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File Number 33-44830
811-6293
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 13
-----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
Amendment No. 26
SEPARATE ACCOUNT VA-K OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Trust)
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
(508) 855-1000
(Registrant's telephone number including area code)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
(Name and complete address of agent for service)
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1997 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (1)
___ on (date) pursuant to paragraph (a) (1)
___ on (date) pursuant to paragraph (a) (2) of Rule 485
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933. The Rule 24f-2 Notice for
the issuer's fiscal year ended December 31, 1996 was filed February 28, 1997.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1. . . . . . . . . Cover Page
2. . . . . . . . . "Special Terms"
3. . . . . . . . . "Summary"; "Annual and Transaction Expenses"
4. . . . . . . . . "Condensed Financial Information"; Performance Information
5. . . . . . . . . Prospectus A: "Description of the Company, the
Separate Account and the Fund"
Prospectus B: Description of the Company, the Variable
Account and Delaware Group Premium Fund, Inc.
6. . . . . . . . . "Charges and Deductions:
7. . . . . . . . . Prospectus A: "The Variable Annuity Policies"
Prospectus B: "Description of the Contract"
8. . . . . . . . . Prospectus A: "The Variable Annuity Policies"
Prospectus B: "Electing the Form of Annuity and the
Annuity Date"; "Description of Variable Annuity Option";
"Annuity Benefit Payments"
9. . . . . . . . . "Death Benefit"
10 . . . . . . . . Prospectus A: "Purchase Payments"; "Computation
of Policy Values and Annuity Payments"
Prospectus B: "Payments"; "Computation of Values";
"Distribution"
11 . . . . . . . . Prospectus A: "Surrender"; "Partial Redemption"
Prospectus B: "Surrender"; Withdrawals"; "Charge for
Surrender and Withdrawal"; "Withdrawal Without Surrender
Charge"; Texas Optional Retirement Program"
12 . . . . . . . . "Federal Tax Considerations"
13 . . . . . . . . "Legal Matters"
14 . . . . . . . . "Statement of Additional Information-Table of Contents"
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FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15 . . . . . . . . "Cover Page"
16 . . . . . . . . "Table of Contents"
17 . . . . . . . . "General Information and History"
18 . . . . . . . . "Services"
19 . . . . . . . . "Underwriters"
20 . . . . . . . . "Underwriters"
21 . . . . . . . . "Performance Information"
22 . . . . . . . . "Annuity Payments"
23 . . . . . . . . "Financial Statements"
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ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
DELAWARE MEDALLION III
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1997 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT. THE
CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
PLEASE READ THE PROSPECTUS CAREFULLY.
1. THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT
The Delaware Medallion III variable annuity contract is a contract between you
and Allmerica Financial Life Insurance and Annuity Company. It is designed to
help you accumulate assets for your retirement or other important financial
goals on a tax-deferred basis. Delaware Medallion III combines the concept of
professional money management with the attributes of an annuity contract.
Delaware Medallion III offers a diverse selection of investment portfolios. You
may allocate your payments among any of 15 investment portfolios of the Delaware
Group Premium Fund, Inc., the Guarantee Period Accounts and the Fixed Account
(the Guaranteed Period Accounts and/or the Fixed Account may not be available in
certain jurisdictions.) This range of investment choices enables you to allocate
your money to meet your particular investment needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an INCOME PHASE.
During the ACCUMULATION PHASE you can make payments into the contract on any
frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you withdraw prior to age 59 1/2.
During the INCOME PHASE you will receive regular payments from your contract,
provided you annuitize. Annuitization involves beginning a series of payments
from the capital that has built up in your contract. The amount of your payments
during the income phase will, in part, be determined by your account's growth
during the accumulation phase.
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments for your lifetime; (2) monthly payments for your
lifetime, but for not less than 10 years; (3) monthly payments for your lifetime
with the guarantee that if payments to you are less than the accumulated value a
refund of the remaining value will be paid; (4) monthly payments for your
lifetime and your survivor's lifetime; (5) monthly payments for your lifetime
and your survivor's lifetime with the payment to the survivor being reduced to
2/3; and (6) monthly payments for a specified period of 1 to 30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making payments
into this contract. Payments are not limited as to frequency, but there are
certain limitations as to amount. Currently, the initial payment must be at
least $600. In all cases, each subsequent payment must be at least $50.
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4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following investment series:
Decatur Series
Devon Series
DelCap Series
Quantum Series
Value Series
Trend Series
International Equity Series
Emerging Markets Series
Delaware Series
Convertible Securities Series
Delchester Series
Capital Reserves Series
Strategic Income Series
Cash Reserve Series
Global Bond Series
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods during which interest rates are guaranteed. The Fixed Account
guarantees principal and a minimum rate of interest (never less than 3%
compounded annually).
5. EXPENSES
Each year and upon surrender, a $30.00 contract fee is deducted from your
contract. The contract fee is waived if the value of the contract is $50,000 or
more or if the contract is issued to and maintained by the Trustees of a 401(k)
plan. We also deduct insurance charges which amount to 1.40% annually of the
daily value of your contract value allocated to the variable investment options.
The insurance charges include: Mortality and Expense Risk Charge, 1.25%; and
Administrative Expense Charge, 0.15%. There are also investment management fees
and other series operating expenses that vary by investment series.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 1% and
7% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence.
There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25.00, for transfers after
your 12 free transfers.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the $30 contract
fee (which is represented as 0.03%), the 1.40% insurance charges and the
investment charges for each investment series. The next two columns show you two
examples of the charges, in dollar amounts, you would pay under a contract. The
examples assume you invest $1,000 in an investment series which earns 5%
annually and that you withdraw your money: (1) at the end of year 1, and (2) at
the end of year 10. For year 1, the Total Annual Charges are assessed as well
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as the surrender charges. For year 10, the example shows the aggregate of all
the annual charges assessed for 10 years, but there is no surrender charge. The
premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSE TOTAL EXPENSE
INSURANCE INVESTMENT ANNUAL AT THE END OF AT THE END OF
INVESTMENT SERIES CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- -------------------------------- ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Decatur Series 1.43% 0.67% 2.10% $ 83 $ 243
Devon Series 1.43% 0.80% 2.23% $ 84 $ 256
DelCap Series 1.43% 0.80% 2.23% $ 84 $ 256
Quantum Series 1.43% 0.80% 2.23% $ 84 $ 256
Value Series 1.43% 0.80% 2.23% $ 84 $ 256
Trend Series 1.43% 0.80% 2.23% $ 84 $ 256
International Equity Series 1.43% 0.80% 2.23% $ 84 $ 256
Emerging Markets Series 1.43% 1.50% 2.93% $ 90 $ 325
Delaware Series 1.43% 0.68% 2.11% $ 83 $ 244
Convertible Securities Series 1.43% 0.80% 2.23% $ 84 $ 256
Delchester Series 1.43% 0.70% 2.13% $ 83 $ 246
Capital Reserves Series 1.43% 0.72% 2.15% $ 83 $ 248
Strategic Income Series 1.43% 0.80% 2.23% $ 84 $ 256
Cash Reserve Series 1.43% 0.61% 2.04% $ 82 $ 237
Global Bond Series 1.43% 0.80% 2.23% $ 84 $ 256
</TABLE>
The charges reflect any expense reimbursement or fee waiver. For more detailed
information, see the Fee Table in the Prospectus for the Contract.
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your investment and partly earnings. You will be
subject to income taxes on the earnings portion of each payment. However, if
your contract is funded with pre-tax or tax deductible dollars (such as a
pension or profit sharing plan contribution), then the entire payment will be
taxable.
7. WITHDRAWALS
You can withdraw money from your contract at any time during the accumulation
phase. Any payment invested for more than seven years can be withdrawn without a
surrender charge. For amounts invested less than seven years, you can withdraw,
without a charge, the GREATEST of: (1) 100% of cumulative earnings; (2) 15% of
the contract value; or (3) if you are the Owner and Annuitant, an amount based
on your life expectancy. Where permitted by state law, the surrender charges are
also waived if after the contract is issued, the owner (1) is diagnosed with a
fatal illness, (2) becomes disabled (before age 65) or (3) is confined in a
medical care facility for the later of one year from issue or 90 days.
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
guarantee period will be subject to a market value adjustment which may increase
or decrease the value in the account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the investment series you choose. The following chart illustrates
past returns for each investment series for the time period shown. The
performance figures reflect the contract fee, the insurance charges, the
investment
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charges and all other expenses of the investment series. They do not reflect the
surrender charges and if applied would reduce such performance. Past performance
is not a guarantee of future results.
<TABLE>
<S> <C> <C> <C> <C>
INVESTMENT SERIES 1996 1995 1994 1993
- -------------------------------- --------- --------- --------- ---------
Decatur Series 19.00% 34.24% -1.61% 13.83%
Devon Series N/A N/A N/A N/A
DelCap Series 12.83% 27.74% -4.90% 10.01%
Quantum Series N/A N/A N/A N/A
Value Series 20.81% 22.12% -0.64% N/A
Trend Series 9.41% 37.29% -1.90% N/A
International Equity Series 18.32% 12.29% 1.20% 14.35%
Emerging Markets Series N/A N/A N/A N/A
Delaware Series 14.25% 24.82% -1.55% 6.66%
Convertible Securities Series N/A N/A N/A N/A
Delchester Series 11.17% 13.89% -4.23% 14.71%
Capital Reserves Series 2.55% 12.57% -4.05% 6.32%
Strategic Income Series N/A N/A N/A N/A
Cash Reserve Series 3.43% 4.09% 2.21% 1.04%
Global Bond Series N/A N/A N/A N/A
</TABLE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (1) the
accumulated value increased for any positive market value adjustment; (2) gross
payments, with interest accumulating daily at an annual rate of 5% from the date
each payment was applied to the date of death, reduced proportionately to
reflect any withdrawals; or (3) the highest accumulated value on any contract
anniversary date, increased by any subsequent payments and reduced
proportionately to reflect withdrawals made after that date.
10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), we will pay you an amount equal
to the value of your contract. This may be more or less than your original
payment. If required by applicable state or federal law, we will return your
payment.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Capital Reserves Series, Cash Reserve Series, Strategic
Income Series or Fixed Account to one or more of the other investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
11. INQUIRIES
If you need more information you may contact us at:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln St.
Worcester, Massachusetts 01653
800-533-2124
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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
(the "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 referred to herein collectively as the "Contract(s)."
The following is a summary of information about the Contract. 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 one of the
following series of Delaware Group Premium Fund, Inc. ("DGPF"):
<TABLE>
<S> <C>
DECATUR TOTAL RETURN SERIES DELAWARE SERIES
DEVON SERIES CONVERTIBLE SECURITIES SERIES
DELCAP SERIES DELCHESTER SERIES
QUANTUM SERIES CAPITAL RESERVES SERIES
VALUE SERIES STRATEGIC INCOME SERIES
TREND SERIES CASH RESERVE SERIES
INTERNATIONAL EQUITY SERIES GLOBAL BOND SERIES
EMERGING MARKETS SERIES
</TABLE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation phase, 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. Amounts
allocated to the Guarantee Period Accounts in the accumulation phase are held in
the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
("SAI"), dated May 1, 1997, as may be amended from time to time, filed with the
Securities and Exchange Commission and incorporated herein by reference. The
Table of Contents of the SAI is listed on page 3 of this Prospectus. The SAI is
available upon request and without charge. To obtain the SAI, fill out and
return the attached request card, or contact Annuity Client Services, Allmerica
Financial Life Insurance and Annuity Company, 440 Lincoln Street, Worcester, MA
01653, Telephone 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 (THE "SEC") 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: MAY 1, 1997
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 3
SPECIAL TERMS 4
SUMMARY 6
ANNUAL AND TRANSACTION EXPENSES 10
CONDENSED FINANCIAL INFORMATION 13
PERFORMANCE INFORMATION 16
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND, INC.
18
INVESTMENT OBJECTIVES AND POLICIES 19
INVESTMENT ADVISORY SERVICES TO DGPF 20
DESCRIPTION OF THE CONTRACT 21
A. Payments 21
B. Right to Revoke Individual Retirement Annuity 21
C. Right to Revoke All Other Contracts 22
D. Transfer Privilege 22
Automatic Transfers and Automatic Account Rebalancing Options 22
E. Surrender 23
F. Withdrawals 23
Systematic Withdrawals 24
Life Expectancy Distributions 24
G. Death Benefit 24
Death of the Annuitant Prior to the Annuity Date 25
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date 25
Payment of the Death Benefit Prior to the Annuity Date 25
Death of the Annuitant after the Annuity Date 25
H. The Spouse of the Owner as Beneficiary 25
I. Assignment 26
J. Electing the Form of Annuity and the Annuity Date 26
K. Description of Variable Annuity Payout Options 26
L. Annuity Benefit Payments 27
The Annuity Unit 27
Determination of the First and Subsequent Annuity Benefit Payments 28
M. NORRIS Decision 28
N. Computation of Values 29
The Accumulation Unit 29
Net Investment Factor 29
CHARGES AND DEDUCTIONS 29
A. Variable Account Deductions 30
Mortality and Expense Risk Charge 30
Administrative Expense Charge 30
Other Charges 30
B. Contract Fee 30
C. Premium Taxes 31
D. Contingent Deferred Sales Charge 31
Charge for Surrender and Withdrawal 31
Reduction or Elimination of Surrender Charge 32
Withdrawal Without Surrender Charge 33
Surrenders 33
Charge at the Time Annuity Benefit Payments Begin 34
</TABLE>
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<TABLE>
<S> <C> <C>
E. Transfer Charge 34
GUARANTEE PERIOD ACCOUNTS 35
FEDERAL TAX CONSIDERATIONS 37
A. Qualified and Non-Qualified Contracts 37
B. Taxation of the Contracts in General 37
Withdrawals Prior to Annuitization 37
Annuity Payouts After Annuitization 38
Penalty on Distribution 38
Assignments or Transfers 38
Non-Natural Owners 38
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations 39
C. Tax Withholding 39
D. Provisions Applicable to Qualified Employer Plans 39
Corporate and Self-Employed Pension and Profit Sharing Plans 39
Individual Retirement Annuities 39
Tax-Sheltered Annuities 40
Texas Optional Retirement Program 40
REPORTS 40
LOANS (QUALIFIED CONTRACTS ONLY) 40
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 41
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 41
VOTING RIGHTS 41
DISTRIBUTION 42
LEGAL MATTERS 42
FURTHER INFORMATION 42
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT B-1
APPENDIX C -- THE DEATH BENEFIT C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 5
PERFORMANCE INFORMATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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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 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 ANNUITY PAYOUT: an annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate 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.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period 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.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract 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.
UNDERLYING FUNDS (OR FUNDS): the Decatur Total Return Series, Devon Series,
DelCap Series, Quantum Series, Value Series, Trend Series, International Equity
Series, Emerging Market Series, Delaware Series, Convertible Securities Series,
Delchester Series, Capital Reserves Series, Strategic Income Series, Cash
Reserve Series, and Global Bond Series of 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
affected materially.
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
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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 PAYOUT: an annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain
Underlying Funds.
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SUMMARY
WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY?
The Delaware Medallion III variable annuity contract is an insurance contract
designed to help you, the Owner, accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Contract combines the
concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- - a customized investment portfolio
- - experienced professional investment advisers
- - tax deferral on earnings
- - guarantees that can protect your family during the accumulation phase
- - income that can be guaranteed for life
- - issue age up to 90.
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the Sub-Accounts investing in series of the Delaware Group Premium Fund, Inc.
("DGPF), to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. The Contract's Accumulated Value is based on the investment
performance of the Funds and any accumulations in the Guarantee Period and Fixed
Accounts. No income taxes are paid on any earnings under the Contract unless and
until Accumulated Values are withdrawn. In addition, during the accumulation
phase, the beneficiaries receive certain protections and guarantees in the event
of the Annuitant's death. See discussion below: "WHAT HAPPENS UPON DEATH DURING
THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years; and
- - periodic payments over a specified number of years (1-30); under this option
you may reserve the right to convert remaining payments to a lump-sum payout
by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the Owner), and us, Allmerica Financial Life
Insurance and Annuity Company ("Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two must be the Annuitant), an
Annuitant and a beneficiary. As Owner, you make payments, choose investment
allocations and select the Annuitant and beneficiary. The Annuitant is the
individual who receives annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
6
<PAGE>
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of payments are flexible, subject only to a $600
minimum for the initial payment ($1,000 in Washington) and a $50 minimum for any
additional payments. (A lower initial payment amount is permitted for certain
qualified plans and where monthly payments are being forwarded directly from a
financial institution.) In addition, a minimum of $1,000 is always required to
establish a Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account.
YOU HAVE A CHOICE OF 15 SUB-ACCOUNTS INVESTING IN THE FOLLOWING SERIES OF DGPF:
Decatur Total Return Series
Devon Series
DelCap Series
Quantum Series
Value Series
Trend Series
International Equity Series
Emerging Markets Series
Delaware Series
Convertible Securities Series
Delchester Series
Capital Reserves Series
Strategic Income Series
Cash Reserve Series
Global Bond Series
Each Underlying Fund operates pursuant to different investment objectives,
discussed below, and this range of investment options enables you to allocate
your money among the Funds to meet your particular investment needs.
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. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, 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 offers nine Guarantee Periods ranging from two to ten
years in duration. 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 any 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 a 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."
THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES. SIMILARLY, NOT
ALL SUB-ACCOUNTS MAY BE AVAILABLE IN ALL STATES.
WHO IS THE INVESTMENT ADVISER?
Delaware Management Company, Inc. ("Delaware Management") is the investment
adviser for the Decatur Total Return Series, Devon Series, DelCap Series,
Quantum Series, Value Series, Trend Series,
7
<PAGE>
Delaware Series, Convertible Securities Series, Delchester Series, Capital
Reserves Series, Strategic Income Series, and Cash Reserve Series. The
investment adviser for the International Equity Series, Emerging Markets Series
and the Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International").
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account. You will incur no current
taxes on transfers while your money remains in the Contract. See "D. Transfer
Privilege." The first 12 transfers in a Contract year are guaranteed to be free
of a transfer charge. For each subsequent transfer in a Contract year, the
Company does not currently charge but reserves the right to assess a processing
charge guaranteed never to exceed $25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. A 10% tax penalty may apply on all amounts deemed to be earnings if
you are under age 59 1/2. Additional amounts may be withdrawn at any time but
may be subject to the surrender charge for payments that have not been invested
in the Contract for more than seven years. (A Market Value Adjustment may apply
to any withdrawal made from a Guarantee Period Account prior to the expiration
of the Guarantee Period.)
In addition, except where prohibited by state law, you may withdraw all or a
portion of your money without a surrender charge if, after the Contract is
issued, you are admitted to a medical care facility, become disabled or are
diagnosed with a fatal illness. For details and restrictions, see "Reduction or
Elimination of Surrender Charge."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
highest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, with interest accumulating daily at an annual rate of 5% (4%
in Washington) starting on the date each payment was applied, and continuing
throughout your investments' entire accumulation phase, reduced
proportionately to reflect withdrawals; or
- - The highest Accumulated Value on any Contract anniversary, increased for
subsequent payments and reduced proportionately to reflect withdrawals since
that anniversary.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment.
(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 "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on each Contract anniversary and
upon surrender, a $30 Contract fee will be deducted from the Contract. The
Contract fee is waived for Contracts issued to and maintained by a trustee of a
401(k) plan.
8
<PAGE>
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity payout options, you may be subject to a
contingent deferred sales charge. If applicable, this charge will be between 1%
and 7% of payments withdrawn, based on when the payments were made.
A deduction for state and local premium taxes, if any, may be made as described
under "C. Premium Taxes."
The Company will deduct a daily Mortality and Expense Risk Charge and
Administrative Expense Charge equal to 1.25% and 0.15%, respectively, of the
average daily net assets invested in each Underlying Fund. The Funds will incur
certain management fees and expenses which are more fully described in "Other
Charges" and in the DGPF prospectus which accompanies this Prospectus.
CAN I EXAMINE THE CONTRACT?
Yes. The Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of the Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires or if the Contract was issued as an Individual Retirement
Annuity ("IRA"), you will receive the greater of the amount described above or
your entire payment. See "B. Right to Revoke Individual Retirement Annuity."
CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
9
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show the charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Underlying Funds. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
deducted as described under "C. Premium Taxes."
CONTRACT CHARGES:
<TABLE>
<CAPTION>
CONTRACT YEAR
AFTER
DATE OF PAYMENT CHARGE
--------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
The charge (as a percentage of payments, applied to the amount 0-1 7%
surrendered in excess of the amount, if any, which may be 2 6%
surrendered free of charge) will be assessed upon surrender, 3 5%
withdrawal, or annuitization under any commutable period certain 4 4%
option or a non-commutable period certain option of less than 5 3%
ten years. 6 2%
7 1%
more than 7 0%
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers. None
The Company guarantees that the first 12 transfers in a Contract
year will be free of a 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
costs of processing the transfer.
ANNUAL CONTRACT FEE:
An annual Contract fee is deducted when Accumulated Value is $30
less than $50,000. The Contract fee currently is waived for a
Contract issued to a trustee of a 401(k) plan, but the Company
reserves the right to impose the Contract fee on such Contracts.
SUB-ACCOUNT 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>
10
<PAGE>
FUND EXPENSES:
<TABLE>
<CAPTION>
OTHER EXPENSES
MANAGEMENT (AFTER ANY TOTAL
FUND FEES APPLICABLE REIMBURSEMENTS)(1) EXPENSES
- ----------------------------------------------- ------------------ -------------------------------------- -------------
<S> <C> <C> <C>
Decatur Total Return Series.................... 0.60% 0.07% 0.67%
Devon Series................................... 0.41% 0.39%* 0.80%
DelCap Series.................................. 0.73% 0.07% 0.80%
Quantum Series................................. 0.55% 0.25%* 0.80%
Value Series................................... 0.56% 0.24% 0.80%
Trend Series................................... 0.63% 0.17% 0.80%
International Equity Series.................... 0.64% 0.16% 0.80%
Emerging Markets Series........................ 1.04% 0.46%* 1.50%
Delaware Series................................ 0.60% 0.08% 0.68%
Convertible Securities Series.................. 0.52% 0.28%* 0.80%
Delchester Series.............................. 0.60% 0.10% 0.70%
Capital Reserves Series........................ 0.60% 0.12% 0.72%
Strategic Income Series........................ 0.33% 0.47%* 0.80%
Cash Reserve Series............................ 0.50% 0.11% 0.61%
Global Bond Series............................. 0.36% 0.44% 0.80%
</TABLE>
* Estimated after expense reimbursement
(1) The investment adviser for the Value Series, Trend Series, DelCap Series,
Delaware Series, Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Cash Reserve Series, Strategic Income Series, Devon Series,
Convertible Securities Series, and Quantum Series is Delaware Management
Company, Inc. ("Delaware Management"). The Investment Adviser for the
International Equity Series, Emerging Markets Series and the Global Bond Series
is Delaware International Advisers Ltd. ("Delaware International"). The
investment advisers for the Series of DGPF have agreed voluntarily to waive
their management fees and reimburse each Series for expenses to the extent that
total expenses will not exceed 1.50% for the Emerging Markets Series and 0.80%
for all other Series. This waiver/reimbursement will be in effect through June
30, 1997. For the fiscal year ended December 31, 1996, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.91% for the International Equity Series,
0.99% for the Value Series, 0.92% for the Trend Series, and 0.82% for the DelCap
Series.
The following examples demonstrate the cumulative expenses which would be paid
by the 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 Funds differ,
separate examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
11
<PAGE>
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable period, you surrender your Contract or
annuitize* under a commutable period certain option of less than ten years, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return................................................... $ 83 $ 112 $ 142 $ 243
Devon Series........................................................... $ 84 $ 116 $ 149 $ 256
DelCap Series.......................................................... $ 84 $ 116 $ 149 $ 256
Quantum Series......................................................... $ 84 $ 116 $ 149 $ 256
Value Series........................................................... $ 84 $ 116 $ 149 $ 256
Trend Series........................................................... $ 84 $ 116 $ 149 $ 256
International Equity Series............................................ $ 84 $ 116 $ 149 $ 256
Emerging Markets Series................................................ $ 90 $ 136 $ 183 $ 325
Delaware Series........................................................ $ 83 $ 112 $ 143 $ 244
Convertible Securities Series.......................................... $ 84 $ 116 $ 149 $ 256
Delchester Series...................................................... $ 83 $ 113 $ 144 $ 246
Capital Reserves Series................................................ $ 83 $ 114 $ 145 $ 248
Strategic Income Series................................................ $ 84 $ 116 $ 149 $ 256
Cash Reserve Series.................................................... $ 82 $ 110 $ 139 $ 237
Global Bond Series..................................................... $ 84 $ 116 $ 149 $ 256
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a life
option or any non-commutable period certain option of ten years or more, 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>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series............................................ $ 21 $ 66 $ 113 $ 243
Devon Series Series.................................................... $ 23 $ 70 $ 119 $ 256
DelCap Series.......................................................... $ 23 $ 70 $ 119 $ 256
Quantum Series......................................................... $ 23 $ 70 $ 119 $ 256
Value Series........................................................... $ 23 $ 70 $ 119 $ 256
Trend Series........................................................... $ 23 $ 70 $ 119 $ 256
International Equity Series............................................ $ 23 $ 70 $ 119 $ 256
Emerging Markets Series................................................ $ 30 $ 91 $ 154 $ 325
Delaware Series........................................................ $ 21 $ 66 $ 113 $ 244
Convertible Securities Series.......................................... $ 23 $ 70 $ 119 $ 256
Delchester Series...................................................... $ 22 $ 67 $ 114 $ 246
Capital Reserves Series................................................ $ 22 $ 67 $ 115 $ 248
Strategic Income Series................................................ $ 23 $ 70 $ 119 $ 256
Cash Reserve Series.................................................... $ 21 $ 64 $ 110 $ 237
Global Bond Series..................................................... $ 23 $ 70 $ 119 $ 256
</TABLE>
* 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 non-commutable
period certain option of ten years or more.
Pursuant to requirements of the Investment Company Act of 1940 ("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 Contract by the Company are divided
by the total average net assets attributable to the Contract. The resulting
percentage is 0.03%, and the amount of the Contract fee is assumed to be $.30 in
the examples. The Contract fee is deducted only when the Accumulated Value is
less than $50,000. Lower costs apply to Contracts issued and maintained as part
of a 401(k) plan.
12
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DECATUR TOTAL RETURN SERIES
Unit Value:
Beginning of Period............................................. 1.582 1.178 1.197 1.051 1.000
End of Period................................................... 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of Period (in thousands)....... 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)....... N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period............................................. 1.432 1.121 1.178 1.070 1.000
End of Period................................................... 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of Period (in thousands)....... 44,667 35,204 29,100 20,802 4,534
QUANTUM SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)....... N/A N/A N/A N/A N/A
VALUE SERIES
Unit Value:
Beginning of Period............................................. 1.214 0.994 1.000 1.000 --
End of Period................................................... 1.467 1.214 0.994 1.000 --
Number of Units Outstanding at End of Period (in thousands)....... 15,725 9,467 6,040 6 --
TREND SERIES
Unit Value:
Beginning of Period............................................. 1.358 0.989 1.007 1.000 --
End of Period................................................... 1.486 1.358 0.989 1.007 --
Number of Units Outstanding at End of Period (in thousands)....... 21,711 13,410 6,197 50 --
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............................................. 1.301 1.159 1.144 1.000 1.000
End of Period................................................... 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of Period (in thousands)....... 30,888 21,612 18,761 6,139 182
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)....... N/A N/A N/A N/A N/A
DELAWARE SERIES
Unit Value:
Beginning of Period............................................. 1.414 1.133 1.150 1.078 1.000
End of Period................................................... 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of Period (in thousands)....... 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)....... N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period............................................. 1.326 1.164 1.214 1.058 1.000
End of Period................................................... 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of Period (in thousands)....... 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period............................................. 1.209 1.075 1.120 1.053 1.000
End of Period................................................... 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of Period (in thousands)....... 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)....... N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period............................................. 1.087 1.044 1.021 1.010 1.000
End of Period................................................... 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of Period (in thousands)....... 21,519 11,568 13,998 5,483 1,387
GLOBAL BOND SERIES
Unit Value:
Beginning of Period............................................. 1.000 1.000 -- -- --
End of Period................................................... 1.107 1.000 -- -- --
Number of Units Outstanding at End of Period (in thousands)....... 886 0 -- -- --
</TABLE>
14
<PAGE>
* The date of inception of the Sub-Accounts investing in the Decatur Total
Return Series, the Delchester Series, the Capital Reserves Series, the Cash
Reserve Series, the DelCap Series, and the Delaware Series was 4/8/92. The
date of inception of the Sub-Account investing in the International Equity
Series was 10/29/92. The dates of inception of the Sub-Accounts investing in
the Value Series and the Trend Series were 12/30/93 and 12/31/93,
respectively. The date of inception of the Sub-Account investing in the Global
Bond Series was 5/1/96. The date of inception of the Sub-Accounts investing in
the Devon Series, the Quantum Series, the Emerging Markets Series, the
Convertible Securities Series and the Strategic Income Series was 5/1/97.
15
<PAGE>
PERFORMANCE INFORMATION
The Delaware Medallion III Contract first was offered to the public in 1996. The
Company, however, 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 Contract being offered
will be calculated as if the Contract 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 Cash Reserve 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 then is
"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. (See TABLE 1)
The Company also may 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),
adjusted by the Sub-Account's 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. (See
TABLE 2)
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
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;
(2) 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 who rank such investment products on overall
performance or other criteria; or (3) 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 SERIES OF THE UNDERLYING FUNDS 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.
16
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
FOR YEAR OR SINCE
NAME ENDED 12/31/96 3 YEARS 5 YEARS INCEPTION
- ------------------------------------------------------------ ------------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series................................. 12.00% 15.02% 13.01% 9.54%
Devon Series................................................ N/A N/A N/A N/A
DelCap Series............................................... 6.11% 9.71% 8.95% 10.07%
Quantum Series.............................................. N/A N/A N/A N/A
Value Series................................................ 13.81% 12.29% N/A 12.51%
Trend Series................................................ 2.90% 12.50% N/A 13.01%
International Equity Series................................. 11.32% 8.99% N/A 10.36%
Emerging Markets Series..................................... N/A N/A N/A N/A
Delaware Series............................................. 7.45% 10.63% 10.48% 10.89%
Convertible Securities Series............................... N/A N/A N/A N/A
Delchester Series........................................... 4.55% 5.15% 8.63% 8.61%
Capital Reserves Series..................................... -3.55% 1.95% 3.81% 5.25%
Strategic Income Series..................................... N/A N/A N/A N/A
Cash Reserve Series......................................... -2.73% 1.72% 1.93% 3.63%
Global Bond Series.......................................... N/A N/A N/A 4.13%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
FOR YEAR OR SINCE
NAME ENDED 12/31/96 3 YEARS 5 YEARS INCEPTION
- ------------------------------------------------------------ ------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series................................. 19.00% 16.27% 13.38% 9.54%
Devon Series................................................ N/A N/A N/A N/A
DelCap Series............................................... 12.83% 11.08% 9.37% 10.30%
Quantum Series.............................................. N/A N/A N/A N/A
Value Series................................................ 20.81% 13.60% N/A 13.54%
Trend Series................................................ 9.41% 13.80% N/A 14.04%
International Equity Series................................. 18.32% 10.38% N/A 10.88%
Emerging Markets Series..................................... N/A N/A N/A N/A
Delaware Series............................................. 14.25% 11.98% 10.88% 10.87%
Convertible Securities Series............................... N/A N/A N/A N/A
Delchester Series........................................... 11.17% 6.63% 9.06% 8.61%
Capital Reserves Series..................................... 2.55% 3.44% 4.32% 5.25%
Strategic Income Series..................................... N/A N/A N/A N/A
Cash Reserve Series......................................... 3.43% 3.21% 2.46% 3.63%
Global Bond Series.......................................... N/A N/A N/A 10.71%
</TABLE>
The dates of inception of the Underlying Funds are: 10/29/92 for the
International Equity Series; 12/27/93 for the Value and Trend Series; 7/02/91
for the DelCap Series; 7/28/88 for the Delaware Series, the Decatur Total Return
Series, the Delchester Series, the Capital Reserves Series, and the Cash Reserve
Series; 5/1/96 for Global Bond Series; and 5/1/97 for the Devon Series, the
Quantum Series, the Emerging Markets Series, the Convertible Securities Series
and the Strategic Income Series.
17
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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 ("Principal Office") is located at 440 Lincoln
Street, Worcester, MA 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, 1996, the
Company had over $6.7 billion in assets and over $25.8 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 and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over $45.3
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
Contract 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 15
Sub-Accounts available under the Contract. 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.
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 a
"separate account" under federal securities law, and is registered with the SEC
as a unit investment trust under the 1940 Act. The registration of the Variable
Account and DGPF does not involve the supervision by the SEC of management or
investment practices or Contracts of the Variable Account, the Company, 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 CONTRACT
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 SEC under the 1940 Act. Such
registration does not involve supervision by the SEC 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 contracts. DGPF
currently has 15 investment portfolios, each issuing a series of shares: Decatur
Total Return Series, Devon Series, DelCap Series, Quantum Series, Value Series,
Trend Series, International Equity Series, Emerging Markets Series, Delaware
Series, Convertible Securities Series, Delchester Series, Capital Reserves
Series, Strategic Income Series, Cash Reserve Series, and Global Bond Series
(collectively, the "Underlying Funds"). The assets of each Underlying Fund are
held
18
<PAGE>
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 Decatur Total Return Series, Devon Series, DelCap
Series, Quantum Series, Value Series, Trend Series, Delaware Series, Convertible
Securities Series, Delchester Series, Capital Reserves Series, Strategic Income
Series, and Cash Reserve Series is Delaware Management Company, Inc. ("Delaware
Management"). The investment adviser for the International Equity Series,
Emerging Markets 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 of DGPF 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
PROSPECTUSES OF THE FUNDS WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statement of Additional Information of DGPF is
available upon request.
DECATUR TOTAL RETURN 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. This Fund formerly was known as
the Equity/Income Series.
DEVON SERIES -- seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
exhibit the potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Fund formerly was known as the Growth Series.
QUANTUM SERIES -- seeks to achieve long-term capital appreciation by investing
primarily in equity securities of medium- to large-sized companies expected to
grow over time.
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 also will be placed on
securities of companies that temporarily may be out of favor or whose value is
not yet recognized by the market.
TREND 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 marketplace and to have fundamental characteristics
to support growth. Income is not an objective. This Fund formerly was known as
the Emerging Growth Series.
INTERNATIONAL EQUITY 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.
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. The Series is an international fund. As such, under normal
market conditions, at least 65% of the Series' assets will be invested in equity
securities of issuers organized or having a majority of their assets or deriving
a majority of their operating income in at least three countries that are
considered to be emerging or developing.
DELAWARE 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
19
<PAGE>
to demonstrate potential for income and capital growth. This Fund formerly was
known as the Multiple Strategy Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, which may include privately
placed convertible securities.
DELCHESTER 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. This Fund formerly was known as High Yield Series.
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.
STRATEGIC INCOME SERIES -- seeks high current income and total return by using a
multi-sector investment approach, investing primarily in three sectors of the
fixed-income securities market: high yield, higher-risk securities; investment
grade fixed-income securities; and foreign government and other foreign fixed-
income securities. The Fund also may invest in U.S. equity securities.
CASH RESERVE SERIES -- seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments. This Fund formerly was known as Money Market Series.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
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 Fund 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, investment advisers are paid an annual fee by their respective
Underlying Funds. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Delaware Series and Devon Series; 0.65% of the average daily
net assets of the Strategic Income Series and 0.75% of the average daily net
assets of the DelCap Series, Value Series, Trend Series, Quantum Series and
Convertible Securities Series. For Delaware International Advisors, Ltd., this
fee is equal to 0.75% of the average daily net assets of the International
Equity Series and the Global Bond Series, and 1.25% of the Emerging Markets
Series.
20
<PAGE>
DESCRIPTION OF THE CONTRACT
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 also may 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 returned immediately 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 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 the Cash Reserve 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. To
the extent permitted by state law, however, if the Contract is issued as an IRA
or is issued in Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington or West Virginia, any
portion of the initial net payment and additional net payments received during
the Contract's first 15 days measured from the issue date, allocated to any
Sub-Account and/or any Guarantee Period Account, will be held in the Cash
Reserve Series until the end of the 15-day period. Thereafter, these amounts
will be allocated as requested.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the 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 an 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. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any local agency of the
Company. Mailing or delivery must occur within ten days after receipt of the
Contract for revocation to be effective.
21
<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 Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER CONTRACTS.
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an 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 "B. Right to Revoke
Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the payments received, including fees, and
any amount allocated to the Variable Account, and (2) 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.
D. TRANSFER PRIVILEGE.
Transfers of 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 the Cash Reserve Series.
Currently, the Company makes no charge for transfers. The first 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.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Capital Reserves Series, the Strategic
Income Series, the Cash Reserve Series, or the Fixed Account (the "source
account") to one or more of the Funds. Automatic transfers may not be made into
the Fixed Account, the Guarantee Period Accounts or, if applicable, the Fund
being used as the source account. If an automatic transfer would reduce the
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Funds. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate the option is received by the
Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
22
<PAGE>
E. SURRENDER.
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Surrender Value. The Owner must return the Contract and a signed,
written request for surrender, satisfactory to the Company, to the Principal
office. The amount payable to the 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 Principal Office.
After the Annuity Date, only Contracts under which a commutable period certain
option was elected 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 normally is 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 Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS.
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The 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 Owner wishes to receive and the accounts from
which such amount is to be withdrawn. The amount withdrawn equals the amount
requested by the 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 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 "E. Surrender."
After the Annuity Date, only a Contract under which a commutable period certain
option was elected may have withdrawals taken. A withdrawal after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see Tax
Sheltered Annuities" and " Texas Optional
23
<PAGE>
Retirement Program." For important tax consequences which may result from
withdrawals, see "FEDERAL TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals ("systematic withdrawals") from amounts in the Sub-Accounts and/or
the Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual
basis. Systematic withdrawals from Guarantee Period Accounts are not available.
The minimum amount of each automatic withdrawal is $100, and will be subject to
any applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the 16th day
following the issue date or on the date selected, if later. If elected after the
issue date, the Owner may elect, by written request, a specific dollar amount
and the percentage of this amount to be taken from each designated Sub-Account
and/or the Fixed Account, or the Owner may elect to withdraw a specific
percentage of the Accumulated Value calculated as of the withdrawal dates, and
may designate the percentage of this amount which should be taken from each
account. The first withdrawal will take place on the date the written request is
received at the Principal Office or, if later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an 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 Principal Office. The LED
option permits the 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 an Owner elects the LED option, in each Contract year a fraction of the
Accumulated Value is withdrawn based on the 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 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 the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. The Owner also may elect to receive distributions under an LED option
which is determined on the joint life expectancy of the Owner and a beneficiary.
The Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in General."
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 "E. Surrender" and "F.
Withdrawal" under "DESCRIPTION OF THE CONTRACT," and "FEDERAL TAX
CONSIDERATIONS."
G. DEATH BENEFIT.
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued in force as provided in "H. The Spouse of
the Owner as Beneficiary." The amount of the death benefit and the time
24
<PAGE>
requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first, and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (1) the Accumulated Value under the Contract increased for any
positive Market Value Adjustment; (2) gross payments accumulated at 5% annual
interest (4% in Washington) 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 (3)
the highest Accumulated Value on any Contract anniversary, increased for
subsequent payments and reduced proportionately to reflect withdrawals after
that date.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY 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 never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period not more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Cash Reserve Series. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Cash Reserve Series. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT AFTER THE ANNUITY DATE. If the Annuitant's death occurs
on or after the Annuity Date but before completion of all guaranteed annuity
benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon the death of
the Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Cash Reserve Series; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value also will be added to the Cash
Reserve 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 Owner will
not be entitled to continue the Contract upon such new Owner's death.
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I. ASSIGNMENT.
The Contract, other than that sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. 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 Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment. For important tax
consequences which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under; or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the 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 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 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.
Subject to certain restrictions described below, the 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 accounts
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-Accounts is made monthly, quarterly, semi-annually 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 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 a
commutable period certain option has been elected. Only beneficiaries entitled
to receive remaining payments for a "period certain" may elect to instead
receive a lump sum settlement.
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten 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.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity options may be funded through the Decatur Total
Return Series, the Delaware Series, and the Capital
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Reserves Series. The Company also provides these same options funded through the
Fixed Account (fixed annuity payout option). Regardless of how payments were
allocated during the accumulation period, any of the variable annuity payout
options or the fixed payout options may be selected, or any of the variable
annuity payout options may be selected in combination with any of the fixed
annuity payout options. Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN 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 ANNUITANT
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.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she 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. The amount of each periodic
payment to the survivor, however, 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 or the beneficiary in
the Contract. 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 30. This option
may be commutable, that is, the payee reserves the right to receive a lump sum
in place of installments, or it becomes noncommutable. The payee must reserve
this right at the time benefits begin.
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 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.
L. ANNUITY BENEFIT PAYMENTS.
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 Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
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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 Sub-Account 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. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are 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 non-commutable period certain options of ten 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 ten 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(a) Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. 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 Sub-Accounts
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 Sub-Account 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 ten 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 ten 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 Sub-Accounts 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-Accounts. 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.
From time to time, the Company may offer the Owner both fixed and variable
annuity rates more favorable than those contained in the Contract. Any such
rates will be applied uniformly to all Owners of the same class. For an
illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. 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
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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.
N. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the 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 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 Sub-Account by the value of an Accumulation
Unit of that Sub-Account 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 Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets, and
(4) is an administrative charge of 0.15% on an annual basis of the daily
value of the Sub-Account'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 Date by the appropriate net
investment factor. For an illustration of an Accumulation Unit calculation using
an hypothetical example see the SAI. Subject to compliance with applicable state
and federal law, the Company reserves the right to change the methodology for
determining the net investment factor.
CHARGES AND DEDUCTIONS
Deductions under the Contract 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 this Prospectus and the SAI of DGPF.
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A. VARIABLE ACCOUNT DEDUCTIONS.
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 Contract. The charge is imposed during both the accumulation
phase and the annuity payout phase. 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
payout 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 Contract 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 phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
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 Contract 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.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Funds, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Funds. The prospectus and SAI of
DGPF contain additional information concerning expenses of the Underlying Funds.
B. CONTRACT FEE.
Currently, a $30 Contract fee is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for a Contract 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 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.
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Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the class of
"eligible persons" as defined in the "Reduction or Elimination of Surrender
Charge" provision below.
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 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 the Contract at the time the 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. A contingent deferred sales charge, however, 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 surrendered previously. For purposes of determining the
amount of any contingent deferred sales charge, surrenders will be deemed to be
taken first from accumulated earnings, then from the remaining Withdrawal
Without Surrender Charge amount, if greater than earnings, then from Old
Payments, and then from New Payments. Earnings and any excess Withdrawal Without
Surrender Charge amount, if applicable, followed by 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.
CHARGE FOR SURRENDER AND WITHDRAWAL. If the 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 NEW
PAYMENT 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 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 state 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: (1) 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; (2) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the Contract; or (3) 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 the
three situations discussed above, no additional payments under the Contract will
be accepted unless required by state law.
In addition, from time to time the Company may allow a reduction in or
elimination of the contingent deferred sales charge, the period during which the
charge applies, or both, and/or credit additional amounts on the Contract when
the Contract is sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider factors such as the following:
(1) the size and type of group or class, and the persistency expected from that
group or class; (2) the total amount of payments to be received and the manner
in which payments are remitted; (3) the purpose for which the Contract is being
purchased and whether that purpose makes it likely that costs and expenses will
be reduced; (4) other transactions where sales expenses are likely to be
reduced; or (5) the level of commissions paid to selling broker-dealers or
certain financial institutions with respect to Contracts within the same group
or class (for example, broker-dealers who offer the Contract in connection with
financial planning services offered on a fee-for-service basis). The Company
also may reduce or waive the contingent sales charge and/or credit additional
amounts on the Contract where either the Owner or the Annuitant on the issue
date 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; an employee of the
Company, its affiliates or subsidiaries; officers, directors, trustees and
employees of any of the Underlying Funds, investment managers or Sub-Advisers;
and the spouses of and
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immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents. Finally, contingent deferred sales charges may be waived under
Section 403(b) Contracts where the amount withdrawn is being contributed to a
life insurance policy issued by the Company as part of the individual's Section
403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to the charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
annuity contracts issued by the Company for the Contract. See "EXCHANGE OFFER"
in the SAI.
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; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution Option (see "Life Expectancy Distributions") whether
or not the withdrawal was part of such distribution (applies only
if Annuitant is also an Owner).
For example, an 81-year-old 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 of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will be deducted first 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 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.
SURRENDERS. In the case of a complete surrender, the amount received by the
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 greatest Withdrawal Without Surrender Charge amount available.
Where an 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 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
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Accumulation Unit values for the Sub-Accounts as of the valuation date on which
a written, signed request is received at the Principal Office.
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. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS." If an owner of
an existing 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 the 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 12 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 each subsequent transfer in a Contract year.
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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 ("the 1933 Act") or the 1940 Act. Accordingly, the staff of the SEC
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
1933 Act relating to the accuracy and completeness of statements made in this
Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period established for the
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 the Contract initially was issued, and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
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 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
Cash Reserve Series. The Owner may allocate amounts to any of the Guarantee
Periods available. Notwithstanding any other provision in this Prospectus, with
respect to a Contract 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 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 automatically
will be applied to a new Guarantee Period Account with the same duration, unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) 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 the Cash Reserve Series. Where amounts
automatically have been renewed in a new Guarantee Period, it is the Company's
current practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment. This
practice may be discontinued or changed at the Company's discretion.
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
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Accumulated Value. See "G. 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)]n365 - 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. 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.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see "APPENDIX B."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
pre-selected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the 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 "E." Surrender and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) 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 "D.
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
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 IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
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 ALWAYS SHOULD 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 Contract, 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
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 Code. The Company files a consolidated tax return with its affiliates.
The IRS 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 diversified adequately 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 owner, would be treated as ordinary income received or accrued by the
owner. It is anticipated that the Series of DGPF will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Contract modifications in order to remain in compliance
with the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
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, or 408 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, depending on 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 Section D below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or
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amounts are withdrawn prior to the annuity date, any withdrawal of investment
gain in value over the cost basis of the Contract will be taxed as ordinary
income. Under the current provisions of the Code, amounts received under an
annuity contract prior to annuitization (including payments made upon the death
of the annuitant or owner), generally are first attributable to any investment
gains credited to the contract over the taxpayer's "investment in the contract."
Such amounts will be treated as gross income subject to federal income taxation.
"Investment in the Contract" is the total of all payments to the Contract which
were not excluded from the Owner's gross income less any amounts previously
withdrawn which were not included in income. Section 72(e)(11)(A)(ii) requires
that all non-qualified deferred annuity contracts issued by the same insurance
company to the same owner during a single calendar year be treated as one
contract in determining taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in 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 investment in the
Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. 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 on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
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 Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the 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. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
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 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, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an 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.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the 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 any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the 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 Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income
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attributable to contributions made after February 28, 1986 is taxed as ordinary
income that is received or accrued by the owner during the taxable year. This
rule does not apply to annuity contracts purchased with a single payment when
the annuity date is no later than a year from the issue date or to deferred
annuities owned by qualified employer plans, estates, employers with respect to
a terminated pension plan, and entities other than employers, such as a trust,
holding an annuity as an agent for a natural person. This exception, however,
will not apply in cases of any employer who is the owner of an annuity contract
under a non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 . In addition, plan assets are treated as property of the employer,
and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified 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.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether or not 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 retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of a non-qualified
Contract. Individuals purchasing a qualified Contract should review carefully
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be
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"rolled over," on a tax-deferred basis, to an IRA. Purchasers of an IRA Contract
will be provided with supplementary information as may be required by the IRS or
other appropriate agency, and will have the right to revoke the Contract as
described in this Prospectus. See "B. Right to Revoke Individual Retirement
Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES (TSAS). Under the provisions of Section 403(b) of the
Code, payments made to 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 total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2 , separates from
service, dies or becomes disabled. In the case of hardship, an 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 be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program 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 additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the 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 be withdrawn first 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
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 be allocated instead to the Cash Reserve
Sub-Account.
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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 no longer are 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
any shares attributable to a Contract interest in a Sub-Account without notice
to the Owner and prior approval of the SEC 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 an 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 SEC 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
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Funds also are issued to other unaffiliated insurance
companies which issue variable annuities and variable life contracts ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although currently the Company and the DGPF do not foresee any such
disadvantages to either variable life insurance owners or variable annuity
owners, the Company and DGPF intend to monitor events in order to identify any
material conflicts between such 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 Owners of all such changes. If the Company deems it to be
in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Account may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from 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 also will vote shares in a Sub-Account that it
owns and which are not attributable to the Contract in the same proportion. If
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act
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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 an 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
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 payout phase, 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.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 and members of the National Association of Securities
Dealers, Inc. (the "NASD.") The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contract. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
The Company pays commissions, not to exceed 6.0% of purchase payments, to
broker-dealers which sell the Contract. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of Contract value. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on a Contract will be retained by the Company.
Owners may direct any inquiries to their financial adviser or to Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-366-1492.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
42
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in the Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
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 Contract, 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 amount in excess of the Withdrawal
Without Surrender Charge 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 for at least seven full Contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a Contract is 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 Cash
Reserve Series.
In Oregon, no payments to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday.
A-1
<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 issue date 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>
HYPOTHETICAL WITHDRAWAL SURRENDER
ACCOUNT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE ACCOUNT 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 issue date 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
Owner's Account, based on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
ACCOUNT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE 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)]n365-1
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.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or 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.
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)]n365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal = -.12054X$62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)]n365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694X$62,985.60
= $4,216.26
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)]n365-1
= [(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 (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)]n365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)(7)-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or
the excess interest earned over 3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ( $8,806.02 or $8,349.25)
= $8,349.25
B-2
<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 issue date 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
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) DEATH 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 (1) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (2) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (3) is the death benefit that would have been 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 (1),
(2), or (3).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date 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
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) DEATH 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 (1) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (2) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (3) is the death benefit that would have been payable
C-1
<PAGE>
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 (1),
(2), or (3).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals. The table below presents examples of
the Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH 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.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INDIVIDUAL VARIABLE ANNUITY POLICIES FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes individual variable annuity policies and group
variable annuity policies, including certificates issued thereunder ("Policies")
offered 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.") The following is a summary of information about these
Policies. More detailed information can be found under the referenced captions
in this Prospectus.
This Prospectus generally describes only the variable accumulation and variable
annuity aspects of the Policies, except where fixed values or fixed annuity
benefit payments are mentioned specifically. Allocations to and transfers to and
from the General Account of the Company are not permitted in certain states.
Certain additional information about the Policies is contained in a Statement of
Additional Information, dated May 1, 1997, as may be amended from time to time,
which has been filed with the Securities and Exchange Commission ("SEC"), and is
incorporated herein by reference. The Statement of Additional Information Table
of Contents is listed on page 3 of this Prospectus. The Statement of Additional
Information ("SAI") is available upon request and without charge. To obtain the
SAI, fill out and return the attached request card, or contact Client Services,
Allmerica Financial Life Insurance and Annuity Company, 440 Lincoln Street,
Worcester, MA 01653.
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 POLICIES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICIES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 3
SPECIAL TERMS 4
SUMMARY 5
ANNUAL AND TRANSACTION EXPENSES 7
CONDENSED FINANCIAL INFORMATION 10
PERFORMANCE INFORMATION 13
WHAT IS AN ANNUITY 15
RIGHT TO REVOKE OR SURRENDER 15
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND DELAWARE GROUP PREMIUM FUND, INC.
15
INVESTMENT OBJECTIVES AND POLICIES 17
INVESTMENT ADVISORY SERVICES TO THE FUND 18
CHARGES AND DEDUCTIONS 18
A. Contingent Deferred Sales Charge 18
B. Premium Taxes 21
C. Policy Fee 22
D. Annual Charge Against Separate Account Assets 22
THE VARIABLE ANNUITY POLICIES 23
A. Purchase Payments 23
B. Transfer Privilege 24
C. Surrender 25
D. Partial Redemption 25
E. Death Benefit 26
F. The Spouse of the Owner as Beneficiary 27
G. Assignment 27
H. Electing the Form of Annuity and Annuity Date 28
I. Description of Variable Annuity Options 28
J. NORRIS Decision 29
K. Computation of Policy Values and Annuity Benefit Payments 30
FEDERAL TAX CONSIDERATIONS 31
A. Qualified and Non-Qualified Policies 32
B. Taxation of the Policies in General 32
Withdrawals Prior to Annuitization 32
Annuity Payouts After Annuitization 33
Penalty on Distribution 33
Assignments or Transfers 33
Non-Natural Owners 33
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations 34
C. Tax Withholding 34
D. Provisions Applicable to Qualified Employer Plans 34
Corporate and Self-Employed Pension and Profit Sharing Plans 34
Individual Retirement Annuities 34
Tax-Sheltered Annuities 35
Texas Optional Retirement Program 35
LOANS (QUALIFIED POLICIES ONLY) 35
REPORTS 35
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 35
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
VOTING RIGHTS 36
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 37
LEGAL MATTERS 37
FURTHER INFORMATION 37
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT A-1
APPENDIX B -- INFORMATION APPLICABLE ONLY TO POLICY NO. A3019-92 (AND STATE VARIATIONS)
B-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE SEPARATE ACCOUNT AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 5
PERFORMANCE INFORMATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the General Account of the
Company then credited to the Policy, on any date before the date annuity benefit
payments are to begin.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
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 Policy.
FIXED ANNUITY PAYOUT: an Annuity payout providing for payments which remain
fixed in amount throughout the annuity benefit payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate investment account.
OWNER: the owner of a Policy who may exercise all rights under the Policy,
subject to the consent of any irrevocable beneficiary. After the Annuity Date,
the Annuitant will be the Owner.
SEPARATE ACCOUNT: Separate Account VA-K of the Company. Separate Account VA-K
consists of assets segregated from other assets of the Company. The investment
performance of the assets of the Separate Account is determined separately from
the other assets of the Company. The assets of the Separate Account are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
SUB-ACCOUNT: a subdivision of Separate Account VA-K. Each Sub-Account available
under the Policies invests exclusively in the shares of a corresponding
investment series of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee and
contingent deferred sales charge applicable upon surrender.
UNDERLYING SERIES: the Decatur Total Return Series, Devon Series, DelCap
Series, Quantum Series, Value Series, Trend Series, International Equity Series,
Emerging Market Series, Delaware Series, Convertible Securities Series,
Delchester Series, Capital Reserves Series, Strategic Income Series, Cash
Reserve Series, and Global Bond Series of Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Series 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, partial withdrawal, or surrender of a Policy was
received) when there is a sufficient degree of trading in an Underlying Series
portfolio securities such that the current net asset value of the Sub-Accounts
may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY PAYOUT: an Annuity payout providing for payments varying in
amount in accordance with the investment experience of certain Underlying
Series.
4
<PAGE>
SUMMARY
INVESTMENT OPTIONS. The Policies permit net purchase payments to be allocated
among Sub-Accounts available under the Policies, which are subdivisions of
Separate Account VA-K ("Separate Account"), a separate account of the Company
and, where available, a fixed interest account ("General Account") of the
Company (together "accounts"). The Separate 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 policies of the Separate Account by the SEC. For
information about the Separate Account and the Company, see "DESCRIPTION OF THE
COMPANY, THE SEPARATE ACCOUNT, AND THE FUND." For more information about the
General Account see APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Each Sub-Account available under the Policies invests its assets without sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. (the "Fund"). The Fund is an open-end, diversified series investment
company. The Fund consists of 15 different series: the Decatur Total Return
Series, Devon Series, DelCap Series, Quantum Series, Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bon Series ("Underlying
Series"). Each Underlying Series operates pursuant to different investment
objectives, discussed below. NOT ALL SUB-ACCOUNTS ARE AVAILABLE IN ALL STATES.
INVESTMENT IN THE SUB-ACCOUNTS. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Series.
There can be no assurance that the investment objectives of the Underlying
Series can be achieved or that the value of a Policy will equal or exceed the
aggregate amount of the purchase payments made under the Policy. For more
information about the investments of the Underlying Series, see "DESCRIPTION OF
THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUND." The accompanying prospectus of
the Fund describes the investment objectives and risks of each of the Underlying
Series.
Dividends or capital gains distributions received from an Underlying Series are
reinvested in additional shares of that Underlying Series, which are retained as
assets of the Sub-Account.
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Policies permit
amounts to be transferred among the Sub-Accounts and, where available, between
the General Account and the Sub-Accounts, subject to certain limitations
described under "B. Transfer Privilege."
ANNUITY BENEFIT PAYMENTS. The Owner may select variable annuity benefit
payments based on 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 "THE VARIABLE ANNUITY POLICIES" for information about annuity benefit
payment options, selecting the Annuity Date, and how annuity benefit payments
are calculated.
REVOCATION RIGHTS. An individual purchasing a Policy intended to qualify as an
Individual Retirement Annuity ("IRA") may revoke the Policy at any time between
the date of the application and the date ten days after receipt of the Policy.
In certain states an Owner may have special revocation rights. For more
information about revocation rights, see "RIGHT TO REVOKE OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Policies, purchase 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 purchase payment must be at
least $600 and subsequent payments must be at least $50. Under a monthly
automatic payment plan, or a payroll deduction plan, each purchase payment must
be at least $50. 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, however, the Company may issue a Policy on the employee if the plan's
average annual contribution per eligible plan participant is at least $600.
5
<PAGE>
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Policy. In addition, the Internal Revenue Code (the
"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 CHARGES.
No sales charge is deducted from purchase payments at the time the payments are
made. Depending on the length of time that the payments to which the withdrawal
is attributed have remained credited under the Policy, however, a contingent
deferred sales charge of up to 7% may be assessed for a surrender, partial
redemption, or election of any commutable period certain option or a
non-commutable period certain for less than ten years.
B. ANNUAL POLICY FEE.
A Policy fee equal to $30 will be deducted from the Accumulated Value under the
Policy for administrative expense on the Policy anniversary, or upon full
surrender of the Policy during the year, when the Accumulated Value is $50,000
or less. The Policy fee currently is waived for policies issued to a trustee of
a 401(k) plan, but the Company reserves the right to impose the Policy fee on
such policies.
C. PREMIUM TAXES.
A deduction for state and local premium taxes, if any, may be made as described
under "B. Premium Taxes." Premium taxes may range from 0 to 3.5%.
D. SEPARATE 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 available under the Policies.
E. TRANSFER CHARGE.
The Company currently makes no charge for transfers. The Company guarantees that
the first 12 transfers in a Policy year will be free of 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 costs of
processing the transfer.
F. CHARGES OF THE UNDERLYING SERIES.
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Series. These charges vary among the
Underlying Series, and may range from an annual rate of 0.80% to an annual rate
of 2.00% of average daily net assets.
SURRENDER OR PARTIAL REDEMPTIONS. At any time before the Annuity Date, the
Owner has the right either to surrender the Policy in full and receive its
current value, minus the Policy fee and any applicable contingent deferred sales
charge, or to redeem a portion of the Policy's value subject to certain limits
and any applicable contingent deferred sales charge. There may be tax
consequences for surrender or redemptions. For further information, see "C.
Surrender" and "D. Partial Redemption" under "THE VARIABLE ANNUITY POLICIES,"
"A. Contingent Deferred Sales Charge" under "CHARGES AND DEDUCTIONS," and
"FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant or Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant,
the death benefit is equal to the greatest of (1) the
6
<PAGE>
Accumulated Value under the Policy, or (2) the sum of the gross payments made
under the Policy reduced proportionally to reflect all partial redemptions, or
(3) the death benefit that would have been payable on the most recent fifth year
Policy anniversary, increased for subsequent purchase payments and reduced
proportionally to reflect withdrawals after that date. Upon death of the Owner,
the death benefit is equal to the Accumulated Value of the Policy.
SALES OF POLICIES. The Policies are sold by agents of the Company who are
authorized by applicable law to sell variable annuity policies. These agents are
registered representatives of broker-dealers which are members of the National
Association of Securities Dealers, Inc. See "Sales Expense."
ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Owner in understanding the
various costs and expenses that the Owners will bear directly or indirectly
under the Policies. The tables reflect charges under the Policies, 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.
CONTRACT CHARGES:
<TABLE>
<CAPTION>
CONTRACT YEAR
AFTER
DATE OF PAYMENT CHARGE
--------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
The charge (as a percentage of payments, applied to the amount 0-3 7%
surrendered in excess of the amount, if any, which may be 4 6%
surrendered free of charge) will be assessed upon surrender, 5 5%
withdrawal, or annuitization under any commutable period certain 6 4%
option or a non-commutable period certain option of less than 7 3%
ten years.
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers. None
The Company guarantees that the $30 first 12 transfers in a
Policy year will be free of a 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 costs of processing the transfer.
ANNUAL POLICY FEE:
An annual Policy fee is deducted when Accumulated Value is less $30
than $50,000. The Policy fee currently is waived for a policies
issued to a trustee of a 401(k) plan, but the Company reserves
the right to impose the Policy fee on such policy.
SEPARATE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Separate Account Administrative Charge 0.15%
---------
Total Annual Expenses 1.40%
</TABLE>
7
<PAGE>
FUND EXPENSES:
DELAWARE GROUP PREMIUM FUND, INC.
<TABLE>
<CAPTION>
OTHER SERIES
EXPENSES (AFTER ANY TOTAL SERIES
FUND MANAGEMENT FEES APPLICABLE REIMBURSEMENTS)(1) EXPENSES
- --------------------------------------------- ------------------ ------------------------------------- -----------------
<S> <C> <C> <C>
Decatur Total Return Series.................. 0.60% 0.07% 0.67%
Devon Series................................. 0.41% 0.39%* 0.80%
DelCap Series................................ 0.73% 0.07% 0.80%
Quantum Series............................... 0.55% 0.25%* 0.80%
Value Series................................. 0.56% 0.24% 0.80%
Trend Series................................. 0.63% 0.17% 0.80%
International Equity Series.................. 0.64% 0.16% 0.80%
Emerging Markets Series...................... 1.04% 0.46%* 1.50%
Delaware Series.............................. 0.60% 0.08% 0.68%
Convertible Securities Series................ 0.52% 0.28%* 0.80%
Delchester Series............................ 0.60% 0.10% 0.70%
Capital Reserves Series...................... 0.60% 0.12% 0.72%
Strategic Income Series...................... 0.33% 0.47%* 0.80%
Cash Reserve Series.......................... 0.50% 0.11% 0.61%
Global Bond Series........................... 0.36% 0.44% 0.80%
</TABLE>
* Estimated first year expenses after expense reimbursements.
(1) The investment adviser for the Value Series, Trend Series, DelCap Series,
Delaware Series, Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Cash Reserve Series, Strategic Income Series, Devon Series,
Convertible Securities Series, and Quantum Series is Delaware Management
Company, Inc. ("Delaware Management"). The Investment Adviser for the
International Equity Series, Emerging Markets Series and the Global Bond Series
is Delaware International Advisers Ltd. ("Delaware International"). The
investment advisers for the Series of the Fund have agreed voluntarily to waive
their management fees and reimburse each Series for expenses to the extent that
total expenses will no exceed 1.50% for the Emerging Markets Series and 0.80%
for all other Series. This waiver will be in effect through June 30, 1997. For
the fiscal year ended December 31, 1996, before waiver and/or reimbursement by
the investment adviser, total Series expenses as a percentage of average daily
net assets were 0.91% for the International Equity Series, 0.99% for the Value
Series, 0.92% for the Trend Series, and 0.82% for the DelCap Series.
The following examples demonstrate the cumulative expenses which would be paid
by the 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 Funds differ,
separate examples are used to illustrate the expenses incurred by an 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 OF
LESSER THAN THOSE SHOWN.
8
<PAGE>
(1) If, at the end of the applicable period, you surrender the Policy or
annuitize* under a commutable period certain option of less than ten years, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series............................................ $ 86 $ 135 $ 163 $ 244
Devon Series........................................................... $ 87 $ 138 $ 170 $ 257
DelCap Series.......................................................... $ 87 $ 138 $ 170 $ 257
Quantum Series......................................................... $ 87 $ 138 $ 170 $ 257
Value Series........................................................... $ 87 $ 138 $ 170 $ 257
Trend Series........................................................... $ 87 $ 138 $ 170 $ 257
International Equity Series............................................ $ 87 $ 138 $ 170 $ 257
Emerging Markets Series................................................ $ 94 $ 158 $ 205 $ 326
Delaware Series........................................................ $ 86 $ 135 $ 164 $ 245
Convertible Securities Series.......................................... $ 87 $ 138 $ 170 $ 257
Delchester Series...................................................... $ 87 $ 136 $ 165 $ 247
Capital Reserves Series................................................ $ 87 $ 136 $ 166 $ 249
Strategic Income Series................................................ $ 87 $ 138 $ 170 $ 257
Cash Reserve Series.................................................... $ 86 $ 133 $ 160 $ 238
Global Bond Series..................................................... $ 87 $ 138 $ 170 $ 257
</TABLE>
(2) If you annuitize* under a life option or any non-commutable period certain
option of ten years or more at the end of the applicable time period or if you
do NOT surrender or annuitize the policy, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series............................................ $ 21 $ 66 $ 113 $ 244
Devon Series........................................................... $ 23 $ 70 $ 120 $ 257
DelCap Series.......................................................... $ 23 $ 70 $ 120 $ 257
Quantum Series......................................................... $ 23 $ 70 $ 120 $ 257
Value Series........................................................... $ 23 $ 70 $ 120 $ 257
Trend Series........................................................... $ 23 $ 70 $ 120 $ 257
International Equity Series............................................ $ 23 $ 70 $ 120 $ 257
Emerging Markets Series................................................ $ 30 $ 91 $ 155 $ 326
Delaware Series........................................................ $ 22 $ 66 $ 114 $ 245
Convertible Securities Series.......................................... $ 23 $ 70 $ 120 $ 257
Delchester Series...................................................... $ 22 $ 67 $ 115 $ 247
Capital Reserves Series................................................ $ 22 $ 68 $ 116 $ 249
Strategic Income Series................................................ $ 23 $ 70 $ 120 $ 257
Cash Reserve Series.................................................... $ 21 $ 64 $ 110 $ 238
Global Bond Series..................................................... $ 23 $ 70 $ 120 $ 257
</TABLE>
Pursuant to requirements of the 1940 Act, the Policy fee has been reflected in
the Examples by a method intended to show the "average" impact of the Policy fee
on an investment in the Separate Account. The total Policy fees collected under
the Policies by the Company are divided by the total average net assets
attributable to the Policies. The resulting percentage is 0.04%, and the amount
of the Policy fee is assumed to be $.40 in the Examples. The Policy fee is
deducted only when the accumulated value is $50,000 or less. Lower charges apply
to Contracts issued and maintained as part of a 401(k) plan.
* The Policy fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any policy year under
an option including a life contingency or under any non-commutable period
certain option of ten years or more.
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DECATUR TOTAL RETURN SERIES
Unit Value:
Beginning of Period............................................. 1.582 1.178 1.197 1.051 1.000
End of Period................................................... 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of Period
(in thousands).................................................. 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period............................................. 1.432 1.121 1.178 1.070 1.000
End of Period................................................... 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of Period
(in thousands).................................................. 44,667 35,204 29,100 20,802 4,534
QUANTUM SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. N/A N/A N/A N/A N/A
VALUE SERIES
Unit Value:
Beginning of Period............................................. 1.214 0.994 1.000 1.000 --
End of Period................................................... 1.467 1.214 0.994 1.000 --
Number of Units Outstanding at End of Period
(in thousands).................................................. 15,725 9,467 6,040 6 --
TREND SERIES
Unit Value:
Beginning of Period............................................. 1.358 0.989 1.007 1.000 --
End of Period................................................... 1.486 1.358 0.989 1.007 --
Number of Units Outstanding at End of Period
(in thousands).................................................. 21,711 13,410 6,197 50 --
</TABLE>
10
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
INTERNATIONAL EQUITY SERIES
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period............................................. 1.301 1.159 1.144 1.000 1.000
End of Period................................................... 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of Period
(in thousands).................................................. 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. N/A N/A N/A N/A N/A
DELAWARE SERIES
Unit Value:
Beginning of Period............................................. 1.414 1.133 1.150 1.078 1.000
End of Period................................................... 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of Period
(in thousands).................................................. 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period............................................. 1.326 1.164 1.214 1.058 1.000
End of Period................................................... 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of Period
(in thousands).................................................. 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period............................................. 1.209 1.075 1.120 1.053 1.000
End of Period................................................... 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of Period
(in thousands).................................................. 20,226 19,818 20,476 16,752 3,828
</TABLE>
11
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
STRATEGIC INCOME SERIES
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period............................................. N/A N/A N/A N/A N/A
End of Period................................................... N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period............................................. 1.087 1.044 1.021 1.010 1.000
End of Period................................................... 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of Period
(in thousands).................................................. 21,519 11,568 13,998 5,483 1,387
GLOBAL BOND SERIES
Unit Value:
Beginning of Period............................................. 1.000 1.000 -- -- --
End of Period................................................... 1.107 1.000 -- -- --
Number of Units Outstanding at End of Period
(in thousands).................................................. 886 0 -- -- --
</TABLE>
* The dates of inception of the Sub-Accounts investing in the Decatur Total
Return Series, the Delchester Series, the Capital Reserve Series, the Cash
Reserve Series, the DelCap Series and the Delaware Series was 4/8/92. The date
of inception of the Sub-Account investing in the International Equity Series
was 10/29/92. The dates of inception of the Sub-Accounts investing in the
Value Series and the Trend Series was 12/30/93 and 12/31/93 respectively. The
date of inception of the Sub-Account investing in the Global Bond Series was
5/1/96. The date of inception of the Sub-Accounts investing in the Devon
Series, the Quantum Series, the Emerging Markets Series, the Convertible
Securities Series and the Strategic Income Series was 5/1/97.
12
<PAGE>
PERFORMANCE INFORMATION
Policies offering the Sub-Accounts first were offered to the public in 1992. The
Company, however, may advertise "Total Return" and "Average Total Return"
performance information based on the periods that the Underlying Series have
been in existence. The results for any period prior to the Policies being
offered will be calculated as if the Policies had been offered during that
period of time, with all charges assumed to be those applicable to the
Sub-Accounts and the Underlying Series.
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 Separate Account charges, and expressed as a
percentage of the investment.
The "yield" of the Sub-Account investing in the Money Market Series of the Fund
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 Policy fee and the contingent deferred sales load which would be assessed
if the investment were completely redeemed at the end of the specified period.
(See TABLE 1)
The Company also may advertise supplemental total return performance
information. Supplemental total return refers to the total income generated by
an investment in the Sub-Account and the changes of value of the principal
invested (due to realized and unrealized capital gains or losses), adjusted by
the annual asset charges and expressed as a percentage of the investment.
Because it is assumed that the investment is NOT redeemed at the end of the
specified period, the contingent deferred sales load is NOT included in the
calculation. (See Table 2)
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
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;
(2) 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 (3) 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.
13
<PAGE>
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE REDEMPTION OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
FOR YEAR OR SINCE
NAME ENDED 12/31/96 3 YEARS 5 YEARS INCEPTION
- ------------------------------------------------------------ ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series................................. 11.99% 14.51% 12.76% 9.53%
Devon Series................................................ N/A N/A N/A N/A
DelCap Series............................................... 5.82% 9.15% 8.65% 9.82%
Quantum Series.............................................. N/A N/A N/A N/A
Value Series................................................ 13.80% 11.75% N/A 11.97%
Trend Series................................................ 2.51% 11.96% N/A 12.48%
International Equity Series................................. 11.31% 8.42% N/A 10.00%
Emerging Markets Series..................................... N/A N/A N/A N/A
Delaware Series............................................. 7.24% 10.07% 10.20% 10.88%
Convertible Securities Series............................... N/A N/A N/A N/A
Delchester Series........................................... 4.16% 4.53% 8.33% 8.60%
Capital Reserves Series..................................... -3.92% 1.21% 3.46% 5.24%
Strategic Income Series..................................... N/A N/A N/A N/A
Cash Reserve Series......................................... -3.10% 0.98% 1.52% 3.62%
Global Bond Series.......................................... N/A N/A N/A 3.73%
</TABLE>
TABLE 2
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING NO REDEMPTION OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
FOR YEAR OR SINCE
NAME ENDED 12/31/96 3 YEARS 5 YEARS INCEPTION
- ------------------------------------------------------------ ------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Decatur Total Return Series................................. 18.99% 16.26% 13.37% 9.53%
Devon Series................................................ N/A N/A N/A N/A
DelCap Series............................................... 12.82% 11.07% 9.36% 10.29%
Quantum Series.............................................. N/A N/A N/A N/A
Value Series................................................ 20.80% 13.59% N/A 13.53%
Trend Series................................................ 9.40% 13.79% N/A 14.03%
International Equity Series................................. 18.31% 10.37% N/A N/A
Emerging Markets Series..................................... N/A N/A N/A N/A
Delaware Series............................................. 14.24% 11.97% 10.87% 10.86%
Convertible Securities Series............................... N/A N/A N/A N/A
Delchester Series........................................... 11.16% 6.62% 9.05% 8.60%
Capital Reserves Series..................................... 2.54% 3.43% 4.31% 5.24%
Strategic Income Series..................................... N/A N/A N/A N/A
Cash Reserve Series......................................... 3.42% 3.20% 2.45% 3.62%
Global Bond Series.......................................... N/A N/A N/A 10.70%
</TABLE>
The dates of inception of the Underlying Series are: 7/28/88 for Delaware,
Decatur Total Return, Delchester, Capital Reserves, and Cash Reserve; 7/12/91
for DelCap; 1/29/92 for International Equity; 12/27/93 for Trend and Value;
4/30/96 for Global Bond and 5/1/97 for Devon, Quantum, Emerging Markets,
Convertible Securities and Strategic Income.
14
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of monthly payments for the lifetime of the purchaser or an individual
chosen by the purchaser. The retirement income payments are called "annuity
benefit payments," and the individual receiving the payments is called the
"annuitant." Annuity benefit payments may begin immediately after a lump sum
purchase is made or may begin after an investment period during which the amount
necessary to provide the desired amount of retirement income is accumulated.
Under an annuity policy, 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 policy,
regardless of actual costs of operations.
The owner's purchase 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 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 GENERAL ACCOUNT."
With a variable annuity, the value of the policy 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 policy and in the annuity benefit payments. If the
portfolio increases in value, the value of the policy increases. If the
portfolio decreases in value, the value of the policy decreases.
RIGHT TO REVOKE OR SURRENDER
The Owner may revoke the Policy at any time between the date of the application
and the date ten days (or the number of days required by state law if more than
ten) after receipt of the Policy. Within seven days of receipt of the revocation
request, the Company will return an amount equal to the sum of (1) the
difference between the gross payment(s) received and any amounts allocated to
the Sub-Accounts, and (2) the Accumulated Value of amounts allocated to the
Sub-Accounts as of the date the request is received. If the Policy was purchased
as an IRA or if required by state law, the Company will refund the greater of
the amount described above or the entire purchase payment. In order to revoke
the Policy, the Owner must mail or deliver the Policy (if it has already been
received) to the agent through whom the Policy was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any authorized
representative of the Company. Mailing or delivery must occur on or before ten
days after receipt of the Policy for revocation to be effective.
The liability of the Separate Accounts under this provision is limited to the
Owner's Accumulated value in each Separate Account on the date of cancellation.
Any additional amounts refunded to the Owner will be paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Owner's bank.
DESCRIPTION OF THE COMPANY, THE
SEPARATE 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 ("Principal Office") is located
at 440 Lincoln Street, Worcester, MA 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
15
<PAGE>
operate. As of December 31, 1996, the Company had over $6.7 billion in assets
and over $25.8 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 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 of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over $45.3
billion in life insurance in force.
THE SEPARATE ACCOUNT. Separate Account VA-K (the "Separate Account") is a
separate investment account of the Company. The assets used to fund the variable
portions of the Policies are set aside in the Sub-Accounts of the Separate
Account, and are kept separate from the general assets of the Company. There are
15 Sub-Accounts available under the Policies. 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 Separate Account
may not be charged with any liabilities arising out of any other business of the
Company.
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Separate Account meets the definition of
"separate account" under federal securities laws, and is registered with the SEC
as a unit investment trust under the 1940 Act. Such registration does not
involve the supervision of management or investment practices or policies of the
Separate Account or the Company by the SEC.
The Company offers other variable annuity contracts investing in the Separate
Account which are not discussed in this Prospectus. The Separate Account also
invests in other underlying funds which are not available to the Policies
described in this Prospectus.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Separate Account and the Sub-Accounts.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. (the "Fund")
is an open-end, diversified management investment company registered with the
SEC under the 1940 Act. Such registration does not involve supervision by the
SEC of the investments or investment policy of the Fund or its separate
investment series.
The Fund was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. The Fund
currently has 15 investment portfolios ("Series"), each issuing a series of
shares: Decatur Total Return Series, Devon Series, DelCap Series, Quantum
Series, Value Series, Trend Series, International Equity Series, Emerging
Markets Series, Delaware Series, Convertible Securities Series, Delchester
Series, Capital Reserves Series, Strategic Income Series, Cash Reserve Series,
and Global Bond Series (collectively, the "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 Decatur Total Return Series, Devon Series, DelCap
Series, Quantum Series, Value Series, Trend Series, Delaware Series, Convertible
Securities Series, Delchester Series, Capital Reserves Series, Strategic Income
Series, and Cash Reserve Series is Delaware Management Company, Inc. ("Delaware
Management"). The investment adviser for the International Equity Series,
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Emerging Markets 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 Series is set forth
below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Series, and other
relevant information regarding the Underlying Series may be found in the
Prospectus of the Fund, which accompanies this Prospectus and should be read
carefully before investing. Also, the SAI of the Fund is available upon request.
DECATUR TOTAL RETURN 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. This Series formerly was known as
Equity/Income Series.
DEVON SERIES -- seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
exhibit the potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Series formerly was known as the Growth Series.
QUANTUM SERIES -- seeks to achieve long-term capital appreciation by investing
primarily in equity securities of medium- to large-sized companies that meet the
series' "social criteria" stategy and are expected to grow over time.
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 also will be placed on
securities of companies that temporarily may be out of favor or whose value is
not yet recognized by the market.
TREND 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 marketplace and to have fundamental characteristics
to support growth. Income is not an objective. This Series formerly was known as
Emerging Growth Series.
INTERNATIONAL EQUITY 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
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. The Series is an international fund. As such, under normal
market conditions, at least 65% of the Series' assets will be invested in equity
securities of issuers organized or having a majority of their assets or deriving
a majority of their operating income in at least three countries that are
considered to be emerging or developing.
DELAWARE 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. This Series formerly was
known as Multiple Strategy Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, including privately placed
convertible securities.
DELCHESTER 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
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<PAGE>
commercial paper. Please read the Fund's prospectus disclosure regarding the
risk factors before investing in this Series. This Series formerly was known as
High Yield Series.
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.
STRATEGIC INCOME SERIES -- seeks high current income and total return by using a
multi-sector investment approach, investing primarily in three sectors of the
fixed-income securities market: high yield, higher-risk securities; investment
grade fixed-income securities; and foreign government and other foreign fixed-
income securities. The Series also may invest in U.S. equity securities.
CASH RESERVE SERIES -- seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments. This Series formerly was known as Money Market Series.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
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. 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.
There is no assurance that the investment objectives of the Underlying Series
will be met.
IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY OF
PARTICULAR SUB-ACCOUNTS.
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.
If you have Policy 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, where available. The Company must receive your written request
within 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 THE FUND
For managing the portfolios of the Underlying Funds and making investment
decisions, investment advisers are paid an annual fee by their respective
Underlying Fund. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserve Series, Delaware Series and Devon Series; 0.75% of the average daily net
assets of the DelCap Series, Value Series, Trend Series; Quantum Series and
Convertible Securities Series. For Delaware International Advisors, Ltd., this
fee is equal to 0.75% of the average daily net assets of the International
Equity Series and the Global Bond Series and 1.25% of the Emerging Markets
Series.
CHARGES AND DEDUCTIONS
Deductions under the Policies and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Series are described in the Prospectus and SAI of the Fund.
A. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from purchase payments at the time the
payments are made. A contingent deferred sales charge is deducted from the
Accumulated Value of the Policy, however, in the case of surrender and/or
partial redemption of the Policy or at the time annuity benefit payments begin,
within certain time limits described below.
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For purposes of determining the contingent deferred sales charge, the Policy
Value is divided into three categories: (1) New Payments--purchase payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments--purchase payments not defined as New Payments; and
(3) Earnings--the amount of Policy Value in excess of all purchase 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 Policy 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.
No contingent deferred sales charge is imposed, and no commissions are paid, on
Policies issued after December 20, 1993 where the Owner and Annuitant as of the
date of application are both within the following class of individuals:
All employees and registered representatives of any broker-dealer that
has entered into a sales agreement with the Company to sell the
Policies; all officers, directors, trustees and bona fide full-time
employees (including former officers and directors and former employees
who had been employed for at least ten years) of Delaware Management,
its affiliates and subsidiaries, and of any Underlying Series; and any
spouses of the above persons or any children or other legal dependents
of the above persons who are under the age of 21.
CHARGES FOR SURRENDER AND PARTIAL REDEMPTION. If a Policy is surrendered, or if
New Payments are redeemed, while the Policy 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 Policy. Any
Free Withdrawal Amount is deducted first as described below. Additional 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 FIFO method of accounting. (See "FEDERAL TAX CONSIDERATIONS" for
a discussion of how withdrawals are treated for income tax purposes.)
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF CHARGE AS PERCENTAGE OF NEW
PAYMENT PAYMENTS WITHDRAWN
- ---------- -----------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
</TABLE>
The amount redeemed equals the amount requested by the Owner plus the charge, if
any, which is applied against the amount requested. For example, if the
applicable charge is 7% and the Owner has requested $200, the Owner will receive
$200 and the charge will be $14 (assuming no Free Withdrawal Amount, discussed
below) for a total withdrawal of $214. The charge is applied as a percentage of
the New Payments redeemed, but in no event will the total contingent deferred
sales charge exceed a maximum limit of 8% of total gross New Payments. Such
total charge equals the aggregate of all applicable contingent deferred sales
charges for surrender, partial redemptions, and annuitization.
In Maryland, a different contingent deferred sales charge applies to monies in
the General Account. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL
ACCOUNT."
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<PAGE>
FREE WITHDRAWAL AMOUNTS. In each calendar year, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Free Withdrawal
Amount") 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:
10% 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 partial redemptions 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
"Life Expectancy Distributions," below), whether or not the withdrawal was
part of such distribution (applies only if the Owner and Annuitant are the
same individual).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Free Withdrawal Amount will be deducted first from Cumulative Earnings. If
the Free Withdrawal Amount exceeds Cumulative Earnings, the excess amount will
be deemed withdrawn from payments not previously redeemed on a last-in-first-out
("LIFO") basis. If more than one partial withdrawal is made during the year, on
each subsequent withdrawal the Company will waive the contingent deferred sales
load, if any, until the entire Free Withdrawal Amount has been redeemed.
LIFE EXPECTANCY DISTRIBUTIONS. An Owner who is also the Annuitant may elect to
make a series of systematic withdrawals from the Policy according to a life
expectancy distribution ("LED"), by returning a properly signed LED request form
to the Principal Office. The LED permits the Owner to make systematic
withdrawals from the Policy over his or her lifetime. The amount withdrawn from
the Policy 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 an Owner elects the LED option, in each Policy year a fraction of the
Accumulated Value is withdrawn from the Policy based on the 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 Owner, as determined annually
by the Company. The resulting fraction, expressed as a percentage, is applied to
the Accumulated Value of the Policy at the beginning of the year to determine
the amount to be distributed during the year. The Owner may elect monthly,
bi-monthly, quarterly, semi-annual, or annual distributions, and may terminate
the LED at any time. The Owner also may elect to receive distributions under a
LED which is determined on the joint life expectancy of the Owner and a
beneficiary. The Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2 , the
withdrawals may be treated by the IRS as premature distributions from the
Policy. 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," "B. Taxation of the Policies in General."
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<PAGE>
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Policy, net of the
applicable contingent deferred sales charge on New Payments, the Policy fee, and
any tax withholding, if applicable. Subject to the same rules that are
applicable to partial redemptions, the Company will not assess a contingent
deferred sales charge on a Free Withdrawal Amount. Because Old Payments count in
the calculation of the Free Withdrawal Amount, if Old Payments equal or exceed
the Free Withdrawal Amount, the Company may assess the full applicable
contingent deferred sales charge on New Payments.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Policy on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Policy to
other policies 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 Principal Office.
For further information on surrender and partial redemption, including minimum
limits on amount redeemed and amount remaining under the Policy in the case of
partial redemption, and important tax considerations, see "C. Surrender" and "D.
Partial Redemption" under "THE VARIABLE ANNUITY POLICIES," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If a period certain option is
chosen (Option V or the comparable fixed annuity option), a contingent deferred
sales charge will be deducted from the Accumulated Value of the Policy if the
Annuity Date occurs at any time during the surrender charge period. Such charge
is the same as that which would apply had the policy been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any policy year under an option involving a life contingency (Options I, II,
III, IV-A, IV-B or the comparable fixed annuity options) or involving a
non-commutable period certain of a duration of ten years or more.
SALES EXPENSE. The Company pays sales commissions, not to exceed 6% of purchase
payments, to entities which sell the Policies. To the extent permitted by NASD
rules, expense reimbursement allowances and additional payments for other
services not directly related to the sale of the Policies, 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 Owners or to the Separate Account. Any contingent
deferred sales charges assessed on a Policy will be retained by the Company.
Alternative commission schedules are available with lower initial commission
amounts based on purchase payments, plus ongoing annual compensation of up to 1%
of policy value.
B. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
policies. 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, to the extent permitted in the Policy the premium tax charge is
deducted on a pro-rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity benefit payments begin (the
Company reserves the right instead to deduct the premium tax charge for
these Policies at the time the purchase payments are received); or
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<PAGE>
(2) the premium tax charge is deducted when annuity benefit payments begin.
If no amount for premium tax was deducted at the time the purchase 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 Policy
value at the time such determination is made.
C. POLICY FEE.
A $30 Policy fee currently is 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 not deducted after annuitization. The Policy fee currently is
waived for Policies issued to a trustee of a 401(k) plan, but the Company
reserves the right to impose the Policy fee on such Policies.
Where Policy value has been allocated to more than one account (General Account
and/or one or more of the Sub-Accounts), a percentage of the total Policy fee
will be deducted from the Policy value in each account. The portion of the
charge deducted from each account will be equal to the percentage which the
Policy value in that account represents of the total Accumulated Value under the
Policy. The deduction of the Policy fee will result in cancellation of a number
of Accumulation Units equal in value to the percentage of the charge deducted
from that account.
D. ANNUAL CHARGES AGAINST SEPARATE 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 Policies. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
special death benefit guarantee and its guarantee that it will make annuity
benefit payments in accordance with annuity rate provisions established at the
time the Policy 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 Policies, 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 Policies 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 available
under the Policies 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. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Policy and the amount of expenses actually attributable to that Policy.
Deductions for the Policy fee (described under "C. Policy 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 Separate Account and the Policies include, but are not
limited to, clerical, accounting,
22
<PAGE>
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.
TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first 12 transfers in a Policy year will be free of
charge, but reserves the right to assess a charge, guaranteed never to exceed
$25, for the thirteenth and each subsequent transfer in a Policy year. For more
information, see "B. Transfer Privilege" under "THE VARIABLE ANNUITY POLICIES."
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 SAI of
the Fund contain additional information concerning expenses of the Underlying
Series.
THE VARIABLE ANNUITY POLICIES
The Policies 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 Owners, and beneficiaries, are cautioned that the rights of any person
to any benefits under such Policies may be subject to the terms and conditions
of the plans themselves, regardless of the terms and conditions of the Policies.
The Policies offered by this Prospectus may be purchased from representatives of
Allmerica Investments, Inc. and certain independent broker-dealers that are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. (NASD). The principal
underwriter of the Policies is Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA, 01653, an indirect wholly owned subsidiary of First Allmerica.
Owners may direct any inquiries to Client Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, MA 01653.
A. PURCHASE PAYMENTS.
Purchase payments are payable to the Company. The initial payment will be
credited to the Policy as of the date that the properly completed application
which accompanies the payment is received by the Company at its Principal
Office. If an application is incomplete, or does not specify how payments are to
be allocated among the Accounts, the initial purchase payment will be returned
within five business days. After a policy is issued, Accumulation Units will be
credited to the Policy at the unit value computed as of the Valuation Date that
a purchase payment is received at the Principal Office.
Purchase payments are not limited as to frequency and number, but there are
certain limitations as to amount. Generally, the initial payment must be at
least $600. Under a salary deduction or a 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 issue a Policy on the employee, if the plan's average
annual contribution per eligible plan participant is at least $600. Total
payments may not exceed the maximum limit specified in the Policy. If the
payments are divided among two or more accounts, a net amount of at least $10 of
each payment must be allocated to each account.
Generally, payments will be allocated among the Sub-Accounts according to the
Owner's instructions when the Policy is issued. If, however, the Policy is
issued in Georgia, Indiana, Michigan, Missouri, New York, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington, West Virginia or in
connection with an IRA, for the first 14 days following the date of issue, all
Separate Account allocations will be held in Sub-Account 204 (the Money Market
Series). For California senior citizens age 60 and older, all Separate Account
allocations will be held in the Cash Reserve Series for 34 days following the
date of issue because of the extended California free-look right for these
individuals. Thereafter, all amounts will be allocated according to the Owner's
instructions. The Owner may change allocation instructions for new payments
pursuant to written or telephone request. If telephone requests are elected by
the Owner, a properly completed authorization form must be on file before
telephone requests will be
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<PAGE>
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 an 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, subject to the Company's then current
rules, an Owner may have amounts transferred among the Sub-Accounts or between a
Sub-Account and the General Account, where available. Transfer values will be
effected at the Accumulation Value next computed after receipt of the transfer
order. The Company will make transfers pursuant to written request or, if a
properly completed authorization is on file, pursuant to a telephone request.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Policy year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Policy year, the Company reserves the right to assess a
charge, guaranteed not to exceed $25, to reimburse it for the expense of
processing transfers.
Except for transfers made under the automatic transfer option (DOLLAR COST
AVERAGING) and for transfers made under policies issued to residents of Texas,
no transfers from the General Account are permitted except during the 30-day
period beginning on each policy anniversary. During this 30-day "window" period,
any amount (up to 100%) of the policy value may be transferred. In Texas,
transfers from the Fixed Account are also permitted if there has been at least a
ninety day period since the last transfer from the General Account and the
amount of the transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred, (2) the minimum
amount that may remain in a Sub-Account following a transfer from that
Sub-Account, (3) the minimum period of time between transfers involving the
General Account, and (4) the maximum amount that may be transferred each time
from the General Account.
The Owner may elect automatic transfers of a pre-determined dollar amount
(DOLLAR COST AVERAGING), not less than $100, on a periodic basis (monthly,
bi-monthly, quarterly, semi-annually or annually) from the Sub-Account investing
in the Capital Reserve Series, the Strategic Income Series, or the Cash Reserve
Series (the "source account") to one or more of the Sub-Accounts. Automatic
transfers may not be made into the General Account or, if applicable, the
Sub-Account being used as the source account. If an automatic transfer would
reduce the balance in the source account to less than $100, the entire balance
will be transferred proportionately to the chosen Sub-Accounts. Automatic
transfers will continue until the amount in the source account on a transfer
date is zero or the Owner's request to terminate the option is received by the
Company. If additional amounts are allocated to the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
The General Account may be used as the source account from which automatic
transfers can be made provided that (1) the amount of each monthly transfer
cannot exceed 10% of the value in the General Account as of the date of the
first transfer; (2) the amount of each bi-monthly transfer cannot exceed 20% of
the value of the General Account as of the date of the first transfer and (3)
each quarterly transfer cannot exceed 25% of the value in the General Account as
of the date of the first transfer.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as requested by the Owner, the
Company will review the percentage allocations in the Sub-Accounts and, if
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necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue until the Owner's request to terminate the option is received by
the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Policy year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge each Policy year. Currently, automatic transfers and automatic
rebalancing may not be in effect simultaneously.
C. SURRENDER.
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Accumulated Value, less applicable charges ("Surrender Amount"). The
Owner must return the Policy and a signed, written request for surrender,
satisfactory to the Company to the Principal Office. The amount payable to the
Owner upon surrender will be based on the Accumulated Value of the Policy as of
the Valuation Date on which the request and the Policy are received at the
Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Policy is surrendered if payments have been credited to the Policy during the
last seven full Policy years. See "CHARGES AND DEDUCTIONS." The Policy fee will
be deducted upon surrender of the Policy.
After the Annuity Date, only Policies under which future annuity benefit
payments are limited to a specified period (as specified in Annuity Option V)
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 partial redemptions of amounts in each Sub-Account during
any period 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 partial redemptions
of amounts allocated to the Company's General Account for a period not to exceed
six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. PARTIAL REDEMPTION.
At any time prior to the Annuity Date, an Owner may redeem a portion of the
Accumulated Value of his or her Policy, subject to the limits stated below. The
Owner must file a signed, written request for redemption, satisfactory to the
Company, at the Principal Office. The written request must indicate the dollar
amount the Owner wishes to receive and the account from which such amount is to
be redeemed. The amount redeemed equals the amount requested by the Owner plus
any applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS."
Where allocations have been made to more than one account, a percentage of the
partial redemption may be allocated to each such account. A partial redemption
from a Sub-Account will result in cancellation of a
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number of units equivalent in value to the amount redeemed, computed as of the
Valuation Date that the request is received at the Principal Office.
Each partial redemption must be in a minimum amount of $100. No partial
redemption will be permitted if the Accumulated Value remaining under the Policy
would be reduced to less than $1,000. Partial redemptions will be paid in
accordance with the time limitations described under "C. Surrender."
After the Annuity Date, only Policies under which a period certain option has
been elected may be partially redeemed. A partial redemption after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or an Owner predeceases the Annuitant) prior to the
Annuity Date while the Policy is in force, a death benefit will be paid to the
beneficiary, except where the Policy continues as provided in "F. The Spouse of
the 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 (1) the
Accumulated Value under the Policy next determined following receipt of due
proof of death at the Principal Office, or (2) the total amount of gross
payments made under the Policy reduced proportionally to reflect the amount of
all prior partial withdrawals, or (3) the death benefit that would have been
payable on the most recent fifth year Policy anniversary, increased for
subsequent purchase payments and reduced proportionally to reflect withdrawals
after that date. A partial withdrawal will reduce the gross payments available
as a death benefit under (2) in the same proportion that the Accumulated Value
was reduced on the date of withdrawal. For each withdrawal, the reduction is
calculated by multiplying the total amount of gross payments by a fraction, the
numerator of which is the amount of the partial withdrawal and the denominator
of which is the Accumulated Value immediately prior to the withdrawal. For
example, if gross payments total $8,000 and a $3,000 withdrawal is made when the
Accumulated Value is $12,000, the proportional reduction of gross payments
available as a death benefit is calculated as follows: The Accumulated Value is
reduced by 1/4 (3,000 divided by 12,000); therefore, the gross amount available
as a death benefit under (2) also will be reduced by 1/4 (8,000 times 1/4 equals
$2,000), so that the $8,000 gross payments are reduced to $6,000. Payments made
after a withdrawal will increase the death benefit available under (2) by the
amount of the payment.
A partial withdrawal after the most recent fifth year Policy anniversary will
decrease the death benefit available under (3) in the same proportion that the
Accumulated Value was reduced on the date of the withdrawal. For example, if the
death benefit that would have been payable on the most recent fifth year Policy
anniversary is $12,000 and partial withdrawals totalling $5,000 are made
thereafter when the Accumulated Value is $15,000, the proportional reduction of
death benefit available under (3) is calculated as follows: The Accumulated
Value is reduced by 1/3 (5,000 divided by 15,000); therefore, the death benefit
that would have been payable on the most recent fifth year Policy anniversary
will also be reduced by 1/3 (12,000 times 1/3 or $4,000), so that the death
benefit available under (3) will be $8,000 ($12,000 minus $4,000). Payments made
after the most recent fifth year Policy anniversary will increase the death
benefit available under (3) by the amount of the payment. Upon death of an Owner
who is not the Annuitant, the death benefit is equal to the Accumulated Value of
the Policy next determined following receipt of due proof of death received at
the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum. The
beneficiary may, however, by written request, elect one of the following
options:
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(1) The payment of the one sum may be delayed for a period not to exceed
five years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin
within one year from the date of death, and are payable over a period
certain not extended beyond the life expectancy of the beneficiary.
(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from
the date of death and are payable over a period not extended beyond the
life expectancy of the beneficiary. Any annuity benefits will be
provided in accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy shall
be based on the unit values next computed after due proof of death has been
received at the 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 (other than a spousal beneficiary of an IRA, See "F. The
Spouse of the Owner as Beneficiary," below) 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.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly 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. If there is more than one beneficiary, the
commuted value of the payments, computed on the basis of the assumed interest
rate incorporated in the annuity option table on which such payments are based,
shall be paid to the beneficiaries in one sum.
F. THE SPOUSE OF THE OWNER AS BENEFICIARY.
If the Owner's spouse is named as beneficiary ("spousal beneficiary") and if the
Owner dies (and predeceases the Annuitant if such Owner is not the Annuitant)
prior to the Annuity Date while the Policy is in force, at the written request
of the spousal beneficiary the death benefit will not be paid and the spousal
beneficiary will become the new Owner (and, if the deceased Owner was also the
Annuitant, the new Annuitant). All other rights and benefits provided in the
Policy will continue, except that any subsequent spouse of such new Owner will
not be entitled to continue the Policy upon such new Owner's death.
G. ASSIGNMENT.
The Policy may be assigned by the Owner at any time prior to the Annuity Date
and while the Annuitant is alive. Policies sold in connection with IRA plans and
certain other qualified plans, however, are not assignable. For more information
about these plans, 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 Policy 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
Policy to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Owner in full settlement of all liability
under the Policy. The interest of the Owner and of any beneficiary will be
subject to any assignment.
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H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the 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 Policy, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the General Account of the Company, and the annuity benefit payments will be
fixed in amount. See "APPENDIX A. MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made each month. Since the value of an
Annuity Unit in a Sub-Account will reflect the investment performance of the
Sub-Account, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $50. If
a combination of fixed and variable payments is selected, the initial payment on
each basis must be at least $50. The Company reserves the right to increase
these minimum amounts. If the annuity option selected does not produce initial
payments which meet these minimums, the Company will pay the Accumulated Value
in one sum. Once the Company begins making annuity payments, the Annuitant
cannot make partial redemptions or surrender the annuity benefit, except in the
case where a commutable period certain option (Option V or a comparable fixed
option) has been chosen. 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 Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Policy is 75 or under, or (2) within ten years from the date of issue of the
Policy and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Owner may elect to change the Annuity
Date by sending a request to the 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. The new Annuity Date 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 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 Owner does not elect otherwise, annuity benefit payments will be made in
accordance with Option I, a variable life annuity with 120 monthly payments
guaranteed. 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 currently provides the variable annuity options described below.
Variable annuity options may be funded through the Decatur Series, the Capital
Reserves Series and the Delaware series.
The Company also provides fixed-amount annuity options which are comparable to
the variable annuity options. Regardless of how payments were allocated during
the accumulation period, any one of the variable annuity options or the
fixed-amount options may be selected, or any one of the variable annuity options
may be selected in combination with any one of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
OPTION I -- VARIABLE LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED. A
variable annuity payable monthly during the lifetime of the payee with the
guarantee that if the payee should die before 120 monthly payments have been
paid, the monthly annuity benefit payments will continue to the beneficiary
until a total of 120 monthly payments have been paid.
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OPTION II -- VARIABLE LIFE ANNUITY. A variable annuity payable monthly only
during the lifetime of the Annuitant. 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. Payments will continue, however, during the lifetime of the
Annuitant, no matter how long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
monthly during the lifetime of the payee with the guarantee that if (1) exceeds
(2), then monthly 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 monthly payment (which determines the greatest
number of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the payee.
OPTION IV-A -- JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. A monthly variable
annuity 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 Policy or the beneficiary. There is no
minimum number of payments under this option. See Option IV-B, below.
OPTION IV-B -- JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. A monthly
variable annuity payable jointly to two payees during their joint lifetime, and
then continuing thereafter during the lifetime of the survivor. The amount of
each monthly payment to the survivor, however, 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
Policy or the beneficiary. There is no minimum number of payments under this
option. See Option IV-A, above.
OPTION V -- PERIOD CERTAIN VARIABLE ANNUITY. A monthly variable annuity payable
for a stipulated number of years ranging from one to 30 years. This option may
be commutable, that is, the payee reserves the right to receive a lump sum in
place of installments, or it becomes non-commutable. The payee must reserve this
right at the time benefits begin.
It should be noted that Option V 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 to do so, the Company currently follows a practice of
permitting persons receiving payments under Option V 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 Owners who have
elected Option V 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 Option V.
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 policy 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 male rates described in such Policy, regardless of whether the
Annuitant is male or female.
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Although the Company believes that the Supreme Court ruling does not affect
Policies funding IRA plans that are not employer-sponsored, the Company will
apply certain aspects of the ruling to annuity benefits under such Policies,
except in those states in which it is prohibited. Such benefits will be based on
(1) the greater of the guaranteed unisex annuity rates described in the
Policies, or (2) the Company's sex-distinct Non-Guaranteed Current Annuity
Option Rates.
K. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net purchase payment is allocated to the accounts
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Policy 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 Policy is equal to the portion of the net purchase
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 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 partial redemption, 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 Series. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
The Accumulated Value under the Policy is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the General Account, if any.
ADJUSTED GROSS INVESTMENT RATE. At each Valuation Date an adjusted gross
investment rate for each Sub-Account for the Valuation Period then ended is
determined from the investment performance of that Sub-Account. Such rate is (1)
the investment income of that Sub-Account for the Valuation Period, plus capital
gains and minus capital losses of that Sub-Account for the Valuation Period,
whether realized or unrealized, adjusted for provisions made for taxes, if any,
divided by (2) the amount of that Sub-Account's assets at the beginning of the
Valuation Period. The adjusted gross investment rate may be either positive or
negative.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR. The net investment rate for a
Sub-Account's variable accumulations for any Valuation Period is equal to the
adjusted gross investment rate of the Sub-Account for such Valuation Period
decreased by the equivalent for such period of a charge equal to 1.40% per
annum. This charge cannot be increased.
The net investment factor is 1.000000 plus the applicable net investment rate.
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 Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see "ANNUITY BENEFIT PAYMENTS" in the SAI.
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 Sub-Account initially was
set at $1.00. The value of an Annuity Unit under a Sub-Account 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 Sub-Account for the current
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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 Policy.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
monthly annuity benefit payment is based upon the Accumulated Value as of a date
not more than four weeks preceding the date the first annuity benefit payment is
due. Currently, variable annuity benefit payments are made on the first of the
month based on unit values as of the 15th day of the preceding month.
The Policy provides annuity rates which determine the dollar amount of the first
monthly payment under each form of annuity for each $1,000 of applied value
(Accumulated Value applied under a specific annuity option to provide annuity
income payments, minus any applicable premium tax). The annuity rates in the
Policy are based on a modification of the 1983(a) Individual Mortality 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 3.5% 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 Sub-Accounts
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 Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first monthly annuity benefit payment under a life
contingency or a non-commutable period certain option of at least a ten-year
option is determined by multiplying (1) the Accumulated Value applied under that
option (after deduction for premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For any
commutable period certain options and for non-commutable period certain options
the Surrender Value less any premium tax is applied. The dollar amount of the
first monthly variable annuity benefit payment is then divided by the value of
an Annuity Unit of the selected Sub-Accounts 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. In each subsequent month, 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 monthly variable annuity
payment will vary with subsequent variations in the value of the Annuity Unit of
the selected Sub-Accounts. The dollar amount of each fixed amount monthly
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
The Company may from time to time offer its Owners both fixed and variable
annuity rates more favorable than those contained in the Policy. Any such rates
will be applied uniformly to all Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
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 IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Policy.
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It should be recognized that the following discussion of federal income tax
aspects of amounts received under variable annuity policies is not exhaustive,
does not purport to cover all situations, and is not intended as tax advice. A
qualified tax adviser always should 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 Policy, 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 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 Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance policies under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity policy are diversified adequately 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 policy, for any taxable year of
the owner, would be treated as ordinary income received or accrued by the owner.
It is anticipated that the Series of DGPF will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Policy modifications in order to remain in compliance with
the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
A. QUALIFIED AND NON-QUALIFIED POLICIES.
From a federal tax viewpoint there are 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 Sections 401, 403, or 408 of the 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 withdrawals or surrenders will
vary, depending on whether they are made from a qualified policy or a non-
qualified policy. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE POLICIES IN GENERAL.
The Company believes that the Policy described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered an annuity
policy under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Policy's Accumulated Value is not taxable to the Owner until it is withdrawn
from the Policy. If the Policy is surrendered or amounts are withdrawn prior to
the annuity date, any withdrawal of investment gain in value over the cost basis
of the Policy will be taxed as ordinary income. Under the current provisions of
the Code, amounts received under an annuity policy prior to annuitization
(including payments made upon the death of the annuitant or owner), generally
are first attributable to any investment gains credited to the policy over the
taxpayer's "investment in the policy." Such amounts will be treated as gross
income subject to federal income taxation. "Investment in the Policy" is the
total of all payments to the Policy which were not excluded from the Owner's
gross income less any amounts previously withdrawn which were not included in
income. Section 72(e)(11)(A)(ii) requires that all non-qualified deferred
annuity policies issued by the
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same insurance company to the same owner during a single calendar year be
treated as one policy in determining taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Policy, generally a portion of each payment may be excluded
from gross income. The excludable portion generally is determined by a formula
that establishes the ratio that the cost basis of the Policy bears to the
expected return under the Policy. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all cost basis in the
Policy is recovered, the entire payment is taxable. If the annuitant dies before
the cost basis is recovered, a deduction for the difference is allowed on the
annuitant's final tax return.
PENALTY ON DISTRIBUTION. 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 on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
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 Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the 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. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity policy were determined by amortizing the accumulated
value of the policy over the taxpayer's remaining life expectancy (such as under
the Policy's 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,
therefore, were subject to the 10% federal penalty tax. This Private Letter
Ruling may be applicable to an 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.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Policy to
another individual as a gift prior to the Annuity Date, the Code provides that
the 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 any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Policy to the Annuitant on the Annuity
Date, as required under the Policy, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity policies owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity policies
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity policies purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity policy under a
non-qualified deferred compensation plan.
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DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity policies. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a policy owned by a state or local government
or a tax-exempt organization will not be treated as an annuity under Section 72.
In addition, plan assets are treated as property of the employer, and are
subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified policies and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified policies. In addition, the Code requires reporting to the IRS of
the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Policies offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Policy made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity policy used to fund such benefits. As such,
the following is simply a general description of various types of qualified
plans that may use the Policy. Before purchasing any annuity policy for use in
funding a qualified plan, more specific information should be obtained.
A qualified Policy may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to a non-qualified Owner.
Individuals purchasing a qualified Policy should review carefully any such
changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Policies in
connection with such plans should seek competent advice as to the suitability of
the Policy to their specific needs and as to applicable Code limitations and tax
consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Policy will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Policy as described in this Prospectus. See "Right to Revoke All
Other Policies."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
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TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Policies 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 total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA policies should
seek competent advice as to eligibility, limitations on permissible payments and
other tax consequences associated with the policies.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA policy after December
31, 1988, may not begin before the employee attains age 59, separates from
service, dies or becomes disabled. In the case of hardship, an 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 be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA policy issued to
participants in the Texas Optional Retirement Program 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 additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
LOANS (QUALIFIED POLICIES ONLY)
Loans will be permitted only for TSAs and Policies issued to a plan qualified
under Section 401(a) and 401(k) of the Code. Loans are made from the Policy's
value on a pro-rata basis from all accounts. The maximum loan amount is the
amount determined under the Company's maximum loan formula for qualified plans.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Policy. Loans are subject to applicable retirement legislation and their
taxation is determined under the federal income tax laws. The amount borrowed
will be transferred to a fixed, minimum guarantee loan assets account in the
Company's General Account, where it will accrue interest at a specified rate
below the then current loan interest rate. Generally, loans must be repaid
within five years and must be made at least quarterly in substantially equal
amounts. When repayments are received, they will be allocated pro-rata in
accordance with the Owner's most recent allocation instructions.
The amount of the death benefit, the amount payable on a full surrender and the
amount applied to provide an annuity on the Annuity Date will be reduced to
reflect any outstanding loan balance (plus accrued interest thereon). Partial
withdrawals may be restricted by the maximum loan limitation.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Series. The Company will also furnish an annual
report to the Owner containing a statement of his or her account, including unit
values and other information required by applicable law, rules and regulations.
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 Series are no longer available for investment or if, in the Company's
judgment further investment in any Underlying Series should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Series and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Owner and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by an Owner.
35
<PAGE>
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Series or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC 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
Owners on a basis to be determined by the Company.
Shares of the Underlying Series are sold to separate accounts of unaffiliated
insurance companies ("shared funding") which issue variable annuity and variable
life policies ("mixed funding"). It is conceivable that in the future such
shared funding or mixed funding may be disadvantageous for variable life
insurance Owners or variable annuity Owners. Although the Company and the Fund
do not currently foresee any such disadvantages to either variable life
insurance owners or variable annuity owners, the Company and the Trustees of the
Fund intend to monitor events in order to identify any material conflicts and to
determine what action, if any, should be taken in response thereto.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Policy to reflect the substitution or change
and will notify Owners of all such changes. If the Company deems it to be in the
best interest of Owners, and subject to any approvals that may be required under
applicable law, the Separate Account or any Sub-Accounts 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.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from Separate Account VA-K or Sub-Account to another of the
Company's separate accounts or sub-accounts having assets of the same class, (2)
to operate the Separate 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 Separate 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 Series shares held by a
Sub-Account, in the event that Underlying Series shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Series shares is inappropriate in view of the purpose of the
Sub-Account. In no event will the changes described above be made without notice
to Owners in accordance with the 1940 Act. The Company reserves the right,
subject to compliance with applicable law, to change the names of the Separate
Account or of the Sub-Accounts.
VOTING RIGHTS
The Company will vote Underlying Series shares held by each Sub-Account in
accordance with instructions received from 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 Series, 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 also will vote shares in a Sub-Account that it
owns and which are not attributable to the Policies 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 Policies, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Series.
During the accumulation period, the number of Underlying Series shares
attributable to each Owner will be determined by dividing the dollar value of
the Accumulation Units of the Sub-Account credited to the Policy by the net
asset value of one Underlying Series share.
During the annuity period, the number of Underlying Series 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
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net asset value of one Underlying Series share. Ordinarily, the Annuitant's
voting interest in the Underlying Series will decrease as the reserve for the
variable annuity is depleted.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Policies as presently offered and to make any change to provisions of the
Contracts to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation. Including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted from this Prospectus pursuant to the
rules and regulations of the SEC. The omitted information may be obtained from
the SEC's principal office in Washington, DC, upon payment of the SEC's
prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General 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 Policy and the
General 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 SEC.
ALLOCATIONS TO AND TRANSFERS TO AND FROM THE GENERAL ACCOUNT OF THE COMPANY ARE
NOT PERMITTED IN CERTAIN STATES.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations to
the General Account, where available, 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 General Account, where available. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Policies, the minimum interest which may be credited on amounts
allocated to the General Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If the Policy is surrendered, or if an Excess Amount is redeemed, while the
Policy 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 Policy less than seven full
Policy years.
If the Policy was issued in Maryland on Form No. A3022-93, the following
surrender charge table applies to monies in the General Account, rather than the
surrender charge table shown in "CHARGES AND DEDUCTION," "A. Contingent Deferred
Sales Charge" (which applies to monies in the Separate Account):
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE
DATE OF PAYMENT OF NEW PAYMENTS WITHDRAWN
- --------------- --------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More Than 9 No Charge
</TABLE>
A-1
<PAGE>
APPENDIX B
INFORMATION APPLICABLE ONLY TO POLICY NO. A3019-92
(AND STATE VARIATIONS)
If the Policy is issued on Form No. A3019-92, or a state variation thereof
("Delaware Medallion I), the Policy is substantially similar to the Policies
described in this Prospectus ("Delaware Medallion II"), except as follows:
1. The minimum interest rate credited to amounts allocated to the General
Account respecting Delaware Medallion II is 3% compounded annually. For Delaware
Medallion I, the minimum interest rate guarantees are 5% for the first five
Policy years, 4% for the next five Policy years, and 3.5% thereafter.
2. The guaranteed death benefit under Delaware Medallion II is reduced
proportionally to reflect partial withdrawals (in the same proportion that the
Accumulated Value was reduced by the withdrawals). Under Delaware Medallion I,
partial withdrawals are subtracted from the guaranteed death benefit.
Additionally, the stepped-up death benefit applies to the most recent fifth year
Policy anniversary for Delaware Medallion II and applies to the most recent
seventh year Policy anniversary for the Delaware Medallion I.
3. Under Delaware Medallion II, the Free Withdrawal Amount is the greater of (1)
cumulative earnings (Accumulated Value as of the most recent Valuation Date
reduced by total gross payments not previously redeemed), (2) 10% of the
Accumulated Value as of the most recent Valuation Date, reduced by the total
amount of any prior partial redemptions made in the same calendar year to which
no contingent deferred sales charge was applied, or (3) the life expectancy
distribution, if applicable. The Free Withdrawal Amount for Delaware Medallion
II is first deducted from cumulative earnings, and any excess will be deemed
withdrawn on a LIFO basis.
Under Delaware Medallion I, the Free Withdrawal Amount is the greater of (1) 10%
of the Accumulated Value as of December 31 of the previous calendar year, or (2)
the life expectancy distribution, if applicable. The Free Withdrawal Amount for
Delaware Medallion I is deducted first from Old Payments, then from the earliest
New Payments and so on until all New Payments have been exhausted pursuant to
the first-in-first-out ("FIFO") method of accounting (LIFO or last-in-first-out
method in New Jersey).
4. If you surrender the Policy or annuitize under a period certain option at the
end of one, three or five years, the expenses you would pay on a $1,000
investment, assuming 5% annual return on assets, would be slightly less than
shown in the expense examples under "ANNUAL AND TRANSACTION EXPENSES."
B-1
<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 SEPARATE
ACCOUNT VA-K, DATED MAY 1, 1997 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER, MA 01653.
DATED: MAY 1, 1997
1
<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 BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "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 ("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, 1996, the
Company had over $6.7 billion in assets and over $25.8 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 and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996 First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over
$45.3 billion in life insurance in force.
Currently, 15 Sub-Accounts of the Variable Account are available under the
Contract. Each of the 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 management investment company. The Fund
currently consists of 15 different investment series: the Decatur Total Return
Series (formerly Equity-Income Series), Delchester Series (formerly High Yield
Series), Capital Reserve Series, Cash Reserve Series (formerly Money Market
Series), Growth Series, Delaware Series (formerly Strategy Series), Value
Series, Trend Series (formerly Emerging Growth Series), Global Bond Series,
International Equity Series, Strategic Income Series, Devon Series, Emerging
Markets Series, Convertible Securities Series, and Quantum Series (the
"Underlying Series"). Each Underlying Series has its own investment objectives
and certain attendant risks.
2
<PAGE>
TAXATION OF THE CONTRACT, THE
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
Contract 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 Internal Revenue Code ("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 the Contract 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 ("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 is not represented by any transferable stock
certificates.
EXPERTS. The financial statements of Allmerica Financial Life Insurance
and Annuity Company prepared in accordance with generally accepted accounting
principles as of and for the year ended December 31, 1996, the statutory
basis financial statements of Allmerica Financial Life Insurance and Annuity
Company for 1995 and each of the three years ended December 31, 1995, and the
financial statements of Separate Account VA-K Delaware Medallion of the
Company at December 31, 1996 and for the periods indicated included in this
Statement of Additional Information (""SAI'') constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Allmerica Financial Life Insurance and Annuity
Company included herein should be considered only as bearing on the ability of
Allmerica Financial Life Insurance and Annuity Company to meet its
obligations under the Policies.
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
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), 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 Contract pursuant to a contract among Allmerica Investments,
the Company, and the Variable Account. Allmerica Investments distributes the
Contract 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 presently is indirectly wholly owned by First
Allmerica.
The Contract offered by this Prospectus is 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
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 6.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% is paid to Delaware Distributors, Inc. for
administrative and support services with respect to the distribution of the
Contract; however, Delaware Distributors, Inc. may direct the Company to pay a
portion of said allowance to broker-dealers who provide support services
directly.
The aggregate amounts of commissions paid to Delaware Distributors, Inc. and to
independent broker-dealers, respectively, for sales of contracts offering
Sub-Accounts of Separate Account VA-K investing solely in one or more of the
Underlying Series was $913,045.90 and $7,560,561.53 in 1996, $495,561.71 and
$4,278,212.71 in
3
<PAGE>
1995, and $700,288.03 and $6,969,614.45 in 1994. Sales of these contracts began
in 1992.
Commissions paid by the Company do not result in any charge to 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, withdrawal
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 BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" 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) . . . . . . 0.000039
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . .0.000296
(7) Net Investment Factor 1.000000 + (6) . . . . . . . . . . . . . . . .1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7). . . . . . . $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of First and Subsequent Annuity Benefit Payments"
in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in the Variable Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 X $1.120000). Assume also
that the 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 3.5% 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 3.5% 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
4
<PAGE>
Valuation Period applicable to the next annuity benefit payment is 1.000190.
Multiplying this factor by .999906 (the one-day adjustment factor for the
assumed interest rate of 3.5% per annum) produces a factor of 1.000096. This
then is 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
then is 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.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain options. A commutable option gives
the Annuitant the right to exchange any remaining payments for a lump sum
payment based on the commuted value. The commuted value is the present value of
remaining payments calculated at 3.5% interest. The determination of the
commuted value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the commuted value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts, described
below, to exchange their contracts at net asset value for the variable annuity
Contract described in the Prospectus, which is issued on Form No. A3025-96 or a
state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of the Company's Elective Payment Variable
Annuity contracts issued on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms A3014-79
and A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new Contract
will be computed as if the payments that had been made to the Exchanged Contract
were made to the new Contract as of the date of issue of the Exchanged Contract.
Any additional payments to the new Contract after the exchange will be subject
to the contingent deferred sales charge computation outlined in the new Contract
and the Prospectus; i.e., the charge will be computed based on the number of
years that the additional payment (or portion of that payment) that is being
withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The new
Contract and the Exchanged Contract differ substantially as summarized below.
There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment Exchanged
Contract. In addition, if an Elective Payment Exchanged Contract was issued more
than nine years before the date of an exchange under this offer, additional
payments to the Exchanged Contract would not be subject to a surrender charge.
New payments to the new Contract may be subject to a charge if withdrawn prior
to the surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k)
5
<PAGE>
plan. No Contract fees are charged on the Single Payment Exchanged Contract. A
$9 semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any Contract year.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of
the Exchanged Contract becomes the "payment" for the new Contract. Therefore,
prior purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
B. FIXED ANNUITY EXCHANGE OFFER.
This exchange offer also applies to all fixed annuity contracts issued by the
Company. A fixed annuity contract to which this exchange offer applies may be
exchanged at net asset value for the Contract described in this Prospectus,
subject to the same provisions for effecting the exchange and for applying the
new Contract's contingent deferred sales charge as described above for variable
annuity contracts. This Prospectus should be read carefully before making such
exchange. Unlike a fixed annuity, the new Contract's value is not guaranteed
and will vary depending on the investment performance of the Underlying Series
to which it is allocated. The new Contract has a different charge structure
than a fixed annuity contract, which includes not only a contingent deferred
sales charge that may vary from that of the class of contracts to which the
exchanged fixed contract belongs, but also Contract fees, mortality and expense
risk charges (for the Company's assumption of certain mortality and expense
risks), administrative expense charges, transfer charges (for transfers
permitted among Sub-Accounts and the Fixed Account), and expenses incurred by
the Underlying Series. Additionally, the interest rates offered under the Fixed
Account of the new Contract and the Annuity Tables for determining minimum
annuity benefit payments may be different from those offered under the exchanged
fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE.
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Revoke Individual Retirement Annuity" and "Right to Revoke All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
revocation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-Accounts of the
reinstated contract in the same proportion that the value in the Fixed Account
and the value in each Sub-Account bore to the transferred Accumulated Value on
the date of the exchange of the contract for the new Contract. For purposes of
calculating any contingent deferred sales charge under the reinstated contract,
the reinstated contract will be deemed to have been issued and to have received
past purchase payments as if there had been no exchange.
6
<PAGE>
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 material information on various
topics of interest to Owners and prospective 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 Contract and the characteristics of and market for such financial
instruments. Total Return data may be advertised based on the period of time
that an Underlying Series has been in existence, even if longer than the period
of time that the Contract has been offered. The results for any period prior to
a Contract being offered will be calculated as if the Contract had been offered
during that period of time, with all charges assumed to be those applicable to
the Contract.
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 specific period, reduced
by the Sub-Accounts asset charge and any applicable contingent deferred sales
charge 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 "SEC). 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:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
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 assets
of the Sub-Account. This charge is 1.40% on an annual basis. The calculation
of ending redeemable value assumes (1) the Contract was issued at the beginning
of the period, and (2) a complete surrender of the Contract 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:
CONTRACT FORM A3019-92 (Delaware Medallion I)
and A3021-93 (Delaware Medallion II)
--------------------------------------------------
(No Guarantee Period Account Options)
Contract Year From Date of Charge as Percentage of
Payment in Which Surrender New Purchase Payments
Occurs Withdrawn*
0-3 7%
4 6%
5 5%
6 4%
7 3%
Thereafter 0%
7
<PAGE>
CONTRACT FORM A3025-96 (Delaware Medallion III)
------------------------------------------------------------------------
(With Guarantee Period Account Options)
Contract Year From Date of Charge as Percentange of
Payment in Which Surrender New Purchase Payments
Occurs Withdrawn*
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
*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, a certain amount(withdrawn without
withdrawal charges, as described in the Prospectus) is not subject to the
contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 annual
Contract fee.
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. It is
assumed, however, 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:
P(1 + T)n = EV
Where: P = a hypothetical initial payment to the Variable 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 Contract is NOT surrendered at the end of the specified period, and
therefore there is no adjustment for the contingent deferred sales charge that
would be applicable if the Contract was surrendered at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $30
annual Contract fee.
YIELD AND EFFECTIVE YIELD -- MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period
8
<PAGE>
ended December 31, 1996:
Yield 3.68%
Effective Yield 3.75%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. 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.
The Money Market Sub-Account 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 reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for the Sub-Accounts of Separate Account VA-K investing in
shares of the Underlying Series of the Fund.
9
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. 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 audit. We conducted our audit of these
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 audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is 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 FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
B. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
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 establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. 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 contractholders 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 shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using
the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned
on a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's 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 tax losses that can be applied to offset life company taxable
income.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife 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.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC 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 AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December
31, 1996.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
obligations with or without call or prepayment penalties, or the Company may
have the right to put or sell the obligations back to the issuers. Mortgage
backed securities are included in the category representing their ultimate
maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate 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
generally are no more than 75% of the property's value at the time the original
loan is made.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired
through foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $16.0 million.
These commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 --
$52.3 million; 2001 -- $7.7 million; and $28.4 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves
of $7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0
million, including restructured loans of $2.6 million. The effect of
non-accruals, compared with amounts that would have been recognized in
accordance with the original terms of the investments, was to reduce net income
by $0.1 million in 1996. There were no fixed maturities on non-accrual status at
December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income
producing for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS 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 realized 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.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
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.
EQUITY SECURITIES
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 are
limited to the lesser of the present value of the cash flows or book value.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. 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 policyholders' 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, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $178.6 million at December 31, 1996. Accident and health claim liabilities
have been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.
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. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
reserves are based on different assumptions, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance agreement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive arrangements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.
F-17
<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
<TABLE>
<S> <C>
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
</TABLE>
<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) (4,828)
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;
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
- 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.
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
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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.
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.
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
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>
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>
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
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.
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>
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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.
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.
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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 1994
---------------------- ----------------------
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>
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.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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.
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
13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
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.
14
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DGPF DGPF DGPF DGPF DGPF
EQUITY/INCOME HIGH YIELD CAPITAL RESERVES MONEY MARKET GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203 204 205
------------- ----------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Delaware Group
Premium Fund, Inc......................... $124,255,096 $61,562,565 $25,093,854 $24,188,373 $72,178,889
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1,606 -- 109 27 --
------------- ----------- ---------------- ------------ -----------
Total assets............................ 124,256,702 61,562,565 25,093,963 24,188,400 72,178,889
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 84 -- -- --
------------- ----------- ---------------- ------------ -----------
Net assets.............................. $124,256,702 $61,562,481 $25,093,963 $24,188,400 $72,178,889
------------- ----------- ---------------- ------------ -----------
------------- ----------- ---------------- ------------ -----------
Net asset distribution by category:
Qualified variable annuity policies....... $31,927,840 $17,176,667 $ 5,598,487 $4,582,612 $21,103,785
Non-qualified variable annuity policies... 92,328,862 44,385,814 19,495,476 19,605,788 51,075,104
------------- ----------- ---------------- ------------ -----------
$124,256,702 $61,562,481 $25,093,963 $24,188,400 $72,178,889
------------- ----------- ---------------- ------------ -----------
------------- ----------- ---------------- ------------ -----------
Qualified units outstanding, December 31,
1996...................................... 16,956,584 11,651,446 4,512,463 4,076,850 13,059,814
Net asset value per qualified unit, December
31, 1996.................................. $ 1.882917 $ 1.474209 $ 1.240672 $ 1.124057 $ 1.615933
Non-qualified units outstanding, December
31, 1996.................................. 49,035,014 30,108,223 15,713,642 17,441,987 31,607,192
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.882917 $ 1.474209 $ 1.240672 $ 1.124057 $ 1.615933
<CAPTION>
DGPF DGPF DGPF DGPF DGPF
MULTIPLE STRATEGY INTERNATIONAL EQUITY VALUE EMERGING GROWTH GLOBAL BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
206 207 208 209 210
----------------- -------------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Delaware Group
Premium Fund, Inc......................... $66,034,061 $47,576,159 $23,071,740 $32,271,754 $ 981,056
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
----------------- -------------------- ----------- --------------- -----------
Total assets............................ 66,034,061 47,576,159 23,071,740 32,271,754 981,056
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 20 -- -- --
----------------- -------------------- ----------- --------------- -----------
Net assets.............................. $66,034,061 $47,576,139 $23,071,740 $32,271,754 $ 981,056
----------------- -------------------- ----------- --------------- -----------
----------------- -------------------- ----------- --------------- -----------
Net asset distribution by category:
Qualified variable annuity policies....... $19,110,195 $12,366,196 $6,287,452 $ 8,847,814 $ 130,853
Non-qualified variable annuity policies... 46,923,866 35,209,943 16,784,288 23,423,940 850,203
----------------- -------------------- ----------- --------------- -----------
$66,034,061 $47,576,139 $23,071,740 $32,271,754 $ 981,056
----------------- -------------------- ----------- --------------- -----------
----------------- -------------------- ----------- --------------- -----------
Qualified units outstanding, December 31,
1996...................................... 11,823,479 8,028,621 4,285,472 5,952,296 118,158
Net asset value per qualified unit, December
31, 1996.................................. $ 1.616292 $ 1.540264 $ 1.467155 $ 1.486454 $ 1.107445
Non-qualified units outstanding, December
31, 1996.................................. 29,031,801 22,859,681 11,440,023 15,758,267 767,716
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.616292 $ 1.540264 $ 1.467155 $ 1.486454 $ 1.107445
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DGPF DGPF DGPF DGPF DGPF
EQUITY/INCOME HIGH YIELD CAPITAL RESERVES MONEY MARKET GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203 204 205
------------- ----------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 8,812,485 $4,988,697 $1,551,539 $901,491 $4,217,665
------------- ----------- ---------------- ------------ -----------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 1,173,813 662,612 305,541 236,655 753,088
Administrative expense charges............ 145,078 81,896 37,764 29,250 93,078
------------- ----------- ---------------- ------------ -----------
Total expenses.......................... 1,318,891 744,508 343,305 265,905 846,166
------------- ----------- ---------------- ------------ -----------
Net investment income................... 7,493,594 4,244,189 1,208,234 635,586 3,371,499
------------- ----------- ---------------- ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 809,085 (237,364) (137,628) -- 1,471,672
Net unrealized gain (loss)................ 8,227,305 1,730,320 (441,461) -- 1,533,852
------------- ----------- ---------------- ------------ -----------
Net realized and unrealized gain (loss)
on investments........................ 9,036,390 1,492,956 (579,089) -- 3,005,524
------------- ----------- ---------------- ------------ -----------
Net increase in net assets from
operations............................ $16,529,984 $5,737,145 $ 629,145 $635,586 $6,377,023
------------- ----------- ---------------- ------------ -----------
------------- ----------- ---------------- ------------ -----------
<CAPTION>
DGPF DGPF DGPF DGPF DGPF
MULTIPLE STRATEGY INTERNATIONAL EQUITY VALUE EMERGING GROWTH GLOBAL BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
206 207 208 209 210*
----------------- -------------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $3,999,229 $1,235,117 $ 614,880 $1,158,401 $ 7,762
----------------- ----------- ----------- --------------- -----------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 722,801 461,360 190,240 297,174 2,500
Administrative expense charges............ 89,335 57,023 23,512 36,729 309
----------------- ----------- ----------- --------------- -----------
Total expenses.......................... 812,136 518,383 213,752 333,903 2,809
----------------- ----------- ----------- --------------- -----------
Net investment income................... 3,187,093 716,734 401,128 824,498 4,953
----------------- ----------- ----------- --------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 692,657 420,080 269,579 1,430,648 1,345
Net unrealized gain (loss)................ 4,036,190 5,076,258 2,616,686 (521,722) 21,456
----------------- ----------- ----------- --------------- -----------
Net realized and unrealized gain (loss)
on investments........................ 4,728,847 5,496,338 2,886,265 908,926 22,801
----------------- ----------- ----------- --------------- -----------
Net increase in net assets from
operations............................ $7,915,940 $6,213,072 $3,287,393 $1,733,424 $27,754
----------------- ----------- ----------- --------------- -----------
----------------- ----------- ----------- --------------- -----------
</TABLE>
* For the period 5/1/96 (date of initial investment) to 12/31/96
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DGPF EQUITY/INCOME DGPF HIGH YIELD DGPF CAPITAL RESERVES
SUB-ACCOUNT 201 SUB-ACCOUNT 202 SUB-ACCOUNT 203
YEAR ENDED YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
DECEMBER 31,
------------------------- ------------------------ ------------------------
1996 1995 1996 1995 1996 1995
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 7,493,594 $ 1,892,291 $ 4,244,189 $ 3,828,641 $ 1,208,234 $ 1,186,442
Net realized gain (loss) on investments... 809,085 351,231 (237,364) (333,660) (137,628) (182,041)
Net unrealized gain (loss) on
investments............................. 8,227,305 14,864,268 1,730,320 2,308,842 (441,461) 1,645,315
------------ ----------- ----------- ----------- ----------- -----------
Net decrease in net assets from
operations.............................. 16,529,984 17,107,790 5,737,145 5,803,823 629,145 2,649,716
------------ ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments..................... 26,861,532 12,611,903 8,793,670 6,631,293 4,929,268 2,286,246
Terminations.............................. (5,222,416) (2,880,389) (3,268,319) (2,405,303) (1,645,843) (1,066,956)
Annuity benefits.......................... (2,162,269) (1,019,742) (1,057,653) (785,046) (508,279) (219,799)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................... 11,835,914 5,127,464 1,221,259 3,958,649 (2,280,137) (1,691,704)
Net decrease in investment by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
capital transactions.................... 31,312,761 13,839,236 5,688,957 7,399,593 495,009 (692,213)
------------ ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets..... 47,842,745 30,947,026 11,426,102 13,203,416 1,124,154 1,957,503
NET ASSETS:
Beginning of year......................... 76,413,957 45,466,931 50,136,379 36,932,963 23,969,809 22,012,306
------------ ----------- ----------- ----------- ----------- -----------
End of year............................... $124,256,702 $76,413,957 $61,562,481 $50,136,379 $25,093,963 $23,969,809
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
<CAPTION>
DGPF MONEY MARKET DGPF GROWTH
SUB-ACCOUNT 204 SUB-ACCOUNT 205
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 635,586 $ 566,390 $ 3,371,499 $ (360,443)
Net realized gain (loss) on investments... -- -- 1,471,672 469,048
Net unrealized gain (loss) on
investments............................. -- -- 1,533,852 9,842,970
----------- ----------- ----------- -----------
Net decrease in net assets from
operations.............................. 635,586 566,390 6,377,023 9,951,575
----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments..................... 47,950,225 22,144,514 11,468,579 5,639,806
Terminations.............................. (1,312,824) (2,008,989) (2,926,784) (2,178,906)
Annuity benefits.......................... (403,064) (603,945) (871,034) (542,098)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................... (35,250,480) (22,149,008) 7,723,573 4,925,391
Net decrease in investment by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
capital transactions.................... 10,983,857 (2,617,428) 15,394,334 7,844,193
----------- ----------- ----------- -----------
Net increase (decrease) in net assets..... 11,619,443 (2,051,038) 21,771,357 17,795,768
NET ASSETS:
Beginning of year......................... 12,568,957 14,619,995 50,407,532 32,611,764
----------- ----------- ----------- -----------
End of year............................... $24,188,400 $12,568,957 $72,178,889 $50,407,532
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DGPF INTERNATIONAL
DGPF MULTIPLE STRATEGY EQUITY DGPF VALUE
SUB-ACCOUNT 206 SUB-ACCOUNT 207 SUB-ACCOUNT 208
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------ ------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 3,187,093 $ 757,664 $ 716,734 $ 263,945 $ 401,128 $ 16,806
Net realized gain (loss) on investments... 692,657 233,085 420,080 242,722 269,579 46,388
Net unrealized gain (loss) on
investments............................. 4,036,190 8,991,892 5,076,258 2,434,397 2,616,686 1,696,345
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets from
operations.............................. 7,915,940 9,982,641 6,213,072 2,941,064 3,287,393 1,759,539
----------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments..................... 8,052,542 6,717,347 8,518,462 4,058,453 5,421,668 2,180,809
Terminations.............................. (3,179,878) (2,312,816) (1,774,463) (1,156,726) (549,128) (318,373)
Annuity benefits.......................... (1,819,910) (877,372) (614,364) (380,631) (241,891) (62,760)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................... 2,449,446 1,349,350 7,119,287 913,674 3,659,512 1,931,543
Net decrease in investment by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
capital transactions.................... 5,502,200 4,876,509 13,248,922 3,434,770 8,290,161 3,731,219
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets..... 13,418,140 14,859,150 19,461,994 6,375,834 11,577,554 5,490,758
NET ASSETS:
Beginning of year......................... 52,615,921 37,756,771 28,114,145 21,738,311 11,494,186 6,003,428
----------- ----------- ----------- ----------- ----------- -----------
End of year............................... $66,034,061 $52,615,921 $47,576,139 $28,114,145 $23,071,740 $11,494,186
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DGPF EMERGING GROWTH
SUB-ACCOUNT 209
YEAR ENDED DECEMBER 31, DGPF GLOBAL BOND
SUB-ACCOUNT 210
------------------------ PERIOD FROM
1996 1995 05/01/96* TO 12/31/96
----------- ----------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 824,498 $ (96,644) $ 4,953
Net realized gain (loss) on investments... 1,430,648 220,458 1,345
Net unrealized gain (loss) on
investments............................. (521,722) 3,031,765 21,456
----------- ----------- --------
Net increase in net assets from
operations.............................. 1,733,424 3,155,579 27,754
----------- ----------- --------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments..................... 8,195,825 3,777,567 396,978
Terminations.............................. (1,365,861) (529,800) (2,674)
Annuity benefits.......................... (399,556) (30,371) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................... 5,895,067 5,710,419 559,017
Net decrease in investment by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- (19)
----------- ----------- --------
Net increase (decrease) in net assets from
capital transactions.................... 12,325,475 8,927,815 953,302
----------- ----------- --------
Net increase (decrease) in net assets..... 14,058,899 12,083,394 981,056
NET ASSETS:
Beginning of year......................... 18,212,855 6,129,461 --
----------- ----------- --------
End of year............................... $32,271,754 $18,212,855 $981,056
----------- ----------- --------
----------- ----------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
Separate Account VA-K -- Delaware Medallion (VA-K) is a separate investment
account of Allmerica Financial Life Insurance and Annuity 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. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
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 ten 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), managed by Delaware Management Company, Inc., or Delaware International
Advisers, Ltd. DGPF (the Fund) is an open-end, diversified 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, or 408 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.
F-5
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT INVESTMENT PORTFOLIO SHARES COST PER SHARE
- --------------- ---------------------------------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
201 Equity/Income........................... 7,775,663 $102,675,680 $15.980
202 High Yield.............................. 6,713,475 61,238,554 9.170
203 Capital Reserves........................ 2,589,665 25,749,775 9.690
204 Money Market............................ 2,418,837 24,188,373 10.000
205 Growth.................................. 4,542,410 59,927,475 15.890
206 Multiple Strategy....................... 3,968,393 53,801,866 16.640
207 International Equity.................... 3,148,654 39,691,671 15.110
208 Value................................... 1,591,154 18,732,694 14.500
209 Emerging Growth......................... 2,217,990 29,737,341 14.550
210 Global Bond............................. 89,512 959,600 10.960
</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 less than $50,000 for
policies issued on Form A3025-96 (Medallion III) and $50,000 or less for
policies issued on Forms A3019-92 and A3021-93 (Medallion I and II). The policy
fee is $30 on all policies and is currently waived for policies originally
issued as part of a 401(k) plan. For the year ended December 31, 1996, policy
fees deducted from accumulated value in VA-K amounted to $124,909. These amounts
are included on the statements of changes in net assets with other transfers to
the General Account.
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.
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, 1996,
the Company received $532,875 for contingent deferred sales charges applicable
to VA-K.
F-6
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Equity/Income Sub-Account 201
Issuance of units..................... 26,906,850 $ 47,592,265 16,817,312 $ 23,691,234
Redemption of units................... (9,220,610) (16,279,504) (7,103,035) (9,851,998)
------------ ------------- ------------ -------------
Net increase........................ 17,686,240 $ 31,312,761 9,714,277 $ 13,839,236
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
High Yield Sub-Account 202
Issuance of units..................... 14,527,804 $ 20,687,367 13,701,843 $ 16,906,107
Redemption of units................... (10,585,763) (14,998,410) (7,619,617) (9,506,514)
------------ ------------- ------------ -------------
Net increase........................ 3,942,041 $ 5,688,957 6,082,226 $ 7,399,593
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Capital Reserves Sub-Account 203
Issuance of units..................... 5,977,466 $ 7,520,009 4,266,217 $ 4,976,279
Redemption of units................... (5,569,637) (7,025,000) (4,924,028) (5,668,492)
------------ ------------- ------------ -------------
Net increase (decrease)............. 407,829 $ 495,009 (657,811) $ (692,213)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Money Market Sub-Account 204
Issuance of units..................... 75,179,072 $ 83,421,240 39,103,291 $ 41,569,167
Redemption of units................... (65,228,364) (72,437,383) (41,533,117) (44,186,595)
------------ ------------- ------------ -------------
Net increase (decrease)............. 9,950,708 $ 10,983,857 (2,429,826) $ (2,617,428)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Growth Sub-Account 205
Issuance of units..................... 18,397,427 $ 29,743,277 13,019,605 $ 16,432,159
Redemption of units................... (8,934,678) (14,348,943) (6,915,534) (8,587,966)
------------ ------------- ------------ -------------
Net increase........................ 9,462,749 $ 15,394,334 6,104,071 $ 7,844,193
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Multiple Strategy Sub-Account 206
Issuance of units..................... 8,988,500 $ 13,995,384 8,419,696 $ 10,930,861
Redemption of units................... (5,336,652) (8,493,184) (4,548,601) (6,054,352)
------------ ------------- ------------ -------------
Net increase........................ 3,651,848 $ 5,502,200 3,871,095 $ 4,876,509
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International Equity Sub-Account 207
Issuance of units..................... 14,899,213 $ 21,486,538 9,412,885 $ 11,535,614
Redemption of units................... (5,613,082) (8,237,616) (6,571,322) (8,100,844)
------------ ------------- ------------ -------------
Net increase........................ 9,286,131 $ 13,248,922 2,841,563 $ 3,434,770
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
F-7
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Value Sub-Account 208
Issuance of units..................... 9,120,472 $ 12,060,935 4,656,792 $ 5,103,171
Redemption of units................... (2,861,959) (3,770,774) (1,229,779) (1,371,952)
------------ ------------- ------------ -------------
Net increase........................ 6,258,513 $ 8,290,161 3,427,013 $ 3,731,219
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Emerging Growth Sub-Account 209
Issuance of units..................... 19,526,544 $ 29,133,746 9,842,931 $ 12,048,818
Redemption of units................... (11,225,741) (16,808,270) (2,630,518) (3,121,003)
------------ ------------- ------------ -------------
Net increase........................ 8,300,803 $ 12,325,475 7,212,413 $ 8,927,815
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Bond Sub-Account 210
Issuance of units..................... 928,356 $ 998,769 -- $ --
Redemption of units................... (42,482) (45,467) -- --
------------ ------------- ------------ -------------
Net increase........................ 885,874 $ 953,302 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</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.
F-8
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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, 1996 were as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- --------------- -------------------------------------------------- ------------ -----------
<S> <C> <C> <C>
201 Equity/Income..................................... $ 45,289,510 $ 6,534,108
202 High Yield........................................ 19,188,239 8,954,554
203 Capital Reserves.................................. 6,353,391 4,557,770
204 Money Market...................................... 50,692,377 39,089,038
205 Growth............................................ 26,534,307 7,823,617
206 Multiple Strategy................................. 13,681,518 5,047,296
207 International Equity.............................. 17,975,620 4,030,492
208 Value............................................. 10,828,180 2,133,189
209 Emerging Growth................................... 25,547,125 12,410,939
210 Global Bond....................................... 1,001,776 43,521
------------ -----------
Totals............................................ $217,092,043 $90,624,524
------------ -----------
------------ -----------
</TABLE>
F-9
<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, 209 and 210) constituting the Separate
Account VA-K -- Delaware Medallion of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1996, and the results of each of their
operations and the changes in each of their net assets for each of the periods
indicated, 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, 1996 by
correspondence with the Fund, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 26, 1997
F-10
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
FINANCIAL STATEMENTS INCLUDED IN PART A
None
FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for Allmerica Financial Life Insurance and
Annuity Company
Financial Statements for Separate Account VA-K
of Allmerica Financial Life Insurance and Annuity Company
FINANCIAL STATEMENTS INCLUDED IN PART C
None
(B) EXHIBITS
Exhibit 1 - Vote Authorizing Establishment of Registrant dated November 1,
1990 was previously filed on April 1, 1991, in Registration
Statement No. 33-39702, 811-6293 and is incorporated herein
by reference.
Exhibit 2 - Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the Registrant NOT pursuant to a trust
indenture or other such instrument.
Exhibit 3 - Wholesaling Agreement was previously filed under Registration
statement No. 33-44830 on March 27, 1992 and is incorporated by
reference herein. Broker's Agreement and Specimen Schedule of
Sales Commissions for Variable Annuity Policies were previously
filed under Registration Statement No. 33-44830 on December 27,
1991 and are incorporated herein by reference.
Exhibit 4 - Specimen Generic Policy Form A was previously filed on December
27, 1991 in Registration Statement No. 33-44830 and are
incorporated herein by reference. Generic Policy Form B was
previously filed on May 1, 1996 in Post-Effective
Amendment No. 11 and 12 incorporated by reference herein.
Exhibit 5 - Specimen Generic Application Form were previously filed on
<PAGE>
December 27, 1991 in Registration Statement No. 33-44830 and
are incorporated herein by reference. Generic Policy
Application Form B was previously filed on May 1, 1996 in
Post-Effective Amendment No. 11 and is incorporated by
reference herein.
Exhibit 6 - The Depositor's Articles of Incorporation, as amended effective
October 1, 1995 to reflect its new name were previously filed
on October 1, 1995 and are incorporated by reference herein.
Exhibit 7 - Not Applicable.
Exhibit 8 - AUV Calculation Services Agreement with The Shareholder
Services Group dated March 31, 1995 was previously filed on
May 1, 1995 and is incorporated by reference herein.
Exhibit 9 - Consent and Opinion of Counsel is filed herewith.
Exhibit 10 - Consent of Independent Accountants is filed herewith.
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 14 - Not Applicable.
Exhibit 15 - Services Agreement with Fidelity Investments et al, was
previously filed on Apirl 30, 1996 and is incorporated herein
by reference
Item 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR
The Principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
<S> <C>
Bruce C. Anderson, Director Director of First Allmerica since 1996; Vice President,
First Allmerica
Abigail M. Armstrong, Secretary and Counsel Secretary of First Allmerica since 1996; Counsel, First
Allmerica
John P. Kavanaugh, Director, Vice President and Director and Chief Investment Officer of First
Allmerica since 1996; Vice President, First Allmerica
since 1991
John F. Kelly, Director Director of First Allmerica since 1996; Senior Vice
President, General Counsel and Assistant Secretary,
First Allmerica
J. Barry May, Director Director of First Allmerica since 1996; Director and
President, The Hanover Insurance Company since
1996; Vice President, The Hanover Insurance
Company, 1993 to 1996
James R. McAuliffe, Director Director of First Allmerica since 1996; President and
CEO, Citizens Insurance Company of America since
1994; Vice President 1982 to 1994 and Chief
Investment Officer, First Allmerica 1986 to 1994
John F. O'Brien, Director and Chairman of the Board Director, Chairman of the Board, President and Chief
Executive Officer, First Allmerica since 1989
Edward J. Parry, III, Director, Vice President, Director and Chief Financial Officer of First Allmerica
Chief Financial Officer and Treasurer since 1996; Vice President and Treasurer, First
Allmerica since 1993
Richard M. Reilly, Director, President and Director of First Allmerica since 1996; Vice President,
Chief Executive Officer First Allmerica since 1990; Director, Allmerica
Investments, Inc. since 1990; Director and President,
Allmerica Investment Management Company, Inc.
since 1990
Larry C. Renfro, Director Director of First Allmerica since 1996; Vice President,
First Allmerica since 1990
Eric A. Simonsen, Director and Vice President Director of First Allmerica since 1996; Vice President,
First Allmerica since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule, Director Director of First Allmerica since 1996; Vice President,
First Allmerica
</TABLE>
<PAGE>
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. SEE ATTACHED
ORGANIZATION CHART
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM High Yield Fund, L.L.C. Limited Liability Company
AFC Capital Trust I Statutory Business Trust
Allmerica Asset Management 440 Lincoln Street Investment advisory services
Limited Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Equity Index Pool Grantor Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, Inc. 440 Lincoln Street Insurance Broker
Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and
and Annuity Company (formerly Worcester MA 01653 health insurance, annuities,
known as SMA Life Assurance variable annuities and
Company) variable life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
<PAGE>
Allmerica Institutional Services, 440 Lincoln Street Accounting, marketing and
Inc. (formerly known as 440 Financial Worcester MA 01653 shareholder services for
Group of Worcester, Inc.) investment companies
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative
Worcester MA 01653 services provider to Allmerica
Financial Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of 645 West Grand River Multi-line property and
America Howell MI 48843 casualty insurance
Citizens Insurance Company of 333 Pierce Road Multi-line property and
Illinois Itasca IL 60143 casualty insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and
Midwest South Drive, Suite 200 casualty insurance
Indianapolis IN 46280
<PAGE>
Citizens Insurance Company of 8101 N. High Street Multi-line property and
Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity,
Insurance Company (formerly State Worcester MA 01653 accident and health insurance
Mutual Life Assurance Company company
of America)
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor Trust
Fund Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
The Hanover Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for Hanover
Management Company, Inc. Road Lloyd's Insurance Company
Richardson TX 75081
Hanover Lloyd's Insurance 801 East Campbell Multi-line property and
Company Road casualty insurance
Richardson TX 75081
Linder Skokie Real Estate 440 Lincoln Street Real estate holding company
Corporation Worcester MA 01653
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land
Bridgeport NJ 08014 development investment
Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
Logan Wells
Water Company,
Inc.
New Jersey
______________________________________________________________________________________________________________________
| | | | | |
59.47% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Somerset Allmerica Allmerica
Property Management Trust Square, Inc. Financial Life Institutional
& Casualty Services, Inc. Company, N.A. Insurance and Services, Inc.
Companies, Inc. Annuity Company
Federally
Delaware Delaware Chartered Massachusetts Delaware Massachusetts
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Employee American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
<CAPTION>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
SMA
Financial Corp.
Massachusetts
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 100% Allmerica
Allmerica Allmerica Allmerica Allmerica Linder Asset
Investments, Investment Asset Financial Services Skokie Management,
Inc. Management Management, Insurance Real Estate Limited
Company, Inc. Inc. Agency, Inc. Corporation
Massachusetts Massachusetts Massachusetts Massachusetts Massachusetts Bermuda
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica Allmerica
Alliance Investment Trust Funds Securities
Insurance Trust
Company
Massachusetts Massachusetts Massachusetts
New Hampshire Massachusetts
|
|
100% Affiliated Management Investment Companies
Lloyd's
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of the Hanover
Insurance Company
Beltsville
AAM High Drive
Yield Fund, Properties
L.L.C. Limited
Partnership
Massachusetts
Delaware
LLC established for the benefit of
First Allmerica, Allmerica Limited partnership involving First Allmerica, as
Financial Life, Hanover and general partner and Allmerica Financial Life as
Citizens limited partner
</TABLE>
<PAGE>
Item 27. NUMBER OF CONTRACT OWNERS.
As of December 31, 1996 there were 4,622 Contract owners of qualified contracts
and 6,054 Contract owners of non-qualified Contracts..
Item 28. INDEMNIFICATION.
Article VIII of the Bylaws of the Depositor state: Each Director and each
Officer of the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or Officer of the
Corporation, including any sums paid in settlement or to discharge judgement,
except in relation to matters as to which he shall be finally adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Separate Accounts VA-A, VA-B, VA-C, VA-G,
VA-H, VA-P, Allmerica Select Separate Account, Group VEL Account,
Allmerica Select Separate Account II, Inheiritage Account, Separate
Account KG, Separate Account KGC, Separate Account Fulcrum, Fulcrum
Variable Life Separate Account of Allmerica Financial Life Insurance and
Annuity Company
- Separate Accounts I, VA-K, VA-P, VEL II Account, Inheiritage Account,
Separate Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account and Allmerica Select Separate
Account of First Allmerica Financial Life Insurance and Annuity Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
Name Position or Office with Underwriter
---- -----------------------------------
Emil J. Aberizk Vice President and Chief Compliance Officer
Abigail M. Armstrong Secretary and Counsel
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer
and Controller
John F. Kelly Director
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive
Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark Steinberg Senior Vice President
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
Item 31. MANAGEMENT SERVICES.
Effective March 31, 1995, the Company provides daily unit value calculations
and related services for the Company's separate accounts.
<PAGE>
Item 32. UNDERTAKINGS.
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant under any
registration statement, underwriting agreement or otherwise, Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Director, Officer or Controlling Person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, Officer or Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges under the
Policies are reasonable in relation to the services rendered, expenses expected
to be incurred, and risks assumed by the Company.
Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.
Registrant, a separate account of Allmerica Financial Life Insurance and Annuity
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 1940
Act with respect to withdrawal restrictions under the Texas Optional Retirement
Program ("Program") and (b) relying on the "no-action" letter (Ref. No. IP-6-88)
<PAGE>
issued on November 28, 1988 to the American Council of Life Insurance, in
applying the withdrawal restrictions of Internal Revenue Code Section
403(b)(11). Registrant has taken the following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions imposed by the
Program and by Section 403(b)(11) have been included in the prospectus of
each registration statement used in connection with the offer of the
Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed by the
Program and by Section 403(b)(11) have been included in sales literature
used in connection with the offer of the Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the redemption
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.
4. A signed statement acknowledging the participant's understanding of (I) the
restrictions on redemption imposed by the Program and by Section 403(b)(11)
and (ii) the investment alternatives available under the employer's
arrangement will be obtained from each participant who purchases a variable
annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not so
denied or limited will be effected as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Worcester, and Commonwealth of Massachusetts
on the 2nd day of April, 1997.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY
SEPARATE ACCOUNT VA-K
By: /s/ Abigail M. Armstrong
------------------------------
Abigail M. Armstrong
Secretary and Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/John F. O'Brien Director and Chairman of the Board
- -----------------------
John F. O'Brien
/s/Bruce C. Anderson Director
- -----------------------
Bruce C. Anderson
/s/John P. Kavanaugh Director
- -----------------------
John P. Kavanaugh
/s/John F. Kelly Director
- -----------------------
John F. Kelly April 2, l997
/s/J. Barry May Director
- -----------------------
J. Barry May
/s/James R. McAuliffe Director
- -----------------------
James R. McAuliffe
<PAGE>
/s/Edward J. Parry, III Director, Vice President, Treasurer
- ----------------------- and Chief Financial Officer
Edward J. Parry, III
/s/Richard M. Reilly Director, President and Chief
- ----------------------- Executive Officer
Richard M. Reilly
/s/Larry C. Renfro Director
- -----------------------
Larry C. Renfro
/s/Eric A. Simonsen Director
- -----------------------
Eric A. Simonsen
/s/Phillip E. Soule Director
- -----------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
April 2, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Post-Effective Amendment to the Registration Statements for Separate Account
VA-K on Form N-4 under the Securities Act of 1933 and the Investment Company Act
of 1940, with respect to the Company's qualified and non-qualified variable
annuity contracts.
I am of the following opinion:
1. Separate Account VA-K is a separate account of the Company validly existing
pursuant to the Delaware Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual qualified and non-qualified variable annuity contracts,
when issued in accordance with the Prospectus contained in the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statements on Form N-4 under the
Securities Act of 1933.
Very truly yours,
/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President Counsel
<PAGE>
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4 of our report dated February 3, 1997, relating to the
financial statements of Allmerica Financial Life Insurance and Annuity
Company, our report dated February 5, 1996 relating to the statutory basis
financial statements of Allmerica Financial Life Insurance and Annuity
Company and our report dated March 26, 1997, relating to the financial
statements of Separate Account VA-K Delaware Medallion of Allmerica Financial
Life Insurance and Annuity Company, all of which appear in such Statement of
Additional Information. We also consent to the reference to us under the
heading "Experts" in such Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997
