30.32% N/A N/A 13.43%
Growth..................................................... 20.77% 8.22% N/A 8.97%
Multiple Strategy.......................................... 17.85% 7.49% N/A 10.47%
Equity-Income.............................................. 27.27% 12.78% N/A 8.35%
High Yield................................................. 6.92% 5.74% N/A 8.29%
Capital Reserves........................................... 5.51% 2.55% N/A 5.65%
Money Market............................................... (2.53)% 0.24% N/A 3.68%
Global Bond................................................ N/A N/A N/A N/A
</TABLE>
12
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR 10 YEARS
ENDED OR SINCE
NAME 12/31/95 3 YEARS 5 YEARS INCEPTION
- ----------------------------------------------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
International Equity....................................... 12.32% 9.16% N/A 8.66%
Value...................................................... 22.15% N/A N/A 10.14%
Emerging Growth............................................ 37.32% N/A N/A 16.47%
Growth..................................................... 27.77% 10.18% N/A 9.77%
Multiple Strategy.......................................... 24.85% 9.47% N/A 10.47%
Equity-Income.............................................. 34.27% 14.59% N/A 8.35%
High Yield................................................. 13.92% 7.78% N/A 8.29%
Capital Reserves........................................... 12.51% 4.72% N/A 5.65%
Money Market............................................... 4.03% 2.44% N/A 3.68%
Global Bond................................................ N/A N/A N/A N/A
</TABLE>
The dates of inception of the Underlying Funds are: 7/28/88 for Multiple
Strategy, Equity Income, High Yield, Capital Reserves, and Money Market; 7/12/91
for Growth; 1/29/92 for International Equity; 12/27/93 for Emerging Growth and
Value; 4/30/96 for Global Bond.
WHAT IS AN ANNUITY?
In general, an annuity is a contract designed to provide a retirement income in
the form of periodic payments for the lifetime of the Contract Owner or an
individual chosen by the Contract Owner. The retirement income payments are
called "annuity benefit payments" and the individual receiving the payments is
called the "Annuitant." Annuity benefit payments begin on the annuity date.
Under an annuity contract, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the Annuitant,
regardless of how long the Annuitant lives or how long all Annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an Individual
Retirement Annuity ("IRA") may revoke the Contract at any time within 10 days
after receipt of the contract and receive a refund. In order to revoke the
Contract, the Contract Owner must mail or deliver the Contract to the agent
through whom the Contract was purchased, to the Principal Office of the Company
at 440 Lincoln Street, Worcester, Massachusetts 01653, or to any local agency of
the Company. Mailing or delivery must occur on or before 10 days after receipt
of the Contract for revocation to be effective.
13
<PAGE>
Within seven days the Company will provide a refund equal to the greater of (1)
gross payments, or (2) the Accumulated Value plus any amounts deducted under the
Contract or by the Underlying Investment Companies for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Contract Owner's Accumulated Value in the Sub-Accounts on the date of
cancellation. Any additional amounts refunded to the Contract Owner will be paid
by the Company.
RIGHT TO REVOKE OR SURRENDER IN SOME STATES
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma, South
Carolina, Texas, Utah, Washington and West Virginia, any Contract Owner may
revoke the Contract at any time within ten days (20 in Idaho) after receipt of
the Contract and receive a refund as described under "RIGHT TO REVOKE INDIVIDUAL
RETIREMENT ANNUITY", above.
In all other states, a Contract Owner may return the Contract at any time within
10 days (or the number of days required by state law if more than 10) after
receipt of the Contract. The Company will pay to the Contract Owner an amount
equal to the sum of (i) the difference between the payment(s) received,
including fees, and any amount allocated to the Variable Account and (ii) the
Accumulated Value of amounts allocated to the Variable Account as of the date
the request is received. If the Contract was purchased as an IRA, the IRA
revocation right described above may be utilized in lieu of the special
surrender right.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY -- The Company is a life insurance company organized under the laws
of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1995, the
Company had over $5 billion in assets and over $18 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries (including
the Company) had over $11 billion in combined assets and over $35.2 billion in
life insurance in force.
THE VARIABLE ACCOUNT -- The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contracts are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Contracts. Each Sub-
Account is administered and accounted for as part of the general business of the
Company, but the income, capital gains, or capital losses of each Sub-Account
are allocated to such Sub-Account, without regard to other income, capital
gains, or capital losses of the Company. Under Delaware law, the assets of the
Variable Account may not be charged with any liabilities arising out of any
other business of the Company.
14
<PAGE>
The Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of
"separate account" under federal securities law and is registered with the
Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940 ("1940 Act"). The registration of the
Variable Account and the Underlying Investment Companies does not involve the
supervision by the Commission of management or investment practices or Contracts
of the Variable Account, the Company, the DGPF or the Underlying Funds.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE VARIABLE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE VARIABLE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE CONTRACTS
DESCRIBED IN THIS PROSPECTUS.
DELAWARE GROUP PREMIUM FUND, INC. -- Delaware Group Premium Fund, Inc. ("DGPF"),
is an open-end, diversified management investment company registered with the
Commission under the 1940 Act. Such registration does not involve supervision by
the Commission of the investments or investment policy of DGPF or its separate
investment series.
DGPF was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. DGPF currently
has ten investment portfolios, each issuing a series of shares: Equity/Income
Series, High Yield Series, Capital Reserves Series, Money Market Series, Growth
Series, Multiple Strategy Series, Value Series, Emerging Growth Series,
International Equity Series, and Global Bond Series (collectively, "Underlying
Funds"). The assets of each Underlying Fund are held separate from the assets of
the other Underlying Funds. Each Underlying Fund operates as a separate
investment vehicle, and the income or losses of one underlying Fund have no
effect on the investment performance of another Underlying Fund. Shares of the
Underlying Funds are not offered to the general public but solely to separate
accounts of life insurance companies.
The investment adviser for the Equity/Income Series, High Yield Series, Capital
Reserves Series, Money Market Series, Growth Series, Multiple Strategy Series,
Value Series, and Emerging Growth Series is Delaware Management Company, Inc.
("Delaware Management"). The investment adviser for the International Equity
Series and the Global Bond Series is Delaware International Advisers Ltd.
("Delaware International").
INVESTMENT OBJECTIVES AND POLICIES -- A summary of investment objectives of each
of the Underlying Funds is set forth below. More detailed information regarding
the investment objectives, restrictions and risks, expenses paid by the
Underlying Funds, and other relevant information regarding the Underlying Funds
may be found in the Prospectus of the Funds, which accompanies this Prospectus
and should be read carefully before investing. The Statement of Additional
Information of DGPF is available upon request.
SUB-ACCOUNT 201 -- invests solely in shares of the Equity-Income Series. The
Equity-Income Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income.
SUB-ACCOUNT 202 -- invests solely in shares of the High Yield Series. The High
Yield Series seeks as high a current income as possible by investing in rated
and unrated corporate bonds (including high-yield bonds commonly known as junk
bonds), U.S. Government securities and commercial paper. Please read the Fund's
prospectus disclosure regarding the risk factors before investing in this
Series.
SUB-ACCOUNT 203 -- invests solely in shares of the Capital Reserves Series. The
Capital Reserves Series seeks a high stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short and intermediate-term securities.
SUB-ACCOUNT 204 -- invests solely in shares of the Money Market Series. The
Money Market Series seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments.
15
<PAGE>
SUB-ACCOUNT 205 -- invests solely in shares of the Growth Series. The Growth
Series seeks long-term capital appreciation by investing its assets in a
diversified portfolio of securities exhibiting the potential for significant
growth.
SUB-ACCOUNT 206 -- invests solely in shares of the Multiple Strategy Series. The
Multiple Strategy Series seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth.
SUB-ACCOUNT 207 -- invests solely in shares of the International Equity Series.
The International Series seeks long-term growth without undue risk to principal
by investing primarily in equity securities of foreign issuers providing the
potential for capital appreciation and income.
SUB-ACCOUNT 208 -- invests solely in shares of the Value Series. The Value
Series seeks capital appreciation by investing in small to mid-cap common stocks
whose market value appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on securities of
companies that may be temporarily out of favor or whose value is not yet
recognized by the market.
SUB-ACCOUNT 209 -- invests solely in shares of the Emerging Growth Series. The
Emerging Growth Series seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
SUB-ACCOUNT 210 -- invests solely in shares of the Global Bond Series. The
Global Bond Series seeks current income consistent with preservation of
principal by investing primarily in fixed income securities that may also
provide the potential for capital appreciation. At least 65% of the series'
assets will be invested in fixed income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
There is no assurance that the investment objectives of the Underlying Funds
will be met.
In the event of a material change in the investment policy of a Sub-Account or
the Underlying Series in which it invests, you will be notified of the change.
No material changes in the investment policy of the Variable Account or any
Sub-Accounts will be made without approval pursuant to the applicable state
insurance laws. If you have Contract Value in that Sub-Account, the Company will
transfer it without charge on written request by you to another Sub-Account or
to the General Account. The Company must receive your written request within
sixty (60) days of the later of (1) the effective date of such change in the
investment policy or (2) the receipt of the notice of your right to transfer.
INVESTMENT ADVISORY SERVICES TO DGPF. -- For managing the portfolios of the
Underlying Funds and making the investment decisions, each investment adviser is
paid an annual fee by their respective Underlying Funds. For Delaware
Management, this fee is equal to 5/10 of 1% of the average daily net assets of
the Money Market Series, 3/4 of 1% of the average daily net assets of the Growth
Series, Value Series and Emerging Growth Series, and 6/10 of 1% of the average
daily net assets of the Equity/Income Series, High Yield Series, Capital Reserve
Series, Multiple Strategy Series. For Delaware International, this fee is equal
to 3/4 of 1% of the average daily net assets of the International Equity Series
and of the Global Bond Series.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS -- The Company reserves the
right, subject to applicable law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts or that the
Sub-Accounts may purchase. If the shares of any Underlying Fund are no longer
available for investment or if in the Company's judgment further investment in
any Underlying Fund should become inappropriate in view of the purposes of the
Variable Account or the affected Sub-Account, the Company may redeem the shares
of that Underlying Fund and substitute shares of another registered open-end
management company. The Company will not substitute
16
<PAGE>
any shares attributable to a Contract interest in a Sub-Account without notice
to the Contract Owner and prior approval of the Commission and state insurance
authorities, to the extent required by the 1940 Act or other applicable law. The
Variable Account may, to the extent permitted by law, purchase other securities
for other contracts or permit a conversion between contracts upon request by a
Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required Commission
approval, the Company may, in its sole discretion, establish new Sub-Accounts or
eliminate one or more Sub-Accounts if marketing needs, tax considerations or
investment conditions warrant. Any new Sub-Accounts may be made available to
existing Contract Owners on a basis to be determined by the Company.
Shares of the Underlying Funds are also issued to other unaffiliated insurance
companies ("shared funding") which issue variable annuities and variable life
Contracts ("mixed funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life Contract
Owners or variable annuity Contract Owners. Although the Company and the DGPF do
not currently foresee any such disadvantages to either variable life insurance
Contract Owners or variable annuity Contract Owners, the Company and DGPF intend
to monitor events in order to identify any material conflicts between such
Contract Owners and to determine what action, if any, should be taken in
response thereto. If it were concluded that separate funds should be established
for variable life and variable annuity separate accounts, the Company will bear
the attendant expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may be operated as a management company under the 1940 Act, may
be deregistered under the 1940 Act if registration is no longer required, or may
be combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Contract Owners and, after the
Annuity Date, from the Annuitants. Each person having a voting interest in a
Sub-Account will be provided with proxy materials of the Underlying Fund
together with a form with which to give voting instructions to the Company.
Shares for which no timely instructions are received will be voted in proportion
to the instructions which are received. The Company will also vote shares in a
Sub-Account that it owns and which are not attributable to Contracts in the same
proportion. If the 1940 Act or any rules thereunder should be amended or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right, whether or not such shares are attributable to the Contract, the Company
reserves the right to do so.
The number of votes which a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Underlying
Fund. During the accumulation period, the number of Underlying Fund shares
attributable to each Contract Owner will be determined by dividing the dollar
value of the Accumulation Units of the Sub-Account credited to the Contract by
the net asset value of one Underlying Fund share.
During the annuity period, the number of Underlying Fund shares attributable to
each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
17
<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Underlying Funds are described in the Prospectus and Statement of
Additional Information of DGPF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE -- The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contracts. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
phase on all contracts, including those that do not involve a life contingency,
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Contracts and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE -- The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. However, there is no direct relationship between
the amount of administrative expenses imposed on a given contract and the amount
of expenses actually attributable to that contract.
Deductions for the Contract Fee (described under B. CONTRACT FEE) and for the
Administrative Expense Charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contracts include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
B. CONTRACT FEE.
A $30 Contract Fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is $50,000 or
less. The Contract Fee is waived for Contracts issued to and maintained by the
Trustee of a 401(k) plan. Where Contract value has been allocated to more than
one account, a percentage of the total Contract Fee will be deducted from the
Value in each account. The portion of the charge deducted from each account will
be equal to the percentage which
18
<PAGE>
the Value in that account bears to the Accumulated Value under the Contract. The
deduction of the Contract Fee from a Sub-Account will result in cancellation of
a number of Accumulation Units equal in value to the percentage of the charge
deducted from that account.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
Contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, the premium tax charge is deducted on a pro rata basis when
withdrawals are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the premium tax
charge for these Contracts at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. However, a contingent deferred sales charge is deducted from the
Accumulated Value of the Contract in the case of surrender and/or withdrawal of
the Contract or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments - payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments - Accumulated payments not defined as New Payments;
and (3) Earnings - the amount of Accumulated Value in excess of all payments
that have not been previously surrendered. For purposes of determining the
amount of any contingent deferred sales charge, surrenders will be deemed to be
taken first from Old Payments, then from New Payments. Old Payments may be
withdrawn from the Contract at any time without the imposition of a contingent
deferred sales charge. If a withdrawal is attributable all or in part to New
Payments, a contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWAL. If a Contract is surrendered, or if New
Payments are withdrawn, while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
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The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF CHARGE AS PERCENTAGE OF
PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 7% of total gross New Payments. Such total charge
equals the aggregate of all applicable contingent deferred sales charges for
surrender, withdrawals, and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Where permitted by law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (a) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (b) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the contract; or (c) physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any state
licensed facility (or, in a state that does not require licensing)a facility
that is operating pursuant to state law, providing medically necessary inpatient
care which is prescribed by a licensed "physician" in writing and based on
physical limitations which prohibit daily living in a non-institutional setting;
"fatal illness" means a condition diagnosed by a licensed physician which is
expected to result in death within two years of the diagnosis; and "physician"
means a person other than the Owner, Annuitant or a member of one of their
families who is state licensed to give medical care or treatment and is acting
within the scope of that license.
Where contingent deferred sales charges have been waived under any one of three
situations discussed above, no additional payments under this Contract will be
accepted.
Where permitted by law, no contingent deferred sales charge is imposed (and no
commissions will be paid) on contracts issued where both the Contract Owner and
the Annuitant on the date of issue are within the following classes of
individuals ("eligible persons"): employees and registered representatives of
any broker-dealer which has entered into a Sales Agreement with the Company to
sell the Contract; officers, directors, trustees and employees of any of the
Underlying Funds, investment managers or sub-advisers; and the spouses and
children/other legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may also reduce the amount of the
contingent deferred sales charge, the period during which it applies, or both,
when Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider (a) the size and type of
group; (b) the total amount of payments to be received; (c) other transactions
where sales expenses are likely to be reduced. Any reduction or elimination in
the amount or duration of the contingent deferred sales charge will not
discriminate unfairly between purchasers of this Contract. The Company will not
make any changes to this charge where prohibited by law.
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Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charges is modified to effect certain exchanges of the annuity
contracts for the Contracts. See Statement of Additional Information.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by
total gross payments not previously redeemed ("Cumulative Earnings")
Where (2) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced
by the total amount of any prior withdrawals made in the same calendar year
to which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution
(see"LED Distributions," below) whether or not the withdrawal was part of
such distribution (applies only if Annuitant is also an Owner)
For example, an 81 year old Contract Owner/Annuitant with an Accumulated Value
of $15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal
Without Surrender Charge Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales charge, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also the
Annuitant may elect to make a series of systematic withdrawals from the Contract
according to a life expectancy distribution ("LED") option, by returning a
properly signed LED request form to the Company's Principal Office. The LED
option permits the Contract Owner to make systematic withdrawals from the
Contract over his or her lifetime. The amount withdrawn from the Contract
changes each year, because life expectancy changes each year that a person
lives. For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If a Contract Owner elects the LED option, in each contract year a fraction of
the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during
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<PAGE>
the year. The Contract Owner may elect monthly, bimonthly, quarterly,
semiannual, or annual distributions, and may terminate the LED option at any
time. The Contract Owner may also elect to receive distributions under an LED
option which is determined on the joint life expectancy of the Contract Owner
and a beneficiary. The Company may also offer other systematic withdrawal
options.
If a Contract Owner makes withdrawals under the LED distribution prior to age
59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract Owner is equal to the entire Accumulated Value under the Contract, net
of the applicable contingent deferred sales charge on New Payments, the Contract
Fee and any applicable tax withholding and adjusted for any applicable market
value adjustment. Subject to the same rules that are applicable to withdrawals,
the Company will not assess a contingent deferred sales charge on an amount
equal to the greater of the Withdrawal Without Surrender Charge Amount,
described above, or the life expectancy distribution, if applicable.
Where a Contract Owner who is trustee under a pension plan surrenders, in whole
or in part, a Contract on a terminating employee, the trustee will be permitted
to reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Company's
Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "Surrender" and "Withdrawal"
under "DESCRIPTION OF THE CONTRACT" and see "FEDERAL TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts". If an owner of a
fixed annuity Contract issued by the Company wishes to elect a variable annuity
option, the Company may permit such owner to exchange, at the time of
annuitization, the fixed Contract for a Contract offered in this Prospectus. The
proceeds of the fixed Contract, minus any contingent deferred sales charge
applicable under the fixed Contract if a period certain option is chosen, will
be applied towards the variable annuity option desired by the owner. The number
of Annuity Units under the option will be calculated using the Annuity Unit
values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE -- The Company currently makes no charge for processing
transfers. The Company guarantees that the first twelve transfers in a Contract
Year will be free of transfer charge, but reserves the right to assess a charge,
guaranteed never to exceed $25, for the thirteenth and each subsequent transfer
in a Contract Year.
The Contract Owner may have automatic transfers of at least $100 a month made on
a periodic basis (a) from Sub-Account 203 (which invests in the Capital Reserves
Series), Sub-Account 204 (which invests in the Money Market Series) or from the
Fixed Account to one or more of the other Sub-Accounts, or (b) in order to
reallocate Contract Value among the Sub-Accounts. The first automatic transfer
counts as one transfer towards the twelve transfers which are guaranteed to be
free of a transfer change in each Contract year. For more information, see
"Transfer Privilege."
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<PAGE>
OTHER CHARGES -- Because the Sub-Accounts purchase shares of the Fund, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Series. The Prospectus and
Statement of Additional Information of the Fund contain additional information
concerning expenses of the Underlying Series.
SALES EXPENSE. The Company pays commissions on the Contracts of up to 6.5% of
purchase payments to entities which sell the Contracts. To the extent permitted
by NASD rules, expense reimbursement allowances and additional payments for
other services not directly related to the sale of the Contracts, including the
recruitment and training of personnel, production of promotional literature, and
similar services may also be made.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges, described above,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to Contract Owners or the Variable Account. Any
contingent deferred sales charges assessed on a Contract will be retained by the
company.
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts offered by the Prospectus may be purchased from representatives of
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts, 01653, is indirectly wholly-owned by the Company. The
Contracts also may be purchased from certain independent broker-dealers which
are NASD members.
Contract Owners may direct any inquiries to Annuity Customer Services, Allmerica
Financial Life Insurance and Annuity Company, 440 Lincoln Street, Worcester,
Massachusetts 01653 1-800-533-2124.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
underwriting requirements are properly met. If all underwriting requirements are
not complied with within five business days of the Company's receipt of the
initial payment, the payment will be immediately returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding underwriting requirements. Subsequent payments will be credited
as of the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600
($1,000 in Washington). Under a salary deduction or monthly automatic payment
plan, the minimum initial payment is $50. In all cases, each subsequent payment
must be at least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may
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<PAGE>
issue a contract on the employee, if the plan's average annual contribution per
eligible plan participant is at least $600. The minimum allocation to a
Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
Sub-Account 204 (Money Market Series).
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated, or,
if subsequently changed, according to the most recent allocation instructions.
However, to the extent permitted by state law, if the contract is issued as an
IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina,
Oklahoma, South Carolina, Texas, Utah, Washington and West Virginia, any portion
of the initial net payment and additional net payments received during the
contracts's first fifteen days measured from the date of issue, allocated to any
Sub-Account and/or any Guarantee Period Account, will be held in Sub-Account 204
(Money Market Series) until the end of the fifteen day period. Thereafter, these
amounts will be allocated as requested.
The Contract Owner may change allocation instructions for new payments pursuant
to a written or telephone request. If telephone requests are elected by the
Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of a Contract Owner identify themselves by name and identify the
Annuitant by name, date of birth and social security number. All transfer
instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer request. The
Company will make transfers pursuant to written or telephone requests. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored. (In Oregon and Massachusetts,
payments and transfers to the Fixed Account are subject to certain restrictions.
See Appendix A.)
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to Sub-Account 204 (Money Market Series ).
The Contract Owner may have automatic transfers of at least $100 each made on a
periodic basis from the Sub-Account investing in the capital Reserves Series or
the Money Market Series , or from the Fixed Account to one or more of the other
Sub-Accounts or may periodically reallocate values among the Sub-Accounts.
Automatic transfers may be made on a monthly, bimonthly, quarterly, semiannual
or annual schedule. The first automatic transfer counts as one transfer towards
the twelve transfers discussed below. Any subsequent automatic transfer will not
count as a transfer for purposes of the charge.
Currently, the Company makes no charge for processing transfers. The first
twelve (12) transfers in a Contract year are guaranteed to be free of any
transfer charge. For each subsequent transfer in a Contract year, the Company
reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing transfers.
C. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for
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<PAGE>
surrender, satisfactory to the Company, to the Company's Principal Office. The
amount payable to the Contract Owner upon surrender will be based on the
Contract's Accumulated Value as of the Valuation Date on which the request and
the Contract are received at the Company's Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last seven full contract years. See "CHARGES AND DEDUCTIONS." The Contract
Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a portion
of the Accumulated Value of his or her Contract, subject to the limits stated
below. The Contract Owner must send a signed, written request for withdrawal,
satisfactory to the Company, to the Company's Principal Office. The written
request must indicate the dollar amount the Contract Owner wishes to receive and
the accounts from which such amount is to be withdrawn. The amount withdrawn
equals the amount requested by the Contract Owner plus any applicable contingent
deferred sales charge, as described under "CHARGES AND DEDUCTIONS." In addition,
amounts withdrawn from a Guarantee Period Account prior to the end of the
applicable Guarantee Period will be subject to a Market Value Adjustment, as
described under "GUARANTEE PERIOD ACCOUNTS".
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount redeemed.
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For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program." For important
tax consequences which may result from withdrawals, see "FEDERAL TAX
CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior to
the Annuity Date while the Contract is in force, the Company will pay the
beneficiary a death benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
Upon death of the Annuitant (including an Owner who is also the Annuitant), the
death benefit is equal to the greatest of (a) the Accumulated Value under the
Contract increased for any positive Market Value Adjustment, (b) gross payments
accumulated daily at 5% starting on the date each payment is applied, reduced
proportionately to reflect withdrawals (for each withdrawal, the proportionate
reduction is calculated as the death benefit under this option immediately prior
to the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal), or (c) or the death
benefit that would have been payable on the most recent contract anniversary,
increased for subsequent payments and reduced proportionally to reflect
withdrawals after that date.
If an Owner who is not also the Annuitant dies before the Annuity Date, the
death benefit will be the Accumulated Value increased by any positive Market
Value Adjustment. The death benefit will never be reduced by a negative Market
Value Adjustment. The death benefit will generally be paid to the Beneficiary in
one sum within 7 days of the receipt of due proof of death unless the Owner has
specified a death benefit annuity option. Instead, the Beneficiary may, by
Written Request, elect to:
(a) defer distribution of the death benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the death benefit is deferred under (a) or (b), any value in
the Guarantee Period Accounts will be transferred to Sub-Account 204 (Money
Market Series). The excess, if any, of the death benefit over the Accumulated
Value will also be added to Sub-Account 204 (Money Market Series). The
Beneficiary may, by Written Request, effect transfers and withdrawals during the
deferral period and prior to annuitization under (b), but may not make
additional payments. If there are multiple Beneficiaries, the consent of all is
required.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
With respect to any death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the Annuitant's
death has been received at the Company's Principal Office. If the beneficiary
elects to receive the death benefit in one sum, the death benefit will be paid
within seven business days. If the beneficiary has not elected an annuity option
within one year from the date notice of death is received by the Company, the
Company will pay the death benefit in one sum. The death benefit will reflect
any earnings or losses experienced during the period and any withdrawals.
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F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole beneficiary, may by written
request continue the Contract in lieu of receiving the amount payable upon death
of the Contract Owner. Upon such election, the spouse will become the Owner and
Annuitant subject to the following: (a) any value in the Guarantee Period
Accounts will be transferred to Sub-Account 204 (Money Market Series); (b) the
excess, if any, of the death benefit over the Contract's Accumulated Value will
also be added to Sub-Account 204 (Money Market Series). Additional payments may
be made; however, a surrender charge will apply to these amounts. All other
rights and benefits provided in the Contract will continue, except that any
subsequent spouse of such new Contract Owner will not be entitled to continue
the Contract upon such new Owner's death.
G. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified plans,
may be assigned by the Contract Owner at any time prior to the Annuity Date and
while the Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company
will not be deemed to have knowledge of an assignment unless it is made in
writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Contract is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Contract to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be made on a fixed
basis, a variable basis, or a combination fixed and variable basis. Annuity
benefit payments are determined according to the annuity tables in the Contract,
by the annuity option selected, and by the investment performance of the
account(s) selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the Fixed Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Account(s) is made monthly, quarterly, semiannually or
annually. Since the value of an Annuity Unit in a Sub-Account will reflect the
investment performance of the Sub-Account, the amount of each annuity benefit
payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required under some state laws). The Company reserves the
right to increase these minimum amounts. If the annuity option(s) selected does
not produce an initial payment which meet this minimum, a single payment will be
made. Once the Company begins making annuity benefit payments, the Annuitant
cannot make withdrawals or surrender the annuity except in the case where future
annuity benefit payments are limited to a "period certain." Only beneficiaries
entitled to receive remaining payments for a "period certain" may elect to
instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted in
your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new Annuity date. The new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday and
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must be within the life expectancy of the Annuitant. The Company shall determine
such life expectancy at the time a change in Annuity Date is requested. The
Internal Revenue Code and the terms of qualified plans impose limitations on the
age at which annuity benefit payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below. Currently,
variable annuity options may be funded through the Equity/Income Series, the
Capital Reserves Series and the Multiple Strategy Series.
The Company also provides these same options funded through the Fixed Account
(fixed-amount annuity option). Regardless of how payments were allocated during
the accumulation period, any of the variable annuity options or the fixed-amount
options may be selected, or any of the variable annuity options may be selected
in combination with any of the fixed-amount annuity options. Other annuity
options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS. This is a variable
annuity payable periodically during the lifetime of the payee with the guarantee
that if the payee should die before all payments have been made, the remaining
annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE PAYEE
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is a variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2) then periodic variable annuity benefit payments will continue to the
beneficiary until the number of such payments equals the number determined in
(1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continuing during
the lifetime of the survivor. The amount of each payment to the survivor is
based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This is a variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity provides periodic
payments for a stipulated number of years ranging from one to thirty. The Period
Certain Option does not involve a life contingency. In the computation of the
payments under this option, the charge for annuity rate guarantees, which
includes a factor for mortality risks, is made. Although not contractually
required
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to do so, the Company currently follows a practice of permitting persons
receiving payments under the Period Certain Option to elect to convert to a
variable annuity involving a life contingency. The Company may discontinue or
change this practice at any time, but not with respect to election of the option
made prior to the date of any change in this practice. See "FEDERAL TAX
CONSIDERATIONS" for a discussion of the possible adverse tax consequences of
selecting a Period Certain Option.
J. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the Norris decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
K. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Contract Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received at the
Company's Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account and will reflect the
investment performance, expenses and charges of its Underlying Funds. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Subaccount by the value of an Accumulation
Unit of that Subaccount on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Subaccount from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (a) by (b) and
subtracting (c) and (d) where:
(a) is the investment income of a Subaccount for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(b) is the value of that Subaccount's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Subaccount's assets, and
(d) is an administrative charge of 0.15% on an annual basis of the daily
value of the Subaccount's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation
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Date by the appropriate net investment factor. For an illustration of an
Accumulation Unit calculation using a hypothetical example see "Annuity
Payments" in the Statement of Additional Information. Subject to compliance with
applicable state and federal law, the Company reserves the right to change the
methodology for determining the net investment factor.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Subaccount
initially was set at $1.00. The value of an Annuity Unit under a Subaccount on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Subaccount for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Currently, variable annuity benefit payments are made on the
first of a month based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and noncommutable period certain options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is the Surrender
Value less any premium tax. For a death benefit annuity, the annuity value will
be the amount of the death benefit. The annuity rates in the Contract are based
on a modification of the 1983 Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. Norris Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Subaccount(s)
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Subaccount is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than 10 years, the Surrender Value less premium taxes, if any, is
used rather than the Accumulated Value. The dollar amount of the first variable
annuity benefit payment is then divided by the value of an Annuity Unit of the
selected Subaccount(s) to determine the number of Annuity Units represented by
the first payment. This number of Annuity Units remains fixed under all annuity
options except the joint and two-thirds survivor annuity option. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity unit on the applicable Valuation Date.
After the first payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Account(s). The dollar amount of each fixed amount
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
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The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "Annuity Payments" in the Statement of Additional
Information.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission has not reviewed the disclosures in this Prospectus relating to the
Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures
regarding the Guarantee Period Accounts and the Fixed Account of this annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there are currently seven Guarantee
Periods available under this Contract with durations of three, five, six, seven,
eight, nine and ten years. Each Guarantee Period established for the Contract
Owner is accounted for separately in a non-unitized segregated account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time-to-time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract Owners may allocate net payments or make transfers from any of the
subaccounts, the Fixed Account or an existing Guarantee Period Account to
establish a new Guarantee Period Account at any time prior to the Annuity Date
(subject to the Fixed Account limitations in some states; see Appendix A, More
Information about the Fixed Account). Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Contract Owner allocates or transfers
amounts to a Guarantee Period except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum that may be allocated to establish a Guarantee Period
Account is $1,000. If less than $1,000 is allocated, the Company reserves the
right to apply that amount to the Money Market Account. The Contract Owner may
allocate amounts to any of the Guarantee Periods available. Notwithstanding any
other provision in this Prospectus, with respect to contracts issued in the
state of Pennsylvania, no amounts may be allocated or transferred to any
Guarantee Period that would extend more than six months beyond the Annuity Date
in effect on the date the allocation or transfer is effected.
At least 45 days, but not more than 75 days prior to the end of a Guarantee
Period, the Company will notify the Contract Owner in writing of the expiration
of that Guarantee Period. At the end of a Guarantee Period the Owner may
transfer amounts to the Sub-Accounts, the Fixed Account or establish a new
Guarantee Period Account of any duration then offered by the Company without a
Market Value Adjustment. If reallocation instructions are not received at the
Principal Office before the end of a Guarantee Period, the Account value will be
automatically applied to a new Guarantee Period Account with the same duration,
unless (a) less than $1,000 would remain in the Guarantee
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Period Account on the expiration date, or (b) the Guarantee Period would extend
beyond the Annuity Date or is no longer available. In such cases, the Guarantee
Period Account value will be transferred to Sub-Account 204 (Money Market
Series).
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "Death Benefit". A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any Surrender Charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)]n/365 - 1
where:
i is the Guaranteed Interest Rate expressed as a decimal (for example: 3%
= 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining in the
current Guarantee Period, rounded to the next higher number of whole years
(interpolated for partial years in the state of Pennsylvania). If that rate is
not available, the Company will use a suitable rate or index allowed by the
Department of Insurance; and
n is the number of days remaining from the Effective Valuation Date to the
end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than the current
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the current Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the 3% Minimum Guarantee Period Account Interest Rate
compounded annually from the beginning of the current Guarantee Period. For
examples of how the Market Value Adjustment works, See Appendix B.
WITHDRAWALS. Prior to the Annuity Date, the Contract Owner may make withdrawals
of amounts held in the Guarantee Period Accounts. Withdrawals from these
accounts will be made in the same manner and be subject to the same rules as set
forth under "Withdrawals" and "Surrender." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: a) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and b) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a Contingent Deferred Sales
Charge applies to the withdrawal, it will be calculated as set forth under
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Contract Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the Internal
Revenue Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contracts, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under subchapter L
of the Internal Revenue Code (the "Code"). The Company files a consolidated tax
return with its affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Code. The regulations provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. If the investments are not adequately diversified, the income on a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract Owner. It is anticipated
that the Trust will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity Contracts,
"qualified" Contracts and "non-qualified" Contracts. A qualified Contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified Contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
Contract or a non-qualified Contract. For more information on the tax provisions
applicable to qualified Contracts, see Sections D through J, below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will, with
certain exceptions (see K below), be considered annuity contracts under Section
72 of the Internal Revenue Code (the "Code"). This section provides for the
taxation of annuities. The following discussion concerns annuities subject to
Section 72. Section 72(e)(11)(A)(ii) requires that all non-qualified deferred
annuity Contracts issued by the same insurance company to the same Contract
Owner during the same calendar year be treated as a single Contract in
determining taxable distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the Contract
is not taxable to the Contract Owner until it is withdrawn from the Contract. If
the Contract is surrendered or amounts are withdrawn prior to the Annuity Date,
any withdrawal of investment gain in value over the cost basis of the Contract
would be taxed as ordinary income. Under the current provisions of the Code,
amounts received under a non-qualified Contract prior to the Annuity Date
(including payments
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made upon the death of the Annuitant or Contract Owner), or as non-periodic
payments after the Annuity Date, are generally first attributable to any
investment gains credited to the Contract over the taxpayer's basis (if any) in
the Contract. Such amounts will be treated as income subject to federal income
taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. Furthermore, under Section 72 of the Code,
this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's life expectancy distribution ("LED") option), and the
option could be changed or terminated at any time, the distributions failed to
qualify as part of a "series of substantially equal payments" within the meaning
of Section 72 of the Code. The distributions were therefore subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to a Contract
Owner who receives distributions under the LED option prior to age 59 1/2.
Subsequent private letter rulings, however, have treated LED-type withdrawal
programs as effectively avoiding the 10% penalty tax. The position of the IRS on
this issue is unclear.
If the Contract Owner transfers (assigns) the Contract to another individual as
a gift prior to the Annuity Date, the Code provides that the Contract Owner will
incur taxable income at the time of the transfer. An exception is provided for
certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such, however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of the Contract bears to the expected return under the Contract. The
portion of the payment in excess of this excludable amount is taxable as
ordinary income. Once all cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
In certain situations, the Code provides for a tax penalty if, prior to death,
disability or attainment of age 59 1/2, a Contract Owner makes a withdrawal or
receives any amount under the Contract, unless the distribution is in the form
of a life annuity (including life expectancy distributions). The penalty is 10%
of the amount includible in income by the Contract Owner.
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The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.*
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the Code,
vary according to the type of plan and the terms and conditions of the plan
itself. Therefore, the following is general information about the use of the
Contracts with various types of qualified plans. The rights of any person to any
benefits under such qualified plans will be subject to the terms and conditions
of the qualified plans themselves regardless of the terms and conditions of the
Contract.
A loan to a participant or beneficiary from plans qualified under Sections 401
and 403 or an assignment or pledge of an interest in such a plan is generally
treated as a distribution. This general rule does not apply to loans which
contain certain repayment terms and do not exceed a specified maximum amount, as
required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of the
employee's beneficiaries receives a "lump sum" distribution (a distribution from
a qualified plan described in Code Section 401(a) within one taxable year equal
to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended, frequently
referred to as "H.R. 10", allows self-employed individuals and partners to
establish qualified pension and profit sharing trusts and annuity plans to
provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements applicable
to corporate qualified plans, with some special restrictions imposed on
"owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and including
alimony payable under a court decree) from employment or self-employment,
whether or not he or she is covered by another qualified plan, may establish an
Individual Retirement Account or Annuity plan ("IRA") for the accumulation of
retirement savings on a tax-deferred basis. Income from investments is not
included in "compensation." The assets of an IRA may be invested in, among other
things, annuity Contracts including the Contracts offered by this Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The
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deduction is reduced proportionately for adjusted gross income between $40,000
and $50,000 (between $25,000 and $35,000 for unmarried taxpayers and between $0
and $10,000 for a married taxpayer filing separately) if the taxpayer and his or
her spouse file a joint return and either is an active participant in an
employer sponsored retirement plan.
An individual and a working spouse each may have an IRA with the above-described
limit on each. An individual with an IRA may establish an additional IRA for a
non-working spouse if they file a joint return. Contributions to the two IRAs
together are deductible up to the lesser of $2,250 or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 and years thereafter. Contributions for that year and
for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due date
of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be taxed
as ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70, and failure to make
adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code Section
408(k) if certain requirements are met. A SEP is an IRA to which the employer
contributes under a written formula. Currently, a SEP may accept employer
contributions each year up to $30,000 or 15% of compensation (as defined),
whichever is less. To establish SEPs the employer must make a contribution for
every employee age 21 and over who has performed services for the employer for
at least three of the five immediately preceding calendar years and who has
earned at least $300 for the year. SEP contributions for employees over age
70 1/2 are permissible.
The employer's contribution is excluded from the employee's gross income for the
taxable year for which it was made up to the $30,000/15% limit. In addition to
the employer's contribution, the
36
<PAGE>
employee may contribute 100% of the employee's earned income, up to $2,000, to
the SEP, but such contributions will be subject to the rules described above in
"G. Individual Retirement Account Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for annuity
Contracts purchased for employees under annuity plans adopted by public school
systems and certain organizations which are tax exempt under Section 501(c)(3)
of the Code are excludable from the gross income of such employees to the extent
that the aggregate purchase payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of participation
in the Texas Optional Retirement Program, distributions may not be received
except in the case of the participant's death, retirement or termination of
employment in the Texas public institutions of higher education. These
restrictions are imposed by reason of an opinion of the Texas Attorney General
interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political subdivisions,
or certain tax-exempt entities to participate in eligible government deferred
compensation plans. An eligible plan, by its terms, must not allow deferral of
more than $7,500 or 33 1/3% of a participant's includible compensation for the
taxable year, whichever is less. Includible compensation does not include
amounts excludable under the eligible deferred compensation plan or amounts paid
into a Code Section 403(b) annuity. The amount a participant may defer must be
reduced dollar-for-dollar by elective deferrals under a SEP, 401(k) plan or a
deductible employee contribution to a 501(c)(18) plan. Under eligible deferred
compensation plans the state, political subdivision, or tax-exempt entity will
be owner of the Contract.
If an employee also participates in another eligible plan or contributes to a
Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred annuities held by
a qualified pension plan, an IRA, a 403(b) plan, estates, employers with respect
to
37
<PAGE>
terminated pension plans, or a nominee or agent holding a contract for the
benefit of an individual. Corporate-owned annuities may result in exposure to
the alternative minimum tax, to the extent that income on the annuities
increases the corporation's adjusted current earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company will also furnish an annual
report to the Contract Owner containing a statement of his or her account,
including unit values and other information as required by applicable law, rules
and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e. contracts issued under
Section 403(b) of the Code) and to contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less and repayments must be
made quarterly and in substantially equal amounts. Repayments will be allocated
pro-rata in accordance with the most recent payment allocation, except that any
allocations to a Guarantee Period Account will instead be allocated to the Money
Market Sub-Account.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from any separate account or Sub-Account to another of the
Company's variable accounts or Sub-Accounts having assets of the same class, (2)
to operate the variable account or any Sub-Account as a management investment
company under the 1940 Act or in any other form permitted by law, (3) to
deregister the Variable account under the 1940 Act in accordance with the
requirements of the 1940 Act and (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable account or of the Sub-
Accounts. In no event will the changes described above be made without notice to
Contract Owners in accordance with the 1940 Act.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
38
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company other
than those allocated to the separate account. Allocations to the Fixed Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. A portion or all of net purchase payments may be allocated
to accumulate at a fixed rate of interest in the Fixed Account. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Contracts, the minimum interest which may be credited on amounts
allocated to the Fixed Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If a Contract is surrendered, or if an Excess Amount is withdrawn, while the
Contract is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Contract less than seven full
contract years.
In Oregon and Massachusetts, payments and transfers to the Fixed Account are
subject to the following restrictions:
If a Contract issued prior to the Annuitant's 60th birthday, allocations to
the Fixed Account will be permitted until the Annuitant's 61st birthday. On
and after the Annuitant's 61st birthday, no additional Fixed Account
allocations will be accepted. If a Contract is issued on or after the
Annuitant's 60th birthday up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will
be permitted at any time.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due
to the limitations outlined above, the monies will be allocated to the Money
Market Fund.
39
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are no withdrawals and that the Withdrawal
Without Surrender Charge Amount is equal to the greater of 15% of the
Accumulated Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender, based
on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
WITHDRAWAL
WITHOUT
HYPOTHETICAL SURRENDER SURRENDER
ACCOUNT ACCUMULATED CHARGE CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume that the Withdrawal Without Surrender Charge Amount is
equal to the greater of 15% of the current Accumulated Value or the accumulated
earnings in the contract and there are withdrawals as detailed below. The table
below presents examples of the surrender charge resulting from withdrawals of
the Contract Owner's Account, based on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
WITHDRAWAL
WITHOUT
HYPOTHETICAL SURRENDER SURRENDER
ACCOUNT ACCUMULATED CHARGE CHARGE SURRENDER
YEAR VALUE WITHDRAWALS AMOUNT PERCENTAGE CHARGE
- --------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is:
[(1+i)/(1+j)]n/365-1
The following examples assume:
1. The payment was allocated to a ten year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
40
<PAGE>
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers of withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054*$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694*$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.11)]2555/365-1
= (.97297)(7)-1
= -.17454
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
negative of the excess interest earned
over 3%
= Minimum of (-.17454*$62,985.60 or
-$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)(7)-1
= .13981
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
excess interest earned over 3%
= Minimum of (.13981*$62,985.60 or
$8,349.25)
= Minimum of ( $8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
42
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
--- ------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $ 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are withdrawals as detailed in the table below
and that the Death Benefit Effective Annual Yield is equal to 5%. The table
below presents examples of the Death Benefit based on the Hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
--- ------------- ------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $ 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
43
<PAGE>
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
--- ------------- ------------ -------------
<S> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
44
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
INDIVIDUAL VARIABLE ANNUITY CONTRACTS FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE ABOVE SUB-ACCOUNTS OF THE VARIABLE
ACCOUNT DATED JULY 8, 1996 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CUSTOMER SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
DATED JULY 8, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY . . . . 3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 5
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 8
GENERAL INFORMATION AND HISTORY
Separate Account VA-K ("Variable Account") is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company ("Company") established
by vote of the Board of Directors on November 1, 1990. The Company is a life
insurance company organized under the laws of Delaware in July, 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, Telephone 508-855-1000. The Company is subject to the laws of the State
of Delaware governing insurance companies and to regulation by the Commissioner
of Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is licensed
to operate. As of December 31, 1995, the Company had over $5 billion in
assets and over $18 billion of life insurance in force.
Effective October 1, 1995, the Comany changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company, converted to
a stock life insurance company on October 16, 1995, and adopted its present
name. First Allmerica is the fifth oldest life insurance company in America.
As of December 31, 1995 First Allmerica and its subsidiaries (including the
Company) had over $11 bllion in combined assets and over $35.2 billion in
life insurance in force.
Ten Sub-Accounts of the Variable Account are available under the Contracts. Each
of the ten Sub-Accounts invests in a corresponding investment portfolio of the
Delaware Group Premium Fund, Inc. (the "Fund"). The Series are managed by
Delaware Management Company, Inc., except for the International Equity Series
which is managed by Delaware International Advisers Ltd.
The Fund is an open-end, diversified series investment company. The Fund
currently consists of ten different investment portfolios: the Equity-Income
Series, High Yield Series, Capital Reserves Series, Money Market Series,
Growth Series, Multiple Strategy Series, Value Series, Emerging Growth Series
Global Bond Series and International Equity Series (the "Underlying Series").
Each Underlying Series has its own investment objectives and certain attendant
risks.
-2-
<PAGE>
TAXATION OF THE CONTRACTS, VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Code and files a consolidated tax return with its parent and
affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Contracts or the Variable Account may have upon its tax.
Such charge for taxes, if any, will be assessed on a fair and equitable basis in
order to preserve equity among classes of Contract Owners. The Variable Account
presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Fund shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Fund shares is reflected on the
records of the Fund and not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995
and of Variable Account VA-K Delaware Medallion of the Company as of December
31, 1995 and for the periods indicated, included in this Statement of
Additional Information constituting part of the Registration Statement, have
been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contracts.
UNDERWRITERS
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD), serves as principal underwriter for the Contracts
pursuant to a contract among Allmerica Investments, Inc., the Company, and
the Variable Account. Allmerica Investments, Inc. distributes the Contracts
on a best efforts basis. Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653 was organized in 1969 as a wholly-owned
subsidiary of First Allmerica and is, at present, a indirectly wholly-owned
by First Allmerica.
The Contracts offered by this Prospectus are offered continuously and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
policies.
All persons selling the Contracts are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
policies. Commissions are paid by the Company on sales of the Contracts. For
the first $100 million of total purchase payments, commissions will equal
7.00% of purchase payments; thereafter, commissions will equal 6.75% of
purchase payments. Commissions not to exceed 6% of purchase payments will be
paid to entities which sell the Contracts. The remaining commissions payable
by the Company on sales of the Contracts will be paid, pursuant to a
Wholesaler Agreement among the Company, Allmerica Investments, Inc. and
Delaware Distributors, Inc. ("Delaware Distributors"), to Delaware
Distributors, a registered broker-dealer under the Securities Exchange Act of
1934, a member of the NASD and an affiliate of Delaware Management Company,
Inc. and the Fund. In addition, expense reimbursement allowances may be
paid. Additional payments may be made for other services not directly
related to
-3-
<PAGE>
the sale of the Contracts, including the recruitment and training of
personnel, production of promotional literature and similar services.
The aggregate amount of commissions paid with respect to sales of the
Contracts was $4,409,730.32 for Delaware Distributors, Inc. in 1995,
$6,969,614.45 for independent brokers-dealers and $700,288.03 for Delaware
Distributors, Inc. in 1994 and $805,008.90 for independent broker-dealers and
$208,594,64?.00 for Delaware Distributors, Inc. in 1993. Sales of the
Contracts began in 1996.
Commissions paid by the Company do not result in any charge to Contract
Owners or to the Variable Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus. The Company intends to recoup
the commission and other sales expense through a combination of anticipated
surrender, withddrawal and/or annuitization charges, the investment earnings
on amounts allocated to accumulate on a fixed basis in excess of the interest
credited on fixed accumulations by the Company, and the profit, if any, from
the mortality and expense risk charge.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "K. Computation of Contract Values and Annuity
Payments" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value - Previous Valuation Period . . . . . . . $ 1.135000
(2) Value of Assets - Beginning of Valuation Period . . . . . . . . . $5,000,000
(3) Excess of investment income and net gains over capital losses . . $1,675
(4) Adjusted Gross Investment Rate for the valuation period (3):(2) . 0.000335
(5) Annual Charge (one day equivalent of 1.40% per annum) . . . . . . 0.000038
(6) Net Investment Rate (4)-(5) . . . . . . . . . . . . . . . . . . . 0.000297
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . . 1.000297
(8) Accumulation Unit Value - Current Period (1)x(7). . . . . . . . . $1.135337
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134577.
The method for determining the amount of annuity payments is described in
detail under "K. Computation of Contract Values and Annuity Payments" in the
Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume
-4-
<PAGE>
an Annuitant has 40,000 Accumulation Units in a Variable Account, and that
the value of an Accumulation Unit on the Valuation Date used to determine the
amount of the first variable annuity payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume
also that the Contract Owner elects an option for which the first monthly
payment is $6.57 per $1,000 of Accumulated Value applied. Assuming no
premium tax or contingent deferred sales charge, the first monthly payment
would be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3-1/2% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment
factor for the assumed interest rate of 3-1/2% per annum) produces a factor of
1.000096. This is then multiplied by the Annuity Unit value on the immediately
preceding Valuation Date (assumed here to be $1.105000). The result is an
Annuity Unit value of $1.105106 for the current monthly payment. The current
monthly payment is then determined by multiplying the number of Annuity Units by
the current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract Owners and prospective Contract Owners.
These topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer and account rebalancing),
the advantages and disadvantages of investing in tax-deferred and taxable
investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and investment
alternatives to certificates of deposit and other financial instruments,
including comparisons between the Contracts and the characteristics of
and market for such financial instruments.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Accounts asset charge and any applicable contingent deferred sales
load which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compounded rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
TO THE POWER OF N
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
-5-
<PAGE>
ERV = the ending redeemable value of the $1,000 payment at the end of the
specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy at the end of the period.
The deduction of the contingent deferred sales charge, if any, applicable at the
end of the period is included in the calculation, according to the following
schedule:
<TABLE>
<CAPTION>
CONTRACT FORM A
-------------
CONTRACT YEAR FROM DATE OF CHARGE AS PERCENTAGE OF NEW
PAYMENT IN WHICH SURRENDER OCCURS PURCHASE PAYMENTS WITHDRAWN*
--------------------------------- ---------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
<CAPTION>
CONTRACT FORM B
-------------
CONTRACT YEAR FROM DATE OF CHARGE AS PERCENTAGE OF NEW
PAYMENT IN WHICH SURRENDER OCCURS PURCHASE PAYMENTS REDEEMED
--------------------------------- ---------------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all calendar years, an amount equal to the greater of
Cumulative Earnings, 10% of the Accumulated Value under the Contract or the life
expectancy distribution, is not subject to the contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 Annual
Contract fee.
-6-
<PAGE>
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
TO THE POWER OF N
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the specified
period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would
be applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return includes the deduction of the $30
Annual Contract fee.
-7-
<PAGE>
YIELD AND EFFECTIVE YIELD - SUB-ACCOUNT 204 (INVESTS IN THE MONEY MARKET SERIES
OF THE FUND)
Set forth below is yield and effective yield information for Sub-Account 204 for
the seven-day period ended December 31, 1995:
Yield 5.69%
Effective Yield 5.53%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one accumulation unit of the Sub-Account at the
beginning of the period, subtracting a charge reflecting the annual 1.40%
deduction for mortality and expense risk and the administrative charge, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a seven-
day base period by (365/7), with the resulting yield carried to the nearest
hundredth of one percent.
Sub-Account 204 computes effective yield by compounding the unannualized base
period return by using the formula:
Effective Yield = [(base period return + 1)(365/7)] - 1
The calculations of yield and effective yield do NOT reflect the $30 Annual
Contract fee.
FINANCIAL STATEMENTS
Financial Statements are included for the Company and for the Sub-Accounts of
Separate Account VA-K investing in shares of the Underlying Series.
-8-
[co...here]
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES - DECEMBER 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF DGPF
EQUITY INCOME HIGH YIELD CAPITAL RESERVES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Delaware Group Premium Fund, Inc. $ 76,463,303 $ 49,835,924 $ 23,877,321
Accrued investment income........................ ....... -- 407,870 127,602
Receivable from Allmerica Financial Life Insurance
and Annuity Company (Sponsor).................. ....... -- -- --
------------ ------------ ------------
Total assets.................................. ....... 76,463,303 50,243,794 24,004,923
============ ============ ============
LIABILITIES:
Payable to Allmerica Financial Life Insurance
and Annuity Company (Sponsor).................. ....... 49,346 107,415 35,114
------------ ------------ ------------
Net assets............................................ $ 76,413,957 $ 50,136,379 $ 23,969,809
============ ============ ============
Net asset distribution by category:
Qualified variable annuity policies.................... $ 20,911,543 $ 14,656,079 $ 5,526,354
Non-qualified variable annuity policies................ 55,502,414 35,480,300 18,443,455
------------ ------------ ------------
$ 76,413,957 $ 50,136,379 $ 23,969,809
============ ============ ============
Qualified units outstanding, December 31, 1995........... 13,219,307 11,055,009 4,569,198
Net asset value per qualified unit, December 31, 1995.... $ 1.581894 $ 1.325741 $ 1.209480
Non-qualified units outstanding, December 31, 1995....... 35,086,051 26,762,619 15,249,078
Net asset value per non-qualified unit, December 31, 1995 $ 1.581894 $ 1.325741 $ 1.209480
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF DGPF DGPF DGPF DGPF
MONEY MARKET GROWTH MULTIPLE STRATEGY INTERNATIONAL EQUITY VALUE EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
204 205 206 207 208 209
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 12,585,034 $ 50,462,674 $ 52,670,993 $ 28,134,693 $ 11,490,483 $ 18,226,642
58,539 -- -- -- -- --
-- -- -- -- 3,703 --
------------ ------------ ------------ ------------ ------------ ------------
12,643,573 50,462,674 52,670,993 28,134,693 11,494,186 18,226,642
============ ============ ============ ============ ============ ============
74,616 55,142 55,072 20,548 -- 13,787
------------ ------------ ------------ ------------ ------------ ------------
$ 12,568,957 $ 50,407,532 $ 52,615,921 $ 8,114,145 $ 11,494,186 $ 18,212,855
============ ============ ============ ============ ============ ============
$ 3,261,236 $ 15,328,952 $ 14,976,218 $ 7,670,937 $ 3,939,957 $ 5,263,020
9,307,721 35,078,580 37,639,703 20,443,208 7,554,229 12,949,835
------------ ------------ ------------ ------------ ------------ ------------
$ 12,568,957 $ 50,407,532 $ 52,615,921 $ 28,114,145 $ 11,494,186 $ 18,212,855
============ ============ ============ ============ ============ ============
3,001,554 10,705,630 10,589,318 5,894,147 3,245,076 3,875,056
$ 1.086516 $ 1.431859 $ 1.414276 $ 1.301450 $ 1.214134 $ 1.358179
8,566,575 24,498,627 26,614,114 15,708,024 6,221,907 9,534,704
$ 1.086516 $ 1.431859 $ 1.414276 $ 1.301450 $ 1.214134 $ 1.358179
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF DGPF
EQUITY INCOME HIGH YIELD CAPITAL RESERVES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends......................................... $ 2,712,649 $ 4,457,302 $ 1,500,392
------------- ------------ ------------
EXPENSES:
Mortality and expense risk fees................... 732,463 561,304 280,312
Administrative expense charges.................... 87,895 67,357 33,638
------------- ------------ ------------
Total expenses................................... 820,358 628,661 313,950
------------- ------------ ------------
Net investment income (loss)...................... 1,892,291 3,828,641 1,186,442
------------- ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss).......................... 351,231 (333,660) (182,041)
Net unrealized gain............................... 14,864,268 2,308,842 1,645,315
------------- ------------ ------------
Net realized and unrealized gain on investments... 15,215,499 1,975,182 1,463,274
------------- ------------ ------------
Net increase in net assets from operations........ $ 17,107,790 $ 5,803,823 $ 2,649,716
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF DGPF DGPF DGPF DGPF
MONEY MARKET GROWTH MULTIPLE STRATEGY INTERNATIONAL EQUITY VALUE EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
204 205 206 207 208 209
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 765,440 $ 208,522 $1,378,902 $ 615,593 $ 133,051 $ 54,841
---------- ---------- ---------- ---------- ---------- ----------
177,722 508,004 554,677 313,971 103,790 135,254
21,328 60,961 66,561 37,677 12,455 16,231
---------- ---------- ---------- ---------- ---------- ----------
199,050 568,965 621,238 351,648 116,245 151,485
---------- ---------- ---------- ---------- ---------- ----------
566,390 (360,443) 757,664 263,945 16,806 (96,644)
---------- ---------- ---------- ---------- ---------- ----------
-- 469,048 233,085 242,722 46,388 220,458
-- 9,842,970 8,991,892 2,434,397 1,696,345 3,031,765
---------- ---------- ---------- ---------- ---------- ----------
-- 10,312,018 9,224,977 2,677,119 1,742,733 3,252,223
---------- ---------- ---------- ---------- ---------- ----------
$ 566,390 $9,951,575 $9,982,641 $2,941,064 $1,759,539 $3,155,579
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF
EQUITY INCOME HIGH YIELD
SUB-ACCOUNT 201 SUB-ACCOUNT 202
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss).................................. $ 1,892,291 $ 2,267,865 $ 3,828,641 $ 3,088,388
Net realized gain (loss) from security transactions........... 351,231 3,449 (333,660) (308,296)
Net unrealized gain (loss) on investments....... 14,864,268 (2,965,177) 2,308,842 (4,224,440)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations......... 17,107,790 (693,863) 5,803,823 (1,444,348)
----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments......................................... 12,611,903 14,802,843 6,631,293 14,433,874
Terminations.................................................. (2,880,389) (1,651,909) (2,405,303) (1,534,910)
Annuity benefits.............................................. (1,019,742) (353,256) (785,046) (391,703)
Other transfers from (to) the General Account of
Allmerica Financial Life Insurance and
Annuity Company (Sponsor)........................................ 5,127,464 3,332,690 3,958,649 (1,197,665)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from capital transactions.. 13,839,236 16,130,368 7,399,593 11,309,596
----------- ----------- ----------- -----------
Net increase (decrease) in net assets............................ 30,947,026 15,436,505 13,203,416 9,865,248
NET ASSETS:
Beginning of year............................................. 45,466,931 30,030,426 36,932,963 27,067,715
----------- ----------- ----------- -----------
End of year................................................... $76,413,957 $45,466,931 $50,136,379 $36,932,963
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF DGPF
CAPITAL RESERVES MONEY MARKET GROWTH
SUB-ACCOUNT 203 SUB-ACCOUNT 204 SUB-ACCOUNT 205
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 1,186,442 $ 1,171,043 $ 566,390 $ 259,597 $ (360,443) $ (258,550)
(182,041) (240,991) -- -- 469,048 263,853
1,645,315 (1,747,833) -- -- 9,842,970 (1,509,855)
------------ ------------ ------------ ------------ ------------ ------------
2,649,716 (817,781) 566,390 259,597 9,951,575 (1,504,552)
------------ ------------ ------------ ------------ ------------ ------------
2,286,246 8,493,873 22,144,514 27,816,729 5,639,806 9,040,443
(1,066,956) (725,896) (2,008,989) (593,317) (2,178,906 (1,052,599)
(219,799) (322,325) (603,945) -- (542,098) (445,753)
(1,691,704) (3,379,667) (22,149,008) (18,463,931) 4,925,391 2,069,057
------------ ------------ ------------ ------------ ------------ ------------
(692,213) 4,065,985 (2,617,428) 8,759,481 7,844,193 9,611,148
------------ ------------ ------------ ------------ ------------ ------------
1,957,503 3,248,204 (2,051,038) 9,019,078 17,795,768 8,106,596
22,012,306 18,764,102 14,619,995 5,600,917 32,611,764 24,505,168
------------ ------------ ------------ ------------ ------------ ------------
$ 23,969,809 $ 22,012,306 $ 12,568,957 $ 14,619,995 $ 50,407,532 $ 32,611,764
============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF
MULTIPLE STRATEGY INTERNATIONAL EQUITY
SUB-ACCOUNT 206 SUB-ACCOUNT 207
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss)........................... $ 757,664 $ 889,593 $ 263,945 $ (147,736)
Net realized gain (loss) from security transactions.... 233,085 (21,360) 242,722 35,518
Net unrealized gain (loss) on investments.............. 8,991,892 (1,495,074) 2,434,397 (133,482)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations.. 9,982,641 (626,841) 2,941,064 (245,700)
------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Net purchase payments.................................. 6,717,347 13,465,944 4,058,453 9,837,628
Terminations........................................... (2,312,816) (1,201,117) (1,156,726) (533,917)
Annuity benefits....................................... (877,372) (493,674) (380,631) (132,866)
Other transfers from the General Account of
Allmerica Financial Life Insurance and
Annuity Company (Sponsor)............................. 1,349,350 1,254,523 913,674 5,788,068
------------ ------------ ------------ ------------
Net increase in net assets from capital transactions... 4,876,509 13,025,676 3,434,770 14,958,913
------------ ------------ ------------ ------------
Net increase in net assets............................. 14,859,150 12,398,835 6,375,834 14,713,213
NET ASSETS:
Beginning of year...................................... 37,756,771 25,357,936 21,738,311 7,025,098
------------ ------------ ------------ ------------
End of year............................................ $ 52,615,921 $ 37,756,771 $ 28,114,145 $ 21,738,311
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF DGPF
VALUE EMERGING GROWTH
SUB-ACCOUNT 208 SUB-ACCOUNT 209
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$ 16,806 $ (44,094) $ (96,644) $ (46,109)
46,388 350 220,458 (7,906)
1,696,345 26,014 3,031,765 24,080
------------ ----------- ------------ ------------
1,759,539 (17,730) 3,155,579 (29,935)
------------ ----------- ------------ ------------
2,180,809 3,146,569 3,777,567 3,321,192
(318,373) (67,564) (529,800) (159,504)
(62,760) (19,428) (30,371) (10,501)
1,931,543 2,955,309 5,710,419 2,957,173
------------ ----------- ------------ ------------
3,731,219 6,014,886 8,927,815 6,108,360
------------ ----------- ------------ ------------
5,490,758 5,997,156 12,083,394 6,078,425
6,003,428 6,272 6,129,461 51,036
------------ ----------- ------------ ------------
$ 11,494,186 $ 6,003,428 $ 18,212,855 $ 6,129,461
============ =========== ============ ============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
NOTE 1 - ORGANIZATION
Separate Account VA-K - Delaware Medallion (VA-K) is a separate investment
account of Allmerica Financial Life Insurance and Annuity Company (formerly
named SMA Life Assurance Company) (the Company), established on November 1, 1990
for the purpose of separating from the general assets of the Company those
assets used to fund certain variable annuity policies issued by the Company.
Effective October 16, 1995, concurrent with the demutualization, State Mutual
Life Assurance Company of America changed their name to First Allmerica
Financial Life Insurance Company (First Allmerica). The Company is a
wholly-owned subsidiary of First Allmerica. Under applicable insurance law, the
assets and liabilities of VA-K are clearly identified and distinguished from the
other assets and liabilities of the Company. VA-K cannot be charged with
liabilities arising out of any other business of the Company.
VA-K is registered as a unit investment trust under the Investment Company Act
of 1940, as amended (the 1940 Act). VA-K currently offers nine Sub-Accounts
under the Delaware Medallion policies. Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Delaware Group Premium Fund, Inc.
(DGPF or the Fund), managed by Delaware Management Company, Inc., or Delaware
International Advisors, Ltd. DGPF is an open-end, diversified series management
investment company registered under the 1940 Act.
Separate Account VA-K has two types of variable annuity policies, "qualified"
policies and "non-qualified" policies. A qualified policy is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, 408, or 457 of the Internal Revenue Code, while a
non-qualified policy is one that is not purchased in connection with one of the
indicated retirement plans. The tax treatment for certain partial redemptions or
surrenders will vary according to whether they are made from a qualified policy
or a non-qualified policy.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Investments - Security transactions are recorded on the trade date.
Investments in shares of DGPF are stated at the net asset value per share of the
respective investment portfolio of DGPF. Net realized gains and losses on
securities sold are determined on the average cost method. Dividends and capital
gain distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of DGPF at net asset
value.
Federal Income Taxes - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of VA-K. Therefore, no provision for income taxes
has been charged against VA-K .
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in DGPF at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO INFORMATION
SUB- INVESTMENT NUMBER OF AGGREGATE NET ASSET
ACCOUNT PORTFOLIO SHARES COST VALUE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
201 Equity Income.................. 5,155,988 $ 63,111,192 $ 14.83
202 High Yield..................... 5,574,488 51,242,233 8.94
203 Capital Reserves............... 2,404,564 24,091,782 9.93
204 Money Market................... 1,258,503 12,585,034 10.00
205 Growth......................... 3,335,273 39,745,113 15.13
206 Multiple Strategy.............. 3,398,129 44,474,987 15.50
207 International Equity........... 2,146,048 25,326,463 13.11
208 Value.......................... 921,450 9,768,124 12.47
209 Emerging Growth................ 1,300,046 15,170,507 14.02
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account but are paid to
the Company on a monthly basis.
A policy fee is currently deducted on the policy anniversary date and upon
full surrender of the policy when the accumulated value is $50,000 or less. The
policy fee is $30. The policy fee is currently waived for policies originally
issued as part of a 401(k) plan. For the year ended December 31, 1995, policy
fees deducted from accumulated value in VA-K amounted to $111,927.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned subsidiary
of First Allmerica, is principal underwriter and general distributor of VA-K,
and does not receive any compensation for sales of the VA-K - Delaware Medallion
policies. Commissions are paid by the Company to registered representatives of
broker-dealers who are registered under the Securities Exchange Act of 1934 and
are members of the National Association of Securities Dealers. As the current
series of policies have a contingent deferred sales charge, no deduction is made
for sales charges at the time of the sale. For the year ended December 31, 1995,
the Company received $447,478 for contingent deferred sales charges applicable
to VA-K.
<PAGE>
NOTE 5 - POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994
UNITS AMOUNT UNITS AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income
Sub-Account 201
Issuance of units................. 16,817,312 $ 23,691,234 19,171,947 $ 22,831,542
Redemption of units............... (7,103,035) (9,851,998) (5,666,972) (6,701,174)
----------- ------------ ------------ -------------
Net increase...................... 9,714,277 $ 13,839,236 13,504,975 $ 16,130,368
=========== ============ ============ =============
High Yield
Sub-Account 202
Issuance of units................. 13,701,843 $ 16,906,107 19,488,761 $ 23,253,050
Redemption of units............... (7,619,617) (9,506,514) (10,034,596) (11,943,454)
----------- ------------ ------------ -------------
Net increase...................... 6,082,226 $ 7,399,593 9,454,165 $ 11,309,596
=========== ============ ============ =============
Capital Reserves
Sub-Account 203
Issuance of units................. 4,266,217 $ 4,976,279 11,238,496 $ 12,211,124
Redemption of units............... (4,924,028) (5,668,492) (7,515,413) (8,145,139)
----------- ------------ ------------ -------------
Net increase (decrease)........... (657,811) $ (692,213) 3,723,083 $ 4,065,985
=========== ============ ============ =============
Money Market
Sub-Account 204
Issuance of unit.................. 39,103,291 $ 41,569,167 42,330,436 $ 43,599,780
Redemption of units............... (41,533,117) (44,186,595) (33,815,190) (34,840,299)
----------- ------------ ------------ -------------
Net increase (decrease)........... (2,429,826) $ (2,617,428) 8,515,246 $ 8,759,481
=========== ============ ============ =============
Growth
Sub-Account 205
Issuance of units................. 13,019,605 $ 16,432,159 15,645,616 $ 18,116,419
Redemption of units (6,915,534) (8,587,966) (7,347,214) (8,505,271)
----------- ------------ ------------ -------------
Net increase...................... 6,104,071 $ 7,844,193 8,298,402 $ 9,611,148
=========== ============ ============ =============
Multiple Strategy
Sub-Account 206
Issuance of units................. 8,419,696 $ 10,930,861 16,287,349 $ 18,753,977
Redemption of units............... (4,548,601) (6,054,352) (5,000,350) (5,728,301)
----------- ------------ ------------ -------------
Net increase...................... 3,871,095 $ 4,876,509 11,286,999 $ 13,025,676
=========== ============ ============ =============
International Equity
Sub-Account 207
Issuance of units................. 9,412,885 $ 11,535,614 15,701,936 $ 18,561,102
Redemption of units............... (6,571,322) (8,100,844) (3,079,760) (3,602,189)
----------- ------------ ------------ -------------
Net increase...................... 2,841,563 $ 3,434,770 12,622,176 $ 14,958,913
=========== ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED DECEMBER 31,
1995 1994
UNITS AMOUNT UNITS AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value
Sub-Account 208
Issuance of units................. 4,656,792 $ 5,103,171 6,433,373 $ 6,412,580
Redemption of units............... (1,229,779) (1,371,952) (399,675) (397,694)
----------- ------------ ------------ -------------
Net increase...................... 3,427,013 $ 3,731,219 6,033,698 $ 6,014,886
=========== ============ ============ =============
Emerging Growth
Sub-Account 209
Issuance of units................. 9,842,931 $ 12,048,818 7,129,299 $ 7,066,268
Redemption of units............... (2,630,518) (3,121,003) (982,590) (957,908)
----------- ------------ ------------ -------------
Net increase...................... 7,212,413 $ 8,927,815 6,146,709 $ 6,108,360
=========== ============ ============ =============
</TABLE>
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VA-K satisfies the current requirements of
the regulations, and it intends that VA-K will continue to meet such
requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the DGPF shares by VA-K during
the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUB-
ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
201 Equity Income................................ $ 20,683,947 $ 4,944,675
202 High Yield................................... 17,379,753 6,125,619
203 Capital Reserves............................. 4,543,667 4,021,898
204 Money Market................................. 27,099,066 29,026,441
205 Growth....................................... 12,692,122 5,197,139
206 Multiple Strategy............................ 9,091,071 3,443,276
207 International Equity......................... 9,126,168 5,416,662
208 Value........................................ 4,572,637 817,161
209 Emerging Growth.............................. 10,861,874 2,003,623
-------------- --------------
Totals....................................... $ 116,050,305 $ 60,996,494
============== ==============
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance
and Annuity Company and Policyowners
of Separate Account VA-K - Delaware Medallion of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts (201,
202, 203, 204, 205, 206, 207, 208, and 209) constituting the Separate Account
VA-K - Delaware Medallion of Allmerica Financial Life and Annuity Company at
December 31, 1995, and the results of each of their operations for the year then
ended and the changes in each of their net assets for each of the two years in
the period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Allmerica
Financial Life Insurance and Annuity Company's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at December 31, 1995 by
correspondence with the Fund, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 23, 1996
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(formerly SMA Life Assurance Company)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
December 31, 1995
Statutory Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . 1
Statement of Assets, Liabilities, Surplus and Other Funds . . . . . 3
Statement of Operations and Changes in Capital and Surplus. . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Statutory Financial Statements . . . . . . . . . . . . . . 6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND
OTHER FUNDS
as of December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash $ 7,791 $ 7,248
Investments:
Bonds 1,659,575 1,595,275
Stocks 18,132 12,283
Mortgage loans 239,522 295,532
Policy loans 122,696 116,600
Real estate 40,967 51,288
Short term investments 3,500 45,239
Other invested assets 40,196 27,443
----------- -----------
Total cash and investments 2,132,379 2,150,908
Premiums deferred and uncollected (1,231) 5,452
Investment income due and accrued 38,413 39,442
Other assets 6,060 10,569
Assets held in separate accounts 2,978,409 1,869,695
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves $ 856,239 $ 890,880
Annuity and other fund reserves 865,216 928,325
Accident and health reserves 167,246 121,580
Claims payable 11,047 11,720
----------- -----------
Total policy liabilities 1,899,748 1,952,505
Expenses and taxes payable 20,824 17,484
Other liabilities 27,499 36,466
Asset valuation reserve 31,556 20,786
Obligations related to separate account business 2,967,547 1,859,502
----------- -----------
Total liabilities 4,947,174 3,886,743
----------- -----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized - 10,000 shares
Issued and outstanding - 2,517 shares 2,517 2,517
Paid-in surplus 199,307 199,307
Unassigned surplus (deficit) 4,282 (13,621)
Special contingency reserves 750 1,120
----------- -----------
Total surplus and other funds 206,856 189,323
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF OPERATIONS AND
CHANGES IN CAPITAL AND SURPLUS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums and other considerations:
Life $ 156,864 $ 195,633 $ 189,285
Annuities 729,222 707,172 660,143
Accident and health 31,790 31,927 35,718
Reinsurance commissions and reserve adjustments 20,198 4,195 2,309
---------- ---------- ----------
Total premiums and other considerations 938,074 938,927 887,455
Net investment income 167,470 170,430 177,612
Realized capital losses, net of tax (2,295) (17,172) (7,225)
Other revenue 37,466 26,065 19,055
---------- ---------- ----------
Total revenue 1,140,715 1,118,250 1,076,897
---------- ---------- ----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits 391,254 331,418 275,290
Increase (decrease) in policy reserves (22,669) 40,113 15,292
---------- ---------- ----------
Total policy benefits 368,585 371,531 290,582
Operating and selling expenses 150,215 164,175 160,928
Taxes, except capital gains tax 26,536 22,846 19,066
Net transfers to separate accounts 556,856 553,295 586,539
---------- ---------- ----------
Total policy benefits and operating expenses 1,102,192 1,111,847 1,057,115
---------- ---------- ----------
NET INCOME 38,523 6,403 19,782
CAPITAL AND SURPLUS, BEGINNING OF YEAR 189,323 182,216 171,941
Unrealized capital gains (losses) on investments 8,279 12,170 (9,052)
Transfer from (to) asset valuation reserve (10,770) (9,822) 1,974
Other adjustments (18,499) (1,644) (2,429)
---------- ---------- ----------
CAPITAL AND SURPLUS, END OF YEAR $ 206,856 $ 189,323 $ 182,216
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF CASH FLOWS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums, deposits and other income $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded 20,693 3,279 22,185
Net investment income 170,949 173,294 182,843
Net increase in policy loans (6,096) (7,585) (7,812)
Benefits to policyholders and beneficiaries (393,472) (330,900) (298,612)
Operating and selling expenses and taxes (153,504) (193,796) (171,533)
Net transfers to separate accounts (608,480) (600,760) (634,021)
Federal income tax (excluding tax on capital gains) (6,771) (19,603) (4828)
Other sources (applications) (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term investments:
Bonds 572,640 478,512 386,414
Stocks 481 63 64
Real estate and other invested assets 13,008 3,008 11,094
Repayment of mortgage principal 55,202 65,334 79,844
Capital gains tax (400) (968) (3,296)
Acquisition of long term investments:
Bonds (640,339) (508,603) (466,086)
Stocks (44) - -
Real estate and other invested assets (11,929) (24,544) (2,392)
Mortgage loans (415) (364) (2,266)
Other investing activities (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term investments (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year 52,487 15,171 40,345
---------- ---------- ----------
End of the year $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION - Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent
with this transaction, First Allmerica became a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are not
carried at fair value and changes in fair value are not recognized
through surplus or the statement of operations, respectively;
- The Asset Valuation Reserve, represents a reserve against possible
losses on investments and is recorded as a liability through a charge
to surplus. The Interest Maintenance Reserve is designed to include
deferred realized gains and losses (net of applicable federal income
taxes) due to interest rate changes and is also recorded as a
liability, however, the deferred net realized investment gains and
losses are amortized into future income generally over the original
period to maturity of the assets sold. These liabilities are not
required under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead of
using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes and other
items, are not deferred and amortized in relation to the revenue/gross
profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed interest,
morbidity and mortality assumptions instead of using more realistic
expense, interest, morbidity, mortality and voluntary withdrawal
assumptions with provision made for adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not recorded
as assets, but as offsets against the respective liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial statements and
those included in the tax returns;
- Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets (principally
agents' balances), are not recorded as assets, but are charged to
surplus; and,
- Costs related to other postretirement benefits are recognized only for
employees that are fully vested.
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS - Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are
carried generally at cost and common stocks are carried at market value. Policy
loans are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS - In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS - In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS - Separate account assets and liabilities represent segregated
funds administered and invested by the Company for the benefit of certain
variable annuity and variable life contract holders. Assets consist principally
of bonds, common stocks, mutual funds, and short term obligations at market
value. The investment income, gains, and losses of these accounts generally
accrue to the contract holders and therefore, are not included in the Company's
net income. Appreciation and depreciation of the Company's interest in the
separate accounts, including undistributed net investment income, is reflected
in capital and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES - Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in
force. These liabilities are computed based upon mortality, morbidity and
interest rate assumptions applicable to these coverages, including provision
for adverse deviation. Reserves are computed using interest rates ranging
from 3% to 6% for individual life insurance policies, 3% to 5 1/2% for
accident and health policies and 3 1/2% to 9 1/2% for annuity contracts.
Mortality, morbidity and withdrawal assumptions for all policies are based on
the Company's own experience and industry standards. The assumptions vary by
plan, age at issue, year of issue and duration. Claims reserves are computed
based on historical experience modified for expected trends in frequency and
severity. Withdrawal characteristics of annuity and other fund reserves vary
by contract. At December 31, 1995 and 1994, approximately 84% and 77%,
respectively, of the contracts (included in both the general account and
separate accounts of the Company) were not subject to discretionary
withdrawal or were subject to withdrawal at book value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
FEDERAL INCOME TAXES - AFC, its life insurance subsidiaries, First Allmerica and
Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES - Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
NOTE 2 - INVESTMENTS
BONDS - The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
<S> <C> <C> <C> <C>
Federal government bonds $ 67,039 $ 3,063 $ - $ 70,102
State, local and government agency bonds 13,607 2,290 23 15,874
Foreign government bonds 12,121 772 249 12,644
Corporate securities 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities 95,385 951 - 96,336
---------- ---------- ---------- ----------
Total $1,659,574 $ 62,912 $ 6,457 $1,715,939
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
Federal government bonds $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds 1,110 54 - 1,164
Foreign government bonds 31,863 83 3,735 28,211
Corporate securities 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities 81,780 268 1,737 80,311
---------- ---------- ---------- ----------
Total $1,595,275 $ 8,558 $ 62,245 $1,541,588
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
----- -----
<S> <C> <C>
Due in one year or less $ 250,578 $ 258,436
Due after one year through five years 736,003 763,179
Due after five years through ten years 538,897 558,445
Due after ten years 134,097 135,880
---------- ----------
Total $1,659,575 $1,715,940
---------- ----------
---------- ----------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE - Mortgage loans and real estate investments, are
diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by
the related properties and are generally no more than 75% of the property value
at the time the original loan is made. At December 31, 1995 and 1994, mortgage
loan and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(In thousands)
Property Type 1995 1994
- ------------- ---- ----
<S> <C> <C>
Office buildings $ 127,149 $ 140,292
Residential 59,934 57,061
Retail 29,578 72,787
Industrial/Warehouse 38,192 39,424
Other 25,636 37,256
----------- -----------
Total $ 280,489 $ 346,820
----------- -----------
----------- -----------
Geographic Region 1995 1994
- ----------------- ---- ----
South Atlantic $ 86,410 $ 92,934
East North Central 55,991 72,704
Middle Atlantic 38,666 48,688
Pacific 32,803 39,892
West North Central 21,486 27,377
Mountain 9,939 12,211
New England 24,886 26,613
East South Central 5,487 6,224
West South Central 4,821 20,177
---------- ----------
Total $ 280,489 $ 346,820
---------- ----------
---------- ----------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NET INVESTMENT INCOME - The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 122,318 $ 123,495 $ 126,729
Stocks 1,653 1,799 953
Mortgage loans 26,356 31,945 40,823
Real estate 9,139 8,425 9,493
Policy loans 9,486 8,797 8,215
Other investments 3,951 1,651 674
Short term investments 2,252 1,378 840
---------- ---------- ----------
175,155 177,490 187,727
Less investment expenses 9,703 9,138 11,026
---------- ---------- ----------
Net investment income, before IMR amortization 165,452 168,352 176,701
IMR amortization 2,018 2,078 911
---------- ---------- ----------
Net investment income $ 167,470 $ 170,430 $ 177,612
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES - Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 727 $ 645 $ 10,133
Stocks (263) (62) 16
Mortgage loans (1,083) (17,142) (83)
Real estate (1,892) 605 (2,044)
--------- --------- ---------
(2,511) (15,954) 8,022
Less income tax 400 968 3,296
--------- --------- ---------
Net realized capital gains (losses) before transfer to IMR (2,911) (16,922) 4,726
Net realized capital gains transferred to IMR 616 (250) (11,951)
--------- --------- ---------
Net realized capital gains (losses) $ (2,295) $(17,172) $ (7,225)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $ .5 million, respectively, were realized on those
sales.
NOTE 3 - FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available,
estimates of fair value are based on discounted cash flow analyses which utilize
current interest rates for similar financial instruments which have comparable
terms and credit quality.
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS - The carrying amounts reported in the statement
of assets, liabilities, surplus and other funds approximate fair value.
BONDS - Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS - Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS - Fair values are estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. The fair value of below investment grade
mortgage loans is limited to the lesser of the present value of the cash flows
or book value.
POLICY LOANS - The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) - Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments 3,500 3,500 45,239 45,239
Bonds 1,659,575 1,715,940 1,595,275 1,541,588
Stocks 18,132 18,414 12,283 12,590
Mortgage loans 239,522 250,196 295,532 291,704
Policy loans 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies 16,796 16,796 16,673 16,673
Other contract deposit funds 632 632 1,105 1,105
</TABLE>
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 4 - FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS
has completed its examination of all of the consolidated federal income tax
returns through 1988. In management's opinion, adequate tax liabilities have
been established for all years. However, the amount of these liabilities could
be revised in the near term if estimates of the Company's ultimate liability are
revised.
NOTE 5 - REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reinsurance premiums assumed $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded
42,914 17,430 14,798
Deduction from insurance
liability including
reinsurance recoverable on
unpaid claims 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance.
Premiums ceded and reinsurance credits taken under this agreement amounted to
$25.4 million and $20.7 million, respectively. At December 31, 1995, the
deduction from insurance liability, including reinsurance recoverable on unpaid
claims under this agreement was $12.7 million.
NOTE 6 - ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 7 - DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its statutory policyholder surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an
insurer, whether or not in excess of the aforementioned threshold, from a source
other than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. At January 1, 1996, the Company could pay
dividends of $4.3 million to First Allmerica, without prior approval.
NOTE 8 - OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $ 85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 - FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 - LITIGATION
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
13
