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File Nos. 333-90543
811-6293
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 45
SEPARATE ACCOUNT VA-K OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Mary Eldridge, Secretary
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Paragraph (b) of Rule 485
_____ on (date) pursuant to Paragraph (b) of Rule 485
_____ 60 days after filing pursuant to Paragraph (a) (1) of
Rule 485
_____ on (date) pursuant to Paragraph (a) (1) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). No filing fee is
submitted as a filing fee is not required for this type of filing. The Rule
24f-2 Notice for the issuer's fiscal year ended December 31, 1999 was filed on
or before March 30, 2000.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act of
1933 or until this
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Registration Statement shall become effective on such date or dates as the
Commission, acting pursuant to said section 8(a), may determine.
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 of Fees and Expenses; Summary of Contract
Features
4..............................Condensed Financial Information; Performance
Information
5..............................Description of the Companies, the Variable
Accounts and the Underlying Investment
Companies
6..............................Charges and Deductions
7..............................Description of the Contract -- The Accumulation
Phase
8..............................Electing the Annuity Date; Description of Annuity
Payout Options; Annuity Benefit Payments
9..............................Death Benefit
10.............................Payments; Computation of Values; Distribution
11.............................Surrender and Withdrawals; Withdrawals After the
Annuity Date
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 Benefit Payments
23.............................Financial Statements
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about the Delaware Medallion
Freedom variable annuity contract issued by Allmerica Financial Life Insurance
and Annuity Company (in all jurisdictions except New York) and First Allmerica
Financial Life Insurance Company (in New York). The contract is a flexible
payment tax-deferred combination variable and fixed annuity offered on both a
group and individual basis. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE
INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING
POSSIBLE LOSS OF PRINCIPAL. THE CONTRACT MAY NOT BE AVAILABLE IN ALL STATES.
A Statement of Additional Information dated , 2000 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by calling Annuity Client Services at 1-800-423-5252.
The Table of Contents of the Statement of Additional Information is listed on
page 3 of this Prospectus. This Prospectus and the Statement of Additional
Information can also be obtained from the Securities and Exchange Commission's
website (http://www.sec.gov).
The Variable Account, known as Separate Account VA-K is subdivided into
Sub-Accounts. Each Sub-Account offered as an investment option under this
contract invests exclusively in shares of one of the following funds:
<TABLE>
<S> <C>
DELAWARE GROUP PREMIUM FUND THE ALGER AMERICAN FUND
DGPF Growth & Income Series Alger American Leveraged AllCap Portfolio
DGPF Devon Series Alger American MidCap Growth Portfolio
DGPF Growth Opportunities Series Alger American Small Capitalization Portfolio
DGPF U.S. Growth Series
DGPF Select Growth Series ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
DGPF Social Awareness Series (CLASS B)
DGPF REIT Series Alliance Growth Portfolio
DGPF Small Cap Value Series Alliance Growth and Income Portfolio
DGPF Trend Series Alliance Premier Growth Portfolio
DGPF International Equity Series Alliance Technology Portfolio
DGPF Emerging Markets Series
DGPF Balanced Series FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
DGPF Convertible Securities Series (CLASS 2)
DGPF High Yield Series Franklin Small Cap Fund
DGPF Capital Reserves Series Mutual Shares Securities Fund
DGPF Strategic Income Series Templeton Growth Securities Fund
DGPF Cash Reserve Series Templeton International Securities Fund
DGPF Global Bond Series PIONEER VARIABLE CONTRACTS TRUST (CLASS II)
AIM VARIABLE INSURANCE FUNDS Pioneer Emerging Markets VCT Portfolio
AIM V.I. Growth Fund Pioneer Mid-Cap Value VCT Portfolio
AIM V.I. High Yield Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
</TABLE>
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and pays an
interest rate guaranteed for one year from the time a payment is received. The
Guarantee Period Accounts offer fixed rates of interest for specified periods. A
Market Value Adjustment is applied to payments removed from a Guarantee Period
Account before the end of the specified period. The Market Value Adjustment may
be positive or negative. Payments allocated to a Guarantee Period Account are
held in the Company's Separate Account GPA (except in California where they are
allocated to the General Account).
THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; FEDERALLY INSURED; OR ENDORSED
BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED , 2000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF CONTRACT FEATURES................................ 12
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND THE
UNDERLYING INVESTMENT COMPANIES............................ 17
INVESTMENT OBJECTIVES AND POLICIES.......................... 19
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE....... 23
A. Payments............................................. 23
B. Computation of Values................................ 23
The Accumulation Unit............................... 24
Net Investment Factor............................... 24
C. Right to Cancel...................................... 24
D. Transfer Privilege................................... 25
Asset Allocation Model Reallocations................ 25
Automatic Transfers (Dollar Cost Averaging)......... 25
Automatic Account Rebalancing....................... 26
E. Surrender and Withdrawals............................ 26
Systematic Withdrawals.............................. 27
Life Expectancy Distributions....................... 28
F. Death Benefit........................................ 28
Standard Death Benefit.............................. 28
Optional Enhanced Death Benefit Rider............... 29
Payment of the Death Benefit Prior to the Annuity
Date................................................ 29
G. The Spouse of the Owner as Beneficiary............... 30
H. Assignment........................................... 30
ANNUITIZATION -- THE PAYOUT PHASE........................... 31
A. Electing the Annuity Date............................ 31
B. Choosing the Annuity Payout Option................... 31
Fixed Annuity Payout Options........................ 32
Variable Annuity Payout Options..................... 32
C. Description of Annuity Payout Options................ 32
D. Variable Annuity Benefit Payments.................... 33
The Annuity Unit.................................... 33
Determination of the First Annuity Benefit
Payment............................................. 33
Determination of the Number of Annuity Units........ 34
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 34
Payment of Annuity Benefit Payments................. 34
E. Transfers of Annuity Units........................... 34
F. Withdrawals after the Annuity Date................... 35
Calculation of Proportionate Reduction.............. 36
Calculation of Present Value........................ 37
Deferral of Withdrawals............................. 38
G. Reversal of Annuitization............................ 38
H. NORRIS Decision...................................... 38
CHARGES AND DEDUCTIONS...................................... 39
A. Variable Account Deductions.......................... 39
Mortality and Expense Risk Charge................... 39
Administrative Expense Charge....................... 39
Other Charges....................................... 39
B. Contract Fee......................................... 40
C. Optional Rider Charge................................ 40
</TABLE>
2
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<TABLE>
<S> <C>
D. Premium Taxes........................................ 40
E. Transfer Charge...................................... 41
GUARANTEE PERIOD ACCOUNTS................................... 42
FEDERAL TAX CONSIDERATIONS.................................. 44
A. General.............................................. 44
The Company......................................... 44
Diversification Requirements........................ 44
Investor Control.................................... 44
B. Qualified and Non-Qualified Contracts................ 45
C. Taxation of the Contract in General.................. 45
Withdrawals Prior to Annuitization.................. 45
Withdrawals After Annuitization..................... 45
Annuity Payouts After Annuitization................. 46
Penalty on Distribution............................. 46
Assignments or Transfers............................ 46
Nonnatural Owners................................... 46
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations............ 46
D. Tax Withholding...................................... 47
E. Individual Retirement Annuities...................... 47
STATEMENTS AND REPORTS...................................... 47
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 47
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 49
VOTING RIGHTS............................................... 49
DISTRIBUTION................................................ 49
LEGAL MATTERS............................................... 50
FURTHER INFORMATION......................................... 50
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- THE MARKET VALUE ADJUSTMENT................... B-1
APPENDIX C -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND
PAYMENT WITHDRAWALS........................................ C-1
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................................................ 4
ANNUITY BENEFIT PAYMENTS.................................... 4
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM.................................................... 4
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
3
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SPECIAL TERMS
ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts credited to the Contract on
any day before the Annuity Date.
ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract whose life is used to determine
the duration of annuity benefit payments involving a life contingency. Joint
Annuitants are permitted and, unless otherwise indicated, any reference to
Annuitant shall include Joint Annuitants.
ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly,
semi-annually or annually) that changes due to investment performance will be
reflected in the dollar value of an annuity benefit payment under a variable
annuity payout option.
ANNUITY DATE: the date specified in the Contract or a date elected later by the
Owner to begin annuity benefit payments. This date must be at least one year
after the issue date and may not be later than the Owner's (or youngest Joint
Owner's) 99th birthday.
ANNUITY UNIT: a measure used to calculate annuity benefit payments under a
variable payout option.
ANNUITY VALUE: the value of the amount applied under an annuity payout option.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to either Allmerica Financial Life Insurance and Annuity Company or
First Allmerica Financial Life Insurance Company.
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
issue date or on any anniversary of the Issue Date.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option with annuity benefit payments
that are fixed in amount and guaranteed throughout the annuity benefit payment
period.
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 that corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and Contract
anniversaries.
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.
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OWNER (YOU): the person, persons (Joint Owners) or entity entitled to exercise
the rights and privileges under this Contract. Unless otherwise indicated, any
reference to Owner shall include Joint Owners.
SUB-ACCOUNT: a subdivision of Separate Account VA-K investing exclusively in the
shares of a corresponding investment portfolio of Delaware Group Premium Fund
("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American Fund
("Alger"), Alliance Variable Products Series Fund, Inc. ("Alliance"), Franklin
Templeton Variable Insurance Products Trust ("FT VIP") and Pioneer Variable
Contracts Trust ("Pioneer VCT").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, rider charge and Market Value
Adjustment.
UNDERLYING FUND (OR FUNDS): an investment portfolio of DGPF, AVIF, Alger,
Alliance, FT VIP and Pioneer VCT in which a Sub-Account invests.
VALUATION DATE: a day on which the 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 Portfolio's
portfolio securities such that the current unit 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 Account is determined separately from
the other assets of the Company and the assets are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Underlying Funds.
5
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will incur directly or indirectly
under the Delaware Medallion Freedom Contract. The purpose of the following
tables is to help you understand these various charges. The tables show
(1) charges under the Contract, (2) annual expenses of the Sub-Accounts, and
(3) annual expenses of the Underlying Funds during the accumulation phase. In
addition to the charges and expenses described below, premium taxes are
applicable in some states and are deducted as described under "D. Premium Taxes"
under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
CHARGE
(1) CONTRACT CHARGES: ------
<S> <C>
None
TRANSFER CHARGE:
The Company currently does not charge for processing
transfers and guarantees that the first 12 transfers in a
Contract year will not be subject to 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: $35*
The fee is deducted annually and upon surrender prior to
the Annuity Date when Accumulated Value is less than
$75,000.
OPTIONAL RIDER CHARGE:
If the Enhanced Death Benefit Rider is elected, 1/12th of
the annual charge is deducted pro rata on a monthly basis
at the end of each Contract month. The charge for this
Rider on an annual basis as a percentage of Accumulated
Value is:
5% Enhanced Death Benefit With Annual Step-Up: 0.25%
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 0.50%
Administrative Expense Charge: 0.15%
------
Total Annual Expenses: 0.65%
*The fee may be lower in some jurisdictions. See Contract
Specifications for specific charge.
</TABLE>
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(3) ANNUAL UNDERLYING FUND EXPENSES: Total expenses of the Underlying Funds are
not fixed or specified under the terms of the Contract and will vary from year
to year. The levels of fees and expenses also vary among the Underlying Funds.
The following table shows the expenses of the Underlying Funds as a percentage
of average net assets for the year ended December 31, 1999, as adjusted for any
material changes.
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT FEE OTHER EXPENSES EXPENSES
(AFTER ANY (AFTER ANY (AFTER ANY WAIVERS/
FUND VOLUNTARY WAIVERS) 12B-1 FEES REIMBURSEMENTS) REIMBURSEMENTS)
---- ------------------ ---------- --------------- -------------------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series............. 0.60% -- 0.11% 0.71%(2)
DGPF Devon Series....................... 0.65% -- 0.12% 0.77%(2)
DGPF Growth Opportunities Series........ 0.75% -- 0.07% 0.82%(2)
DGPF U.S. Growth Series*................ 0.61% -- 0.14% 0.75%(1)(2)
DGPF Select Growth Series............... 0.74% -- 0.06% 0.80%(1)(2)
DGPF Social Awareness Series............ 0.70% -- 0.15% 0.85%(1)(2)
DGPF REIT Series........................ 0.64% -- 0.21% 0.85%(1)(2)
DGPF Small Cap Value Series............. 0.75% -- 0.10% 0.85%(2)
DGPF Trend Series....................... 0.75% -- 0.07% 0.82%(2)
DGPF International Equity Series........ 0.83% -- 0.12% 0.95%(1)(2)
DGPF Emerging Markets Series............ 1.19% -- 0.28% 1.47%(1)(2)
DGPF Balanced Series.................... 0.65% -- 0.11% 0.76%(2)
DGPF Convertible Securities Series...... 0.75% -- 0.08% 0.83%(2)
DGPF High Yield Series.................. 0.65% -- 0.09% 0.74%(2)
DGPF Capital Reserves Series............ 0.50% -- 0.26% 0.76%(2)
DGPF Strategic Income Series............ 0.65% -- 0.15% 0.80%(2)
DGPF Cash Reserve Series................ 0.45% -- 0.10% 0.55%(2)
DGPF Global Bond Series................. 0.75% -- 0.10% 0.85%(2)
AIM V.I. Growth Fund.................... 0.63% -- 0.10% 0.73%
AIM V.I. High Yield Fund................ 0.63% -- 0.51% 1.14%(3)
AIM V.I. International Equity Fund...... 0.75% -- 0.22% 0.97%
AIM V.I. Value Fund..................... 0.61% -- 0.15% 0.76%
Alger American Leveraged AllCap
Portfolio.............................. 0.85% -- 0.08%(4) 0.93%
Alger American MidCap Growth
Portfolio.............................. 0.80% -- 0.05% 0.85%
Alger American Small Capitalization
Portfolio.............................. 0.85% -- 0.05% 0.90%
Alliance Growth Portfolio (Class B)..... 0.75% 0.25% 0.12% 1.12%
Alliance Growth and Income Portfolio
(Class B).............................. 0.63% 0.25% 0.09% 0.97%
Alliance Premier Growth Portfolio
(Class B).............................. 1.00% 0.25% 0.04% 1.29%
Alliance Technology Portfolio
(Class B).............................. 1.00% 0.25% 0.27% 1.52%(5)
Franklin Small Cap Fund (Class 2)....... 0.55% 0.25% 0.27% 1.07%(6)(7)
Mutual Shares Securities Fund
(Class 2).............................. 0.60% 0.25% 0.19% 1.04%(6)(8)
Templeton Growth Securities Fund
(Class 2).............................. 0.83%(9) 0.25% 0.05% 1.13%(6)(10)
Templeton International Securities Fund
(Class 2).............................. 0.69% 0.25% 0.19% 1.13%(6)(11)
Pioneer Emerging Markets VCT Portfolio**
(Class II)............................. 0.00% 0.25% 1.88% 2.13%(12)
Pioneer Mid-Cap Value VCT Portfolio**
(Class II)............................. 0.65% 0.25% 0.11% 1.01%
</TABLE>
*The DGPF U.S. Growth Series commenced operations on November 15, 1999. Expenses
shown are based on annualized amounts.
**Class II shares of the Pioneer Emerging Markets VCT Portfolio and Pioneer
Mid-Cap Value VCT Portfolio commenced operations on May 1, 2000; therefore,
expenses shown are estimated and annualized.
(1)For the fiscal year ended December 31, 1999, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.81% for DGPF Select Growth
7
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Series, 0.90% for DGPF Social Awareness Series, 0.96% for DGPF REIT Series,
1.53% for DGPF Emerging Markets Series, 0.97% for DGPF International Equity
Series and 0.79% for DGPF U.S. Growth Series.
(2)The investment adviser for the DGPF Growth & Income Series, DGPF Devon
Series, DGPF Growth Opportunities Series (formerly known as "DelCap Series"),
DGPF U.S. Growth Series, DGPF Select Growth Series (formerly known as
"Aggressive Growth Series"), DGPF Social Awareness Series, DGPF REIT Series,
DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series (formerly
known as "Delaware Balanced Series"), DGPF Convertible Securities Series, DGPF
High Yield Series (formerly known as "Delchester Series"), DGPF Capital Reserves
Series, DGPF Strategic Income Series, and DGPF Cash Reserve Series is Delaware
Management Company, a series of Delaware Management Business Trust ("Delaware
Management"). The investment adviser for the DGPF International Equity Series,
DGPF Emerging Markets Series and the DGPF Global Bond Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, 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 DGPF
Emerging Markets Series; 0.95% for the DGPF International Equity Series; 0.85%
for DGPF Growth Opportunities Series, DGPF Select Growth Series, DGPF Social
Awareness Series, DGPF REIT Series, DGPF Small Cap Value Series, DGPF Trend
Series, DGPF Convertible Securities Series and DGPF Global Bond Series, 0.75%
for DGPF U.S. Growth Series, and 0.80% for all other Series. The fee ratios
shown above have been restated, if necessary, to reflect the new voluntary
limitations which took effect on May 1, 2000. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(3)Had there been no fee waivers or expense reimbursements, the Management Fee,
Other Expenses and Total Fund Expenses would have been 0.63%, 0.79% and 1.42%,
respectively.
(4)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(5)From time to time, the Alliance Technology Portfolio's investment adviser, in
its own discretion, may voluntarily waive all or part of its fees and/or
voluntarily assume certain portfolio expenses. An expense cap of 1.20% which was
in effect during 1999, is no longer in effect as of May 1, 2000. Therefore, the
expenses shown in the above table have been restated to reflect current fees
without the cap.
(6)The fund's class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus.
(7)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Franklin Small Cap Fund with a similar fund of the Templeton Variable
Products Series Fund, effective 5/1/00. On 2/28/00, fund shareholders approved
new management fees, which apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new fees and assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses after
May 1, 2000 would be estimated to be the same.
(8)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Mutual Shares Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund.
(9)The fund administration fee is paid indirectly through the management fee.
(10)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Templeton Growth Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund. However, if the table reflected combined assets, the fund's expenses after
5/1/00 would be estimated as: Management Fees 0.80%, 12b-1 Fees 0.25%, Other
Expenses 0.05%, and Total Fund Expenses 1.10%.
8
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(11)On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.65%, 12b-1 Fees 0.25%, Other Expenses 0.20%, and Total Fund
Expenses 1.10%.
(12)Fees and expenses reflect waivers/reimbursements currently applicable to the
portfolio. As of May 1, 2000, Pioneer Investment Management, Inc. has agreed
voluntarily to limit its management fee and, if necessary, to limit other
operating expenses of Class I shares to 1.75% of the Pioneer Emerging Markets
VCT Portfolio's average daily net assets attributable to Class I shares. The
portion of portfolio expenses attributable to Class II shares will be reduced
only to the extent such expenses are reduced for Class I shares. This agreement
is voluntary and temporary and may be revised or terminated at any time.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay 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. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the examples by a
method designed to show the "average" impact on an investment in the Variable
Account. The total Contract fees collected are divided by the total average net
assets attributable to the Contracts. The resulting percentage is 0.04%, and the
amount of the Contract fee is assumed to be $0.40 in the examples. The Contract
fee is only deducted when the Accumulated Value is less than $75,000. 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.
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THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(1) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets, and no
Rider.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $14 $44 $ 76 $167
DGPF Devon Series.......................................... $15 $46 $ 79 $174
DGPF Growth Opportunities Series........................... $15 $48 $ 82 $180
DGPF U.S. Growth Series.................................... $15 $45 $ 78 $172
DGPF Select Growth Series.................................. $15 $47 $ 81 $177
DGPF Social Awareness Series............................... $16 $48 $ 84 $183
DGPF REIT Series........................................... $16 $48 $ 84 $183
DGPF Small Cap Value Series................................ $16 $48 $ 84 $183
DGPF Trend Series.......................................... $15 $48 $ 82 $180
DGPF International Equity Series........................... $17 $52 $ 89 $194
DGPF Emerging Markets Series............................... $22 $67 $116 $249
DGPF Balanced Series....................................... $15 $46 $ 79 $173
DGPF Convertible Securities Series......................... $15 $48 $ 83 $181
DGPF High Yield Series..................................... $15 $45 $ 78 $171
DGPF Capital Reserves Series............................... $15 $46 $ 79 $173
DGPF Strategic Income Series............................... $15 $47 $ 81 $177
DGPF Cash Reserve Series................................... $13 $39 $ 68 $149
DGPF Global Bond Series.................................... $16 $48 $ 84 $183
AIM V.I. Growth Fund....................................... $14 $45 $ 77 $170
AIM V.I. High Yield Fund................................... $19 $57 $ 99 $214
AIM V.I. International Equity Fund......................... $17 $52 $ 90 $196
AIM V.I. Value Fund........................................ $15 $46 $ 79 $173
Alger American Leveraged AllCap Portfolio.................. $16 $51 $ 88 $192
Alger American MidCap Growth Portfolio..................... $16 $48 $ 84 $183
Alger American Small Capitalization Portfolio.............. $16 $50 $ 86 $188
Alliance Growth Portfolio.................................. $18 $57 $ 98 $212
Alliance Growth and Income Portfolio....................... $17 $52 $ 90 $196
Alliance Premier Growth Portfolio.......................... $20 $62 $106 $230
Alliance Technology Portfolio.............................. $22 $69 $118 $254
Franklin Small Cap Fund.................................... $18 $55 $ 95 $207
Mutual Shares Securities Fund.............................. $18 $54 $ 94 $204
Templeton Growth Securities Fund........................... $18 $57 $ 98 $213
Templeton International Securities Fund.................... $18 $57 $ 98 $213
Pioneer Emerging Markets VCT Portfolio..................... $28 $87 $149 $314
Pioneer Mid-Cap Value VCT Portfolio........................ $17 $53 $ 92 $200
</TABLE>
10
<PAGE>
(2) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and
election at issue of the 5% Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $17 $52 $ 89 $195
DGPF Devon Series.......................................... $17 $54 $ 93 $201
DGPF Growth Opportunities Series........................... $18 $55 $ 95 $207
DGPF U.S. Growth Series.................................... $17 $53 $ 92 $199
DGPF Select Growth Series.................................. $18 $55 $ 94 $205
DGPF Social Awareness Series............................... $18 $56 $ 97 $210
DGPF REIT Series........................................... $18 $56 $ 97 $210
DGPF Small Cap Value Series................................ $18 $56 $ 97 $210
DGPF Trend Series.......................................... $18 $55 $ 95 $207
DGPF International Equity Series........................... $19 $59 $102 $221
DGPF Emerging Markets Series............................... $24 $75 $128 $274
DGPF Balanced Series....................................... $17 $53 $ 92 $200
DGPF Convertible Securities Series......................... $18 $56 $ 96 $208
DGPF High Yield Series..................................... $17 $53 $ 91 $198
DGPF Capital Reserves Series............................... $17 $53 $ 92 $200
DGPF Strategic Income Series............................... $18 $55 $ 94 $205
DGPF Cash Reserve Series................................... $15 $47 $ 81 $177
DGPF Global Bond Series.................................... $18 $56 $ 97 $210
AIM V.I. Growth Fund....................................... $17 $52 $ 90 $197
AIM V.I. High Yield Fund................................... $21 $65 $112 $241
AIM V.I. International Equity Fund......................... $19 $60 $103 $223
AIM V.I. Value Fund........................................ $17 $53 $ 92 $200
Alger American Leveraged AllCap Portfolio.................. $19 $59 $101 $219
Alger American MidCap Growth Portfolio..................... $18 $56 $ 97 $210
Alger American Small Capitalization Portfolio.............. $19 $58 $ 99 $215
Alliance Growth Portfolio.................................. $21 $64 $111 $238
Alliance Growth and Income Portfolio....................... $19 $60 $103 $223
Alliance Premier Growth Portfolio.......................... $23 $70 $119 $256
Alliance Technology Portfolio.............................. $25 $77 $131 $279
Franklin Small Cap Fund.................................... $20 $63 $108 $233
Mutual Shares Securities Fund.............................. $20 $62 $106 $230
Templeton Growth Securities Fund........................... $21 $65 $111 $239
Templeton International Securities Fund.................... $21 $65 $111 $239
Pioneer Emerging Markets VCT Portfolio..................... $31 $95 $161 $338
Pioneer Mid-Cap Value VCT Portfolio........................ $20 $61 $105 $227
</TABLE>
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<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE DELAWARE MEDALLION FREEDOM VARIABLE ANNUITY?
The Delaware Medallion Freedom variable annuity contract ("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 may be purchased up to age 90 of the oldest Owner or, if the Owner is
not a natural person, the oldest Annuitant. 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;
- a Fixed Account;
- Guarantee Period Accounts;
- experienced professional investment advisers;
- tax deferral on earnings;
- guarantees that can protect your family;
- withdrawals during the accumulation and annuitization phases; and
- income that you can receive for life.
WHAT HAPPENS IN THE ACCUMULATION PHASE?
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase (described below). During the accumulation
phase, you may allocate your initial payment and any additional payments you
choose to make among the Sub-Accounts investing in the Underlying Funds, to the
Guarantee Period Accounts, and to the Fixed Account (collectively "the
investment options"). 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. Your Contract's Accumulated
Value is based on the investment performance of the Underlying Funds and any
accumulations in the Guarantee Period Accounts and the Fixed Account. You do not
pay taxes on any earnings under the Contract until you withdraw money. In
addition, during the accumulation phase, your beneficiaries receive certain
protections in the event of your death. See discussion below: WHAT HAPPENS UPON
MY DEATH DURING THE ACCUMULATION PHASE?
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner dies before the Annuity Date, a standard death benefit
will be paid to the beneficiary. (No death benefit is payable at the death of
any Annuitant except when the Owner is not a natural person.) An optional
Enhanced Death Benefit Rider is available at issue for a separate monthly
charge. See "F. Death Benefit" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE.
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on one of the numerous annuity payout options available under the
Contract. You choose:
- the annuity payout option;
- the date annuity benefit payments begin but no earlier than 1 year after
the Issue Date;
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<PAGE>
- whether you want variable annuity benefit payments based on the investment
performance of the Underlying Funds, fixed-amount annuity benefit payments
with payment amounts guaranteed by the Company, or a combination of
fixed-amount and variable annuity benefit payments.
You may also take withdrawals during the annuity payout phase. The type of
withdrawal and the number of withdrawals that may be made each calendar year
depend upon whether the Owner annuitizes under an annuity payout option with
payments based on the life of one or more Annuitants with no guaranteed payments
(a "Life" annuity payout option), under a life annuity payout option that in
part provides for a guaranteed number of payments (a "Life With Period Certain"
or "Life With Cash Back" annuity payout option), or an annuity payout option
based on a guaranteed number of payments (a "Period Certain" annuity payout
option). Under a Life annuity payout option, the Owner may make one Payment
Withdrawal each calendar year. Under a Life with Period Certain or Life with
Cash Back annuity payout option, the Owner may make one Payment Withdrawal and
one Present Value Withdrawal in each calendar year. Under a Period Certain
annuity payout option, the Owner may make multiple Present Value Withdrawals
each calendar year. For more information, see "F. Withdrawals After the Annuity
Date" under ANNUITIZATION -- THE PAYOUT PHASE. In addition, if you choose a
variable payout option, you may transfer among the available Sub-Accounts.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company. Each Contract has an Owner (or an Owner and a
Joint Owner), an Annuitant (or an Annuitant and a Joint Annuitant) and one or
more beneficiaries. As Owner, you may:
- make payments
- choose investment allocations
- choose annuity payout options
- receive annuity benefit payments (or designate someone else to receive
annuity benefit payments)
- select the Annuitant and beneficiary.
The Annuitant is the person whose life is used to determine the duration of
annuity benefit payments involving a life contingency. There must be at least
one Annuitant at all times. If an Annuitant dies and a replacement is not named,
the Owner will become the new Annuitant. The beneficiary is the person(s) or
entity entitled to the death benefit at the death of a sole Owner prior to the
Annuity Date. In the case of the death of a Joint Owner, the surviving Joint
Owner will receive the death benefit. Under certain circumstances, the
beneficiary may be entitled to annuity benefit payments upon the death of an
Owner on or after the Annuity Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
During the Accumulation Phase, you may make additional payments. Total payments
under the Contract can exceed $5,000,000 only with the Company's prior approval.
The number and frequency of your payments are flexible, subject only to a
$10,000 minimum for your initial payment and a $50 minimum for any additional
payments. A minimum of $1,000 is always required to establish a Guarantee Period
Account.
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<PAGE>
WHAT ARE MY INVESTMENT CHOICES?
You may choose among the Sub-Accounts investing in the Underlying Funds, the
Guarantee Period Accounts, and the Fixed Account.
THE VARIABLE ACCOUNT. You have the choice of Sub-Accounts investing in the
following Underlying Funds:
<TABLE>
<S> <C>
DGPF Growth & Income Series AIM V.I. Growth Fund
DGPF Devon Series AIM V.I. High Yield Fund
Growth Opportunities Series AIM V.I. International Equity Fund
DGPF U.S. Growth Series AIM V.I. Value Fund
DGPF Select Growth Series Alger American Leveraged AllCap Portfolio
DGPF Social Awareness Series Alger American MidCap Growth Portfolio
DGPF REIT Series Alger American Small Capitalization Portfolio
DGPF Small Cap Value Series Alliance Growth Portfolio
DGPF Trend Series Alliance Growth and Income Portfolio
DGPF International Equity Series Alliance Premier Growth Portfolio
DGPF Emerging Markets Series Alliance Technology Portfolio
DGPF Balanced Series Mutual Shares Securities Fund
DGPF Convertible Securities Series Franklin Small Cap Fund
DGPF High Yield Series Templeton Growth Securities Fund
DGPF Capital Reserves Series Templeton International Securities Fund
DGPF Strategic Income Series Pioneer Emerging Markets VCT Portfolio
DGPF Cash Reserve Series Pioneer Mid-Cap Value VCT Portfolio
DGPF Global Bond Series
</TABLE>
FOR A MORE DETAILED DESCRIPTION OF THE UNDERLYING FUNDS, SEE INVESTMENT
OBJECTIVES AND POLICIES.
Each Underlying Fund operates pursuant to different investment objectives, and
this range of investment options enables you to allocate your money among the
Underlying 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 (except in California where assets are held in the
Company's General 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 may offer up to 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 payout 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 value. However, this adjustment will
never be applied against your principal. In addition, earnings in the GPA AFTER
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see GUARANTEE PERIOD ACCOUNTS.
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT
OFFERED AFTER ANNUITIZATION.
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
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<PAGE>
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. 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.
WHO ARE THE INVESTMENT ADVISERS OF THE UNDERLYING FUNDS?
Delaware Management Company, a series of Delaware Management Business Trust
("Delaware Management") is the investment adviser for the DGPF Growth & Income
Series, DGPF Devon Series, DGPF Growth Opportunities Series, DGPF U. S. Growth
Series, DGPF Select Growth Series, DGPF Social Awareness Series, DGPF REIT
Series, DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series,
DGPF Convertible Securities Series, DGPF High Yield Series, DGPF Capital
Reserves Series, DGPF Strategic Income Series, and DGPF Cash Reserve Series. The
investment adviser for the DGPF International Equity Series, DGPF Emerging
Markets Series and the DGPF Global Bond Series is Delaware International
Advisers Ltd. ("Delaware International"). A I M Advisors, Inc. is the investment
adviser for the AIM V.I. Growth Fund, AIM V.I. High Yield Fund, AIM V.I.
International Equity Fund and AIM V.I. Value Fund of AIM Variable Insurance
Funds. The investment adviser of the Alger American Leveraged AllCap Portfolio,
Alger American MidCap Growth Portfolio and Alger American Small Capitalization
Portfolio is Fred Alger Management, Inc. Alliance Capital Management, L.P.
serves as the investment adviser to the Alliance Growth Portfolio, Alliance
Growth and Income Portfolio, Alliance Premier Growth Portfolio and Alliance
Technology Portfolio of Alliance Variable Products Series Fund, Inc. The
investment adviser for Franklin Small Cap Fund is Franklin Advisers, Inc. The
investment adviser to the Mutual Shares Securities Fund is Franklin Mutual
Advisers, LLC. Templeton Global Advisors Limited is the investment adviser for
the Templeton Growth Securites Fund. Templeton Investment Counsel, Inc. is the
investment adviser of the Templeton International Securities Fund. Pioneer
Investment Management, Inc. is the investment adviser to the Pioneer Emerging
Markets VCT Portfolio and Pioneer Mid-Cap Value VCT Portfolio.
CAN I MAKE TRANSFERS AMONG THE SUB-ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed
Account. On and after the Annuity Date, if you have elected a variable option,
you may transfer only among the Sub-Accounts. You will incur no current taxes on
transfers while your money remains in the Contract. See "D. Transfer Privilege"
under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE and "E. Transfers of
Annuity Units" under ANNUITIZATION -- THE PAYOUT PHASE.
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.
If you authorize automatic periodic transfers (under an Asset Allocation Model
Reallocation program, Automatic Transfers program (Dollar Cost Averaging) or
Automatic Account Rebalancing program), the first automatic transfer or
rebalancing under a request counts as one transfer for purposes of the 12
transfers guaranteed to be free of a transfer charge in each Contract year. Each
subsequent automatic transfer or rebalancing under that request is without
charge and does not reduce the remaining number of transfers which may be made
free of charge in that Contract year.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
Before the annuity payout phase begins, you may surrender your Contract or make
withdrawals at any time. A Market Value Adjustment will apply to withdrawals
from a Guarantee Period Account prior to the expiration of the Guarantee Period.
A 10% tax penalty may apply on all amounts deemed to be earnings if you are
under age 59 1/2.
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<PAGE>
CAN I EXAMINE THE CONTRACT?
Yes. Your 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 jurisdictions; see the "Right
to Examine" provision on the cover of your Contract.
If you cancel the Contract, you will receive the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any fees or charges that may have been deducted. However,
if required in your state or if the Contract was issued as an Individual
Retirement Annuity (IRA), you will generally receive a refund of your gross
payment(s). In certain jurisdictions this refund may be the greater of (1) your
gross payment(s) or (2) the Accumulated Value adjusted for any Market Value
Adjustment, plus any fees or charges previously deducted. See "C. Right to
Cancel" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change the beneficiary, unless you have designated an irrevocable
beneficiary.
- You may change your allocation of payments.
- You may make transfers among the Sub-Accounts without any tax
consequences.
- You may cancel your Contract within ten days of delivery (or longer if
required by state law).
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<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
AND THE UNDERLYING INVESTMENT COMPANIES
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial 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, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999,
Allmerica Financial had over $17 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a 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 Financial Life Insurance Company, organized under the laws of
Massachusetts in 1844, is among the five oldest life insurance companies in
America. As of December 31, 1999, First Allmerica and its subsidiaries had over
$25 billion in combined assets and over $43 billion of life insurance in force.
Effective October 16, 1995, First Allmerica converted from a mutual life
insurance company known as State Mutual Life Assurance Company of America to a
stock life insurance company and adopted its present name. First Allmerica is a
wholly owned subsidiary of AFC. First Allmerica's principal office ("Principal
Office") is located at 440 Lincoln Street, Worcester, MA 01653, telephone
508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
referred to as Separate Account VA-K (the "Variable Account"). Separate Account
VA-K was authorized by a vote of the Board of Directors of Allmerica Financial
Life Insurance and Annuity Company on November 1, 1990 and by a vote of the
Board of Directors of First Allmerica Financial Life Insurance Company on
August 20, 1991. Each Variable Account is registered with the SEC as a unit
investment trust under the Investment Company Act ("the 1940 Act"). This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts or the Companies by the SEC.
Each Sub-Account of the Variable Account invests in a corresponding investment
portfolio of the Underlying Funds. 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. Each
Sub-Account is administered and accounted for as part of the general business of
the Company. The income, capital gains or capital losses of each Sub-Account,
however, are allocated to each Sub-Account, without regard to any other income,
capital gains or capital losses of the Company. Obligations under the Contract
are obligations of the Company. Under Delaware and Massachusetts law, the assets
of the Variable Account may not be charged with any liabilities arising out of
any other business of the Company.
Each Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. Each Company may
offer other variable annuity contracts investing
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<PAGE>
in the Variable Account which are not discussed in this Prospectus. The Variable
Account also may invest in other underlying funds which are not available to the
Contracts described in this Prospectus.
THE UNDERLYING INVESTMENT COMPANIES
DELAWARE GROUP PREMIUM FUND
Delaware Group Premium Fund ("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 serve as an
investment vehicle for various separate accounts supporting variable insurance
contracts. DGPF currently has 18 investment portfolios, each issuing a series of
shares ("Series"): DGPF Growth & Income Series, DGPF Devon Series, DGPF Growth
Opportunities Series, DGPF U.S. Growth Series, DGPF Select Growth Series, DGPF
Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value Series, DGPF
Trend Series, DGPF International Equity Series, DGPF Emerging Markets Series,
DGPF Balanced Series, DGPF Convertible Securities Series, DGPF High Yield
Series, DGPF Capital Reserves Series, DGPF Strategic Income Series, DGPF Cash
Reserve Series, and DGPF Global Bond Series. The assets of each Underlying Fund
are held separate from the assets of the other Series. Each Series operates as a
separate investment vehicle, and the income or losses of one Series have no
effect on the investment performance of another Series. Shares of the
Series are not offered to the general public but solely to separate accounts of
life insurance companies.
The investment adviser for the DGPF Growth & Income Series, DGPF Devon Series,
DGPF Growth Opportunities Series, DGPF U. S. Growth Series, DGPF Select Growth
Series, DGPF Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value
Series, DGPF Trend Series, DGPF Balanced Series, DGPF Convertible Securities
Series, DGPF High Yield Series, DGPF Capital Reserves Series, DGPF Strategic
Income Series, and DGPF Cash Reserve Series is Delaware Management Company, a
series of Delaware Management Business Trust ("Delaware Management"). The
investment adviser for the DGPF International Equity Series, DGPF Emerging
Markets Series and the DGPF Global Bond Series is Delaware International
Advisers Ltd. ("Delaware International").
AIM VARIABLE INSURANCE FUNDS
AIM Variable Insurance Funds ("AVIF"), an open-end, series, management
investment company, was organized as a Maryland corporation on January 22, 1993,
changed to a Delaware business trust on May 1, 2000, and is registered with the
SEC under the 1940 Act. The investment adviser for the AIM V.I. Growth Fund, AIM
V.I. High Yield Fund, AIM V.I. International Equity Fund, and AIM V.I. Value
Fund is A I M Advisors, Inc. ("AIM"). AIM was organized in 1976, and, together
with its subsidiaries, manages or advises over 120 investment company portfolios
encompassing a broad range of investment objectives.
THE ALGER AMERICAN FUND
The Alger American Fund ("Alger"), is an open-end, diversified management
investment company established as a Massachusetts business trust on April 6,
1988 and registered with the SEC under the 1940 Act. The investment adviser for
the Alger American Leveraged AllCap Portfolio, Alger American MidCap Growth
Portfolio, and Alger American Small Capitalization Portfolio is Fred Alger
Management, Inc.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Alliance Variable Products Series Fund, Inc. ("Alliance") is registered with the
SEC as an open-end, management investment company. Four of its separate
investment portfolios are currently available under the Contract. Alliance
Capital Management, L.P. ("Alliance Capital"), serves as the investment adviser
to Alliance. Alliance Capital Management Corporation, the sole general partner
of Alliance Capital, is an
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<PAGE>
indirect wholly owned subsidiary of The Equitable Life Assurance Society of the
United States, which is in turn a wholly owned subsidiary of the Equitable
Companies Incorporated, a holding company which is controlled by AXA, a French
insurance holding company.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Franklin Templeton Variable Insurance Products Trust ("FT VIP") and the funds'
investment managers and their affiliates manage over $224 billion (as of
December 31, 1999) in assets. In 1992, Franklin joined forces with Templeton, a
pioneer in international investing. The Mutual Advisers organization became part
of the Franklin Templeton organization four years later. The investment adviser
to the Franklin Small Cap Fund is Franklin Advisers, Inc. Franklin Mutual
Advisers, LLC is the investment adviser to the Mutual Shares Securities Fund.
Templeton Global Advisors Limited is the investment adviser to the Templeton
Growth Securities Fund. Templeton Investment Counsel, Inc. is the investment
adviser to the Templeton International Securities Fund.
PIONEER VARIABLE CONTRACTS TRUST
Pioneer Variable Contracts Trust ("Pioneer VCT") is an open-end, management
investment company registered with the SEC under the 1940 Act. Pioneer
Investment Management, Inc. ("Pioneer") is the investment adviser to the Pioneer
Emerging Markets VCT Portfolio and Pioneer Mid-Cap Value VCT Portfolio. Pioneer
also provides investment research and portfolio management services to a number
of other retail mutual funds and certain institutional clients. Pioneer is a
wholly owned subsidiary of The Pioneer Group, Inc. ("PGI"). PGI, established in
1928, is one of America's oldest investment managers and has its principal place
of business at 60 State Street, Boston, Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND
IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS, WHICH ACCOMPANY THIS PROSPECTUS
AND SHOULD BE READ CAREFULLY BEFORE INVESTING. Also, the Statements of
Additional Information ("SAI") of the Underlying Funds are available upon
request. There can be no assurance that the investment objectives of the
Underlying Portfolios can be achieved or that the value of the Contract will
equal or exceed the aggregate amount of the purchase payments made under the
Contract.
DELAWARE GROUP PREMIUM FUND:
DGPF GROWTH & INCOME SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income.
DGPF DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DGPF GROWTH OPPORTUNITIES SERIES -- seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth.
DGPF U.S. GROWTH SERIES -- seeks to achieve maximum capital appreciation.
DGPF SELECT GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth.
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DGPF SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
DGPF REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
DGPF SMALL CAP 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.
DGPF 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.
DGPF 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.
DGPF EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective 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.
DGPF BALANCED 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.
DGPF 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.
DGPF HIGH YIELD SERIES -- seeks total return and, as a secondary objective, high
current income. The Series invests in rated and unrated corporate bonds
(including high-yield bonds commonly known as "junk bonds"), foreign bonds, U.S.
government securities and commercial paper. Please read the Series' prospectus
disclosure regarding the risk factors before investing in this Series.
DGPF 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.
DGPF STRATEGIC INCOME SERIES -- seeks high current income and total return. It
seeks to achieve its objective 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.
DGPF CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
DGPF 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%
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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.
AIM VARIABLE INSURANCE FUNDS:
AIM V.I. GROWTH FUND -- seeks to provide growth of capital primarily by
investing in seasoned and better capitalized companies considered to have strong
earnings momentum.
AIM V.I. HIGH YIELD FUND -- seeks to achieve a high level of current income. The
Fund seeks to meet this objective by investing at least 65% of the value of its
assets in publicly traded, lower-quality debt securities, i.e., "junk bonds".
AIM V.I. INTERNATIONAL EQUITY FUND -- seeks to provide long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities or
relative to the equity market generally. Income is a secondary objective.
THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size that demonstrate promising growth potential.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO -- seeks long-term capital appreciation.
The Portfolio focuses on midsize companies with promising growth potential.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO -- seeks long-term capital
appreciation. The Portfolio focuses on small, fast-growing companies that offer
innovative products, services or technologies to a rapidly expanding
marketplace.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
ALLIANCE GROWTH PORTFOLIO (CLASS B) -- seeks to provide long-term growth of
capital. Current income is only an incidental consideration.
ALLIANCE GROWTH AND INCOME PORTFOLIO (CLASS B) -- seeks reasonable current
income and reasonable appreciation through investments primarily in
dividend-paying common stocks of good quality.
ALLIANCE PREMIER GROWTH PORTFOLIO (CLASS B) -- seeks growth of capital by
pursuing aggressive investment policies.
ALLIANCE TECHNOLOGY PORTFOLIO (CLASS B) -- seeks growth of capital and invests
for capital appreciation. Current income is only an incidental consideration.
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FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST:
FRANKLIN SMALL CAP FUND (CLASS 2) -- seeks long-term capital growth. The fund
invests primarily in equity securities of small cap U.S. companies.
MUTUAL SHARES SECURITIES FUND (CLASS 2) -- seeks capital appreciation. Its
secondary goal is income. The fund invests primarily in equity securities of
companies the manager believes are available at market prices less than their
value based on certain recognized or objective criteria (intrinsic value).
TEMPLETON GROWTH SECURITIES FUND (CLASS 2) -- seeks long-term capital growth.
The fund invests primarily in the equity securities of companies located
anywhere in the world, including the U.S. and emerging markets.
TEMPLETON INTERNATIONAL SECURITIES FUND (CLASS 2) -- seeks long-term capital
growth. The fund invests in the equity securities of companies located outside
the U.S., including emerging markets.
PIONEER VARIABLE CONTRACTS TRUST:
PIONEER EMERGING MARKETS VCT PORTFOLIO (CLASS II) -- seeks long-term growth of
capital. The Portfolio invests primarily in securities of issuers in countries
with emerging economies or securities markets and related depositary receipts.
PIONEER MID-CAP VALUE VCT PORTFOLIO (CLASS II) -- seeks capital appreciation
through a diversified portfolio of securities consisting primarily of common
stocks.
Certain Underlying Funds have investment objectives and/or policies similar to
those of other Underlying Funds. To choose the Sub-Accounts which best meet
individual needs and objectives, carefully read the Underlying Fund
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
If there is a material change in the investment policy of a Sub-Account or the
Fund in which it invests, the Owner will be notified of the change. If the Owner
has values allocated to that Sub-Account, the Company will transfer it without
charge on written request by the Owner to another Sub-Account or to the Fixed
Account. The Company must receive such written request within 60 days of the
later of (1) the effective date of the change in the investment policy, or
(2) the receipt of the notice of the Owner's right to transfer.
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DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
A. PAYMENTS
The latest Issue Date is age 90 of the oldest Owner or, if the Owner is not a
natural person, the oldest Annuitant. The Company will issue a Contract when its
underwriting requirements are met. These requirements include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office and may include the proper completion of an application; however, where
permitted by law, the Company may issue a Contract without completion of an
application. If all issue requirements are not completed within five business
days of the Company's receipt of the initial payment, the payment will be
returned immediately unless the applicant authorizes the Company to retain it
pending completion of all issue requirements.
Payments may be made to the Contract at any time prior to the Annuity Date, or
prior to the death of an Owner, subject to certain minimums:
- Currently the initial payment must be at least $10,000.
- Each subsequent payment must be at least $50.
- 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 DGPF Cash Reserve Series.
Payments are to be made payable to the Company. The Company may reduce a payment
by any applicable premium tax before applying it to the Contract. The initial
net payment is credited to the Contract and allocated among the requested
investment options as of the date that all issue requirements are properly met.
The allocation instructions for the initial net payment will serve as the
allocation instructions for all future payments. You can change the allocation
instructions for future payments by notifying the Company.
You also have the option of specifying how a specific payment should be
allocated. This will not change the allocation instructions for any subsequent
payment.
For a discussion of future payments to an Automatic Transfer Program (Dollar
Cost Averaging), please see "Automatic Transfers (Dollar Cost Averaging)" below.
In order for the Owner to be able to initiate transactions over the telephone, 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 we
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. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape-recorded.
B. COMPUTATION OF VALUES
The Owner may allocate payments among the Sub-Accounts, Guarantee Period
Accounts, and the Fixed Account. Allocations to the 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. See GUARANTEE
PERIOD ACCOUNTS and APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.
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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 together the values of each Sub-Account, and
(3) adding the amount of the accumulations in the Fixed Account and
Guarantee Period Accounts, if any.
THE ACCUMULATION UNIT. 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 payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date. 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 arbitrarily set at $1.00
on the first Valuation Date for each Sub-Account.
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 (which may be positive or
negative) 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 0.50% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 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 a hypothetical
example see the SAI.
C. RIGHT TO CANCEL
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by law) and receive a refund. In order to
cancel the Contract, the Owner must mail or deliver it to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective.
In most states, the Company will pay the Owner the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any amounts deducted for taxes, charges or fees. However,
if the Contract was purchased as an IRA or issued in a state that requires a
full refund of the initial payment(s), the Company will provide a refund equal
to your gross payment(s). In some states, the refund may equal the greater of
(a) your gross payment(s) or (b) the Accumulated Value adjusted for any Market
Value Adjustment, plus any amounts deducted for taxes, charges or fees. At the
time the
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Contract is issued, the "Right to Examine" provision on the cover of the
Contract will specifically indicate what the refund will be and the time period
allowed to exercise the right to cancel.
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.
D. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among investment
options at any time upon written or telephone request to the Company. As
discussed in "A. Payments", a properly completed authorization form must be on
file before telephone requests will be honored. Transfer values will be based on
the Accumulated Value next computed after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the DGPF Cash Reserve Series. Transfers from a
Guarantee Period Account prior to the expiration of the Guarantee Period will be
subject to a Market Value Adjustment.
Currently, the Company does not 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 these additional transfers. The first automatic transfer or
rebalancing under an Asset Allocation Model Reallocation program, Automatic
Transfers (Dollar Cost Averaging) program, or Automatic Account Rebalancing
program counts as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Each subsequent automatic
transfer or rebalancing under that request is without charge and does not reduce
the remaining number of transfers which may be made free of charge in that
Contract year.
The Company also reserves the right to restrict transfer privileges when
exercised by a market timing firm or any other third party authorized to
initiate allocations, transfers or exchanges on behalf of multiple Contract
Owners. The Company may, among other things, not accept:
- the transfer or exchange instructions of any agent acting under a power of
attorney on behalf of more than one Owner, or
- the transfer or exchange instructions of individual Owners who have
executed pre-authorized transfer or exchange forms which are submitted by
market timing firms or other third parties on behalf of more than one
Owner at the same time.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties that provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers
of a predetermined dollar amount on a periodic basis from either the Fixed
Account, the Sub-Account investing in the DGPF Capital Reserves Series or the
Sub-Account investing in the DGPF Cash Reserve Series (the "source
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accounts") to one or more available Sub-Accounts. You may elect these automatic
transfers to one or more Sub-Accounts, subject to the following:
- the predetermined dollar amount may not be less than $100;
- the periodic basis may be monthly, quarterly, semi-annually or annually;
- automatic transfers may not be made into the selected source account,
Fixed Account, or the Guarantee Period Accounts; and
- if an automatic transfer would reduce the balance in the source account(s)
to less than $100, the entire balance will be transferred proportionately
to the chosen Sub-Accounts.
Automatic transfers from a particular source account will continue until the
earlier of:
- 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 a source account before its balance has
fallen to zero, those additional amounts will also be automatically transferred.
The original automatic transfer allocations will apply to all amounts in that
source account unless you provide new allocation instructions. New allocation
instructions will apply to the entire balance in the source account. If
additional amounts are allocated to a source account after its balance has
fallen to zero, automatic transfers will not begin again unless you specifically
notify the Company to do so.
To the extent permitted by law, the Company reserves the right, from time to
time, to credit an enhanced interest rate to an initial and/or subsequent
payment made to the Fixed Account, which is then used as the source account from
which to process automatic transfers. For more information see "Enhanced
Automatic Transfer (Dollar Cost Averaging) Program" in the SAI.
AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of
Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in
accordance with his/her specified percentage allocations. As frequently as
elected by the Owner, the Company will review the percentage allocations in the
Underlying 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 (1) the Owner's request to
terminate or change the option is received by the Company or (2) the end date
designated by the Owner when the option was elected. If a subsequent payment is
allocated in a manner different from the percentage allocation mix in effect on
the date the payment is received, on the next scheduled rebalancing date the
payment will be reallocated in accordance with the existing mix.
Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in
effect simultaneously. Either option may be elected at no additional charge when
the Contract is purchased or at a later date. 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.
E. SURRENDER AND WITHDRAWALS
Before the Annuity Date, an Owner may surrender the Contract for its Surrender
Value or withdraw a portion of its Accumulated Value. In the case of surrender,
the Owner must send the Contract and a signed written
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request for surrender, satisfactory to the Company, to the Principal Office. The
Surrender Value will be calculated based on the Contract's Accumulated Value as
of the Valuation Date.
In the case of a withdrawal, the Owner must submit to the Principal Office a
signed, written request indicating the desired dollar amount and the investment
options from which such amount is to be withdrawn. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn. Each withdrawal must be a minimum of $100. No
withdrawal will be permitted if the Accumulated Value remaining under the
Contract would be reduced to less than $1,000.
A Contract fee may apply when a withdrawal is made or a Contract is surrendered.
See 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.
Any distribution is normally payable within seven days following the Company's
receipt of the surrender or withdrawal request. The Company reserves the right
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
Company reserves the right to defer surrenders and withdrawals of amounts in
each Sub-Account in any period during which:
- 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,
- the SEC has by order permitted such suspension, or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
The Company reserves the right 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.
For important tax consequences, which may result from surrender or withdrawals,
see FEDERAL TAX CONSIDERATIONS.
For information about Withdrawals after the Annuity Date, see ANNUITIZATION --
THE PAYOUT PHASE, "F. Withdrawals After the Annuity Date."
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 periodic basis (monthly, bimonthly, quarterly, semi-annually
or annually). Systematic withdrawals from Guarantee Period Accounts are not
available. The Owner may request:
- the withdrawal of 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 withdrawal of 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 latest of 15 days after the Issue
Date, the date the written request is received at the Principal Office, or on a
date specified by the Owner.
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The minimum amount of each automatic withdrawal is $100. If a withdrawal would
cause the remaining Accumulated Value to be less than $1,000, systematic
withdrawals may 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. (For Qualified Contracts and Contracts issued
under Section 457 Deferred Compensation Plans only.) Prior to the Annuity Date,
an Owner may elect to make a series of systematic withdrawals from the Contract
according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office. Where the
Owner is a trust or other nonnatural person, the Owner may elect the LED option
based on the Annuitant's life expectancy.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Owner's life expectancy (or the
joint life expectancy of the Owner and a beneficiary.) The numerator of the
fraction is 1 (one). The denominator of the fraction will be either:
- the remaining life expectancy of the Owner (or Owner and beneficiary), as
determined annually by the Company; or
- the prior year's life expectancy, minus one.
The resulting fraction, expressed as a percentage, is then applied to the
Accumulated Value at the beginning of the year to determine the amount to be
distributed during the year. The Owner may choose to have the applicable life
expectancy redetermined each year or use the prior year's life expectancy, minus
one. Under the Company's LED option, the amount withdrawn from the Contract
changes each year.
The Owner may elect periodic LED distributions on a monthly, bi-monthly,
quarterly, semi-annual, or annual basis. The Owner may terminate the LED option
at any time. The LED option will terminate automatically on the latest possible
Annuity Date permitted under the Contract, at which time an annuity payout
option must be selected.
The LED option may not produce annual distributions that meet the definition of
"substantially equal periodic payments" as defined under Code Section 72(t). The
withdrawals may be treated by the Internal Revenue Service (IRS) as premature
distributions from the Contract and may be subject to a 10% federal tax penalty.
Owners seeking distributions over their life under this definition should
consult their tax advisor. For more information, see FEDERAL TAX CONSIDERATIONS,
"C. Taxation of the Contract in General."
F. DEATH BENEFIT
A death benefit is payable if the Owner or the first of Joint Owners dies prior
to the Annuity Date. If the Owner is a natural person, no death benefit is
payable at the death of any Annuitant. If the Owner is not a natural person, a
death benefit will be paid upon the death of any Annuitant. A spousal
beneficiary may elect to continue the Contract rather than receive the death
benefit as provided in "G. The Spouse of the Owner as Beneficiary."
STANDARD DEATH BENEFIT. Unless an enhanced death benefit is elected at issue,
the standard death benefit will be paid. The standard death benefit is equal to
the greater of (a) the Contract's Accumulated Value on the Valuation Date that
the Company receives proof of death, increased by any positive Market Value
Adjustment or (b) gross payments prior to the date of death, proportionately
reduced to reflect withdrawals. For each withdrawal under (b) the proportionate
reduction is calculated by multiplying the standard death benefit immediately
prior to the withdrawal by the following fraction:
Amount of the withdrawal
------------------------------------------------
Accumulated Value immediately prior to the withdrawal
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OPTIONAL ENHANCED DEATH BENEFIT RIDER. When applying for the Contract, an Owner
may elect the optional 5% Enhanced Death Benefit With Annual Step-Up Rider. A
separate charge for this Rider is made against the Contract's Accumulated Value
on the last day of each Contract month for the coverage provided during that
month. The charge is made through a pro-rata reduction (based on relative
values) of Accumulation Units in the Sub-Accounts and dollar amounts in the
Fixed and Guarantee Period Accounts. For specific charges and more detail, see
"C. Optional Rider Charge" under CHARGES AND DEDUCTIONS.
The 5% Enhanced Death Benefit With Annual Step-Up Rider provides a death benefit
guarantee if the death of an Owner (or an Annuitant if the Owner is not a
natural person) occurs before the Annuity Date. The calculation of the death
benefit depends upon whether death occurs before or after the 90th birthday:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date and before his/her 90th birthday,
the death benefit will be the GREATEST of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment;
(b) gross payments, accumulated daily at an effective annual yield of 5%
from the date each payment is applied until the date of death,
proportionately reduced to reflect withdrawals (in Hawaii and New York,
the 5%, is not available; therefore (b) equal gross payments
proportionately reduced to reflect withdrawals); or
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
II. Death ON OR AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner
is not a natural person) dies before the Annuity Date but on or after his/her
90th birthday, the death benefit is equal to the GREATER of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum upon receipt of proof of
death at the Principal Office, unless the Owner has elected to apply the
proceeds to a life annuity not extending beyond the beneficiary's life
expectancy. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning within 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 DGPF Cash Reserve
Sub-Account. The excess, if any, of the death benefit over the Accumulated Value
also will be transferred to the DGPF Cash Reserve Sub-Account. 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.
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G. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the sole beneficiary is the deceased Owner's spouse, he or she may, by
written request, continue the Contract in lieu of receiving payment of the death
benefit. The spouse will then become the Owner and Annuitant subject to the
following:
(1) any value in the Guarantee Period Accounts will be transferred to the
DGPF Cash Reserve Sub-Account; and
(2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be added to the DGPF Cash Reserve Sub-Account.
The new Owner may also make additional payments. All other rights and benefits
provided in the Contract will continue, except that any subsequent spouse of the
new Owner, if named as beneficiary, will not be entitled to continue the
Contract when the new Owner dies.
H. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (see FEDERAL TAX CONSIDERATIONS). The Company will not be
deemed to have knowledge of an assignment unless it is made in writing and filed
at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the 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.
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ANNUITIZATION -- THE PAYOUT PHASE
Subject to certain restrictions discussed below, at annuitization the Owner has
the right:
- to select the annuity payout option under which annuity benefit payments
are to be made;
- to determine whether those payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. If a variable
annuity payout option is selected, the Owner must choose an Annuity
Benefit Payment Change Frequency ("Change Frequency") and the date the
first Change Frequency will occur; and
- to select one of the available Assumed Investment Returns ("AIR") for a
variable option (see "D. Variable Annuity Benefit Payments" below for
details).
A. ELECTING THE ANNUITY DATE
Generally, annuity benefit payments under the Contract will begin on the Annuity
Date. The Annuity Date:
- may not be earlier than the first Contract Anniversary; and
- must occur on the first day of any month before the Owner's 99th birthday.
If the Owner does not select an Annuity Date, the Annuity Date will be the later
of (a) the Owner's age 85 or (b) one year after the Issue Date.
If there are Joint Owners, the age of the younger will determine the latest
possible Annuity Date. The Owner may elect to change the Annuity Date by sending
a written request to the Principal Office at least one month before the earlier
of the new Annuity Date or the currently scheduled date.
If the Annuity Date occurs when the Owner is at an advanced age, it is possible
that the Contract will not be considered an annuity for federal tax purposes. In
addition, the Internal Revenue Code ("the Code") and/or the terms of qualified
plans may impose limitations on the age at which annuity benefit payments may
commence and the type of annuity payout option that may be elected. The Owner
should carefully review the Annuity Date and the annuity payout options with
his/her tax adviser. See FEDERAL TAX CONSIDERATIONS for further information.
B. CHOOSING THE ANNUITY PAYOUT OPTION
Regardless of how payments were allocated during the accumulation phase, the
Owner may choose a variable annuity payout option, a fixed annuity payout option
or a combination fixed and variable annuity payout option. Currently, all of the
variable annuity payout options described below are available and may be funded
through all of the variable Sub-Accounts. In addition, each of the variable
annuity payout options is also available on a fixed basis. The Company may offer
other annuity payout options.
The Owner may change the annuity payout option up to one month before the
Annuity Date. If the Owner fails to choose an annuity payout option, monthly
benefit payments will be made under a variable Life with Cash Back annuity
payout option.
The annuity payout option selected must result in an initial payment of at least
$100 (a lower amount may be required in certain jurisdictions.) The Company
reserves the right to increase this minimum amount. If the annuity payout option
selected does not produce an initial payment which meets this minimum, a single
payment may be made.
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FIXED ANNUITY PAYOUT OPTIONS. If the Owner selects a fixed annuity payout
option, each monthly annuity benefit payment will be equal to the first (unless
a withdrawal is made or as otherwise described under certain reduced survivor
annuity benefits.) Any portion of the Contract's Accumulated Value converted to
a fixed annuity will be held in the Company's General Account. The Contract
provides guaranteed fixed annuity option rates that determine the dollar amount
of the first payment under each form of fixed annuity for each $1,000 of applied
value. These rates are based on the Annuity 2000 Mortality Table and a 3% AIR.
The Company may offer 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 more specific information about fixed annuity payout options, see the
Contract.
VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity payout
option, he/she will receive monthly payments equal to the value of the fixed
number of Annuity Units in the chosen Sub-Account(s). The first variable annuity
benefit payment will be based on the current annuity option rates made available
by the Company at the time the variable annuity payout option is selected.
Annuity option rates determine the dollar amount of the first payment for each
$1,000 of applied value. The annuity option rates are based on the Annuity 2000
Mortality Table and a 3% AIR.
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of each monthly annuity benefit
payment will usually vary. However, under this Contract, if the Owner elects a
variable payout option, he or she must also select a monthly, quarterly,
semi-annual or annual Change Frequency. The Change Frequency is the frequency
that changes due to the Sub-Account's investment performance will be reflected
in the dollar value of a variable annuity benefit payment. As such, the Change
Frequency chosen will determine how frequently monthly variable annuity payments
will vary. For example, if a monthly Change Frequency is in effect, payments may
vary on a monthly basis. If a quarterly Change Frequency is selected, the amount
of each monthly payment may change every three months and will be level within
each three month cycle.
At the time the Change Frequency is elected, the Owner must also select the date
the first change is to occur. This date may not be later than the length of the
Change Frequency elected. For example, if a semi-annual Change Frequency is
elected, the date of the first change may not be later than six months after the
Annuity Date. If a quarterly Change Frequency is elected, the date of the first
change may not be later than three months after the Annuity Date.
C. DESCRIPTION OF ANNUITY PAYOUT OPTIONS
The Company currently provides the following annuity payout options:
LIFE ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity benefit payment due prior to the
Annuitant's death.
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. Upon the first death, payments will
continue for the remaining lifetime of the survivor at a previously
elected level of 100%, two-thirds or one-half of the total number of
Annuity Units.
LIFE WITH PERIOD CERTAIN ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments guaranteed for a specified number
of years and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have been made, the
remaining payments continue to the Owner or the Beneficiary (whichever is
applicable).
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- JOINT AND SURVIVOR ANNUITIES -- Monthly payments guaranteed for a
specified number of years and continuing during the Annuitant's and Joint
Annuitant's joint lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime at the previously elected level of 100%,
two-thirds or one-half of the Annuity Units. If the surviving Annuitant
dies before all guaranteed payments have been made, the remaining payments
continue to the Owner or the Beneficiary (whichever is applicable).
LIFE WITH CASH BACK ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Thereafter, any excess of the original applied Annuity Value, over the
total amount of annuity benefit payments made and withdrawals taken, will
be paid to the Owner or the Beneficiary (whichever is applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. At the first death, payments
continue for the survivor's remaining lifetime at the previously elected
level of 100%, two-thirds or one-half of the Annuity Units. Thereafter,
any excess of the original applied Annuity Value, over the total amount of
annuity benefit payments made and withdrawals taken, will be paid to the
Owner or the Beneficiary (whichever is applicable).
PERIOD CERTAIN ANNUITY PAYOUT OPTION
Monthly annuity benefit payments for a chosen number of years ranging from five
to thirty are paid. If the Annuitant dies before the end of the period,
remaining payments will continue. 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.
D. VARIABLE ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
payout option. The value of an Annuity Unit in each Sub-Account on its inception
date was set at $1.00. The value of an Annuity Unit of a Sub-Account on any
Valuation Date thereafter is equal to the value of the Annuity Unit on the
immediately preceding Valuation Date multiplied by the product of:
(a) a discount factor equivalent to the AIR and
(b) the Net Investment Factor of the Sub-Account funding the annuity benefit
payments for the applicable Valuation Period.
Annuity benefit payments will increase from one payment date to the next if the
annualized net rate of return during that period is greater than the AIR and
will decrease if the annualized net rate of return is less than the AIR. Where
permitted by law, the Owner may select an AIR of 3%, 5% or 7%. A higher AIR will
result in a higher initial payment. However, subsequent payments will increase
more slowly during periods when actual investment performance exceeds the AIR
and will decrease more rapidly during periods when investment performance is
less than the AIR.
DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first
periodic variable annuity benefit payment depends on the:
- annuity payout option chosen;
- length of the annuity payout option elected;
- age of the Annuitant;
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- gender of the Annuitant (if applicable, see "H. NORRIS Decision");
- value of the amount applied under the annuity payout option;
- applicable annuity option rates based on the Annuity 2000 Mortality Table;
and
- AIR selected.
The dollar amount of the first periodic annuity benefit payment 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, (or the amount of
the death benefit, if applicable) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is then divided by the value of an Annuity Unit
of the selected Sub-Account(s) to determine the number of Annuity Units
represented by the first payment. The number of Annuity Units remains fixed
under all annuity payout options (except for the survivor annuity benefit
payment under the joint and two-thirds or joint and one-half option) unless the
Owner transfers among Sub-Accounts, makes a withdrawal, or units are split.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. 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. The dollar amount of each
periodic variable annuity benefit payment after the first will vary with
subsequent variations in the value of the Annuity Unit of the selected
Sub-Account(s).
For an illustration of the calculation of a variable annuity benefit payment
using a hypothetical example, see "Annuity Benefit Payments" in the SAI.
PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit
payments unless he/ she requests in writing that payments be made to another
person, persons, or entity. If the Owner (or, if there are Joint Owners, the
surviving Joint Owner) dies on or after the Annuity Date, the beneficiary will
become the Owner of the Contract. Any remaining annuity benefit payments will
continue to the beneficiary in accordance with the terms of the annuity benefit
payment option selected. If there are Joint Owners on or after the Annuity Date,
upon the first Owner's death, any remaining annuity benefit payments will
continue to the surviving Joint Owner in accordance with the terms of the
annuity benefit payment option selected.
If an Annuitant dies on or after the Annuity Date but before all guaranteed
annuity benefit payments have been made, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated. Unless otherwise
indicated by the Owner, the present value of any remaining guaranteed annuity
benefit payments may be paid in a single sum to the Owner. For discussion of
present value calculation, see "Calculation of Present Value" below.
E. TRANSFERS OF ANNUITY UNITS
After the Annuity Date and prior to the death of the Annuitant, the Owner may
transfer among the available Sub-Accounts upon written or telephone request to
the Company. As discussed in "A. Payments," a properly completed authorization
form must be on file before telephone requests will be honored. A designated
number of Annuity Units equal to the dollar amount of the transfer requested
will be exchanged for an equivalent dollar amount of Annuity Units of another
Sub-Account. Transfer values will be based on the Annuity Value next computed
after receipt of the transfer request.
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Currently, the Company does not 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 (Automatic Account Rebalancing) are available during the
annuitization phase subject to the same rules described in "D. Transfer
Privilege" except that the Fixed Account is not available as a source account.
F. WITHDRAWALS AFTER THE ANNUITY DATE
WITHDRAWALS AFTER THE ANNUITY DATE FROM QUALIFIED AND NON-QUALIFIED CONTRACTS
MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE CONSULT
YOUR TAX ADVISOR AND SEE "C. TAXATION OF THE CONTRACT IN GENERAL -- WITHDRAWALS
AFTER ANNUITIZATION" UNDER FEDERAL TAX CONSIDERATIONS.
After the Annuity Date and prior to the death of the Annuitant, the Owner may
take withdrawals from the Contract. The Owner must submit to the Principal
Office a signed, written request indicating the desired dollar amount of the
withdrawal. The minimum amount of a withdrawal is $1,000. If the amount
requested is greater than the maximum amount that may be withdrawn at that time,
the Company will allow the withdrawal only up to the maximum amount.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depend upon whether the Owner annuitizes under an annuity payout
option with payments based on the life of one or more Annuitants with no
guaranteed payments (a "Life" annuity payout option), under a life annuity
payout option that in part provides for a guaranteed number of payments (a "Life
With Period Certain" or "Life With Cash Back" annuity payout option), or an
annuity payout option based on a guaranteed number of payments (a "Period
Certain" annuity payout option).
WITHDRAWALS UNDER LIFE ANNUITY PAYOUT OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
WITHDRAWALS UNDER LIFE WITH PERIOD CERTAIN OR LIFE WITH CASH BACK ANNUITY PAYOUT
OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
The Owner may make one Present Value Withdrawal in each calendar year, if there
are remaining GUARANTEED annuity benefit payments. The amount of each Present
Value Withdrawal represents a percentage of the present value of the remaining
guaranteed annuity benefit payments. Each year a Present Value Withdrawal is
taken, the Company records the percentage of the present value of the then
remaining guaranteed annuity benefit payments that was withdrawn. The total
percentage withdrawn over the life of the Contract cannot exceed 75%. This means
that each Present Value Withdrawal is limited by the REMAINING AVAILABLE
PERCENTAGE. (For example, assume that in year three the Owner withdraws 15% of
the then current present value of the remaining guaranteed annuity benefit
payments. In year seven, the Owner withdraws 20% of the then present value of
the remaining guaranteed number of annuity benefit payments. Through year seven
the total percentage withdrawn is 35%. After year seven, the Owner may make
Present Value Withdrawal(s) of up to 40% (75% - 35%) of the present value of any
remaining guaranteed annuity benefit payments).
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Under a Life with Period Certain annuity payout option or Life with Cash Back
annuity payout option, if the Annuitant is still living after the guaranteed
annuity benefit payments have been made, the number of Annuity Units or dollar
amount applied to future annuity benefit payments will be restored as if no
Present Value Withdrawal(s) had taken place. See "Calculation of Proportionate
Reduction -- Present Value Withdrawals," below.
WITHDRAWALS UNDER PERIOD CERTAIN ANNUITY PAYOUT OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year, up
to 100% of the present value of the guaranteed annuity benefit payments.
Withdrawal of 100% of the present value of the guaranteed annuity benefit
payments will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity benefit payments or
remaining guaranteed annuity benefit payments, respectively, and proportionately
reduces the number of Annuity Units (under a variable annuity payout option) or
dollar amount (under a fixed annuity payout option) applied to future annuity
benefit payments. Because each variable annuity benefit payment is determined by
multiplying the number of Annuity Units by the value of an Annuity Unit, the
reduction in the number of Annuity Units will result in lower future variable
annuity benefit payments. See "Calculation of Proportionate Reduction," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
benefit payment or the dollar amount applied to each future fixed annuity
benefit payment. Each Present Value Withdrawal proportionately reduces the
number of Annuity Units applied to each future GUARANTEED variable annuity
benefit payment or the dollar amount applied to each future GUARANTEED fixed
annuity benefit payment. Because each variable annuity benefit payment is
determined by multiplying the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will result in lower future
variable annuity benefit payments.
- PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life, Life with
Period Certain, or Life with Cash Back annuity payout options. The Owner may
make one Payment Withdrawal in each calendar year.
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable annuity benefit payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
------------------------------------------------
Present value of all remaining variable annuity
benefit payments immediately prior to the withdrawal
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower future variable annuity benefit
payments.
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining fixed annuity benefit payments.
- PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under Life
with Period Certain or Life with Cash Back annuity payout options (the Owner
may make one Present Value Withdrawal in each calendar year, if there are
remaining guaranteed annuity benefit payments) and under Period Certain
annuity payout options (the Owner may make multiple Present Value Withdrawals
in each calendar year).
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Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable guaranteed annuity benefit payment (determined immediately prior to
the withdrawal) by the following fraction:
Amount of the variable withdrawal
------------------------------------------------
Present value of remaining guaranteed variable annuity
benefit payments immediately prior to the withdrawal
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining guaranteed fixed annuity benefit payments.
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower variable annuity benefit payments
with respect to the guaranteed payments. Under a fixed annuity payout option,
the proportionate reduction will result in lower fixed annuity benefit
payments with respect to the guaranteed payments. However, under a Life with
Period Certain annuity payout option or Life with Cash Back annuity payout
option, if the Annuitant is still living after the guaranteed number of
annuity benefit payments has been made, the number of Annuity Units or dollar
amount of future annuity benefit payments will be restored as if no Present
Value Withdrawal(s) had taken place.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity benefit payments is calculated based on an assumed mortality
table and a discount rate. The mortality table that is used will be equal to the
mortality table used at the time of annuitization to determine the annuity
benefit payments (currently the Annuity 2000 Mortality Table with male, female,
or unisex rates, as appropriate). The discount rate is the AIR (for a variable
annuity payout option) or the interest rate (for a fixed annuity payout option)
that was used at the time of annuitization to determine the annuity benefit
payments.
For each Payment Withdrawal, the number of years of annuity benefit payments
being valued depends upon the life expectancy of the Annuitant at the time of
the withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity benefit payments (currently the Annuity 2000 Mortality
Table).
Carefully consider the following before making a withdrawal (especially if you
are making the withdrawal under a Life with Period Certain or Life with Cash
Back annuity payout option):
- For a Payment Withdrawal, the present value calculation affects the
proportionate reduction of the remaining number of Annuity Units (under a
variable annuity payout option) or dollar amount (under a fixed annuity
payout option), applied to each future annuity benefit payment, as
explained in "Calculation of Proportionate Reduction -- Payment
Withdrawals," above. There will be a proportionate reduction in the number
of Annuity Units or the dollar amount applied to each future annuity
benefit payment. This will result in lower future annuity benefit
payments, all other things being equal.
- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. There will be a proportionate reduction in the number of
Annuity Units or the dollar amount applied to each future guaranteed
annuity benefit payment. This will result in lower future annuity benefit
payments with respect to the guaranteed payments, all other things being
equal. See "Calculation of Proportionate Reduction -- Present Value
Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX C -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
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DEFERRAL OF WITHDRAWALS. A withdrawal is normally payable within seven days
following the Company's receipt of the withdrawal request. However, the Company
reserves the right to defer withdrawals of amounts in each Sub-Account in any
period during which:
- 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;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
The Company reserves the right to defer withdrawals of amounts allocated to the
Company's General Account for a period not to exceed six months.
G. REVERSAL OF ANNUITIZATION
The Owner may reverse the decision to annuitize by written request to the
Company within 90 days of the Annuity Date. Upon receipt of such request, the
Company will return the Contract to the Accumulation Phase, subject to the
following:
(1) The value applied under a fixed annuity payout option at the time of
annuitization will be treated as if it had been invested in the Fixed
Account of the Contract on that same date.
(2) The Sub-Account allocations that were in effect at the time of
annuitization will first be used for calculating the reversal. Any
transfers between variable Sub-Accounts during the Annuity Payout phase
will then be treated as transfers during the Accumulation Phase. (As a
result, the Contract's Accumulated Value after the reversal will reflect
the same Sub-Account allocations that were in effect immediately prior to
the reversal).
(3) Any annuity benefit payments paid and any withdrawals taken during the
Annuity Payout phase will be treated as a withdrawal of the Surrender
Value in the Accumulation Phase, as of the date of the payment or
withdrawal. There may be adverse tax consequences resulting from these
withdrawals. See FEDERAL TAX CONSIDERATIONS, "C. Taxation of the Contract
in General."
If the Company learns of the Owner's decision to reverse annuitization after the
latest possible Annuity Date permitted under the Contract, the Company will
contact the Owner. The Owner must then immediately select an annuity payout
option (either the original annuity payout option or a different annuity payout
option). If the Owner does not select an annuity payout option, payments will
begin under a variable Life with Cash Back annuity payout option.
H. 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 payout options based
on sex-distinct actuarial tables are not permissible under Title VII of the
Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS decision will be based on unisex rates.
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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 the prospectuses and SAIs of the Underlying
Funds.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The mortality and expense risk charge is assessed daily at an
annual rate of 0.50% of each Sub-Account's assets. 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
payout option selected), no matter how long the Annuitant lives and no matter
how long all Annuitants as a class live. 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.
This charge may not be increased. Since mortality and expense risks involve
future contingencies that 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.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily Administrative Expense 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 and may not be increased. The
daily Administrative Expense Charge is assessed to help defray administrative
expenses actually incurred in the administration of the Sub-Account. 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 below 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 Underlying
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
prospectuses and SAIs of the Underlying Funds contain additional information
concerning expenses of the Underlying Funds.
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B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in some states) currently is deducted
during the accumulation phase, on the Contract anniversary date and upon full
surrender of the Contract if the Accumulated Value on any of these dates is less
than $75,000.
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
that 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 portion of
the charge deducted from that Sub-Account.
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 following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries,
officers, directors, trustees and employees of any of the Underlying Funds;
investment managers or sub-advisers of the Underlying Funds; and the spouses of
and immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents.
C. OPTIONAL RIDER CHARGE
Subject to state availability, the Company offers a Rider that is available only
if elected by the Owner at issue. A separate monthly charge is made for the
Rider through a pro-rata reduction of the Accumulated Value of the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts. The pro-rata reduction is
based on the relative value that the Accumulation Units of the Sub-Accounts, the
dollar amounts in the Fixed Account and the dollar amounts in the Guarantee
Period Accounts bear to the total Accumulated Value.
The applicable charge for the Rider is assessed on the Accumulated Value on the
last day of each Contract month multiplied by 1/12th of the following annual
percentage rate:
5% Enhanced Death Benefit With Annual Step-Up...............................
0.25%
For a description of the Rider, see "Optional Enhanced Death Benefit Rider"
under "F. Death Benefit," DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE,
above.
D. 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 a Contract at the time 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.
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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.
E. TRANSFER CHARGE
The Company currently does not assess a charge for processing transfers. The
Company guarantees that the first 12 transfers in a Contract year will be free
of a transfer charge, but reserves the right to assess a charge, guaranteed
never to exceed $25, for each subsequent transfer in a Contract year to
reimburse it for the expense of processing transfers. For more information, see
"D. Transfer Privilege" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION
PHASE and "E. Transfers of Annuity Units" under ANNUITIZATION -- THE PAYOUT
PHASE.
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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 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 Contract or any fixed 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 the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account except in
California where it is accounted for in the Company's General 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. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%. The Guarantee Period Accounts are not available in New
York, Oregon, Maryland and Pennsylvania.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract 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. 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 DGPF Cash Reserve Sub-
Account. The Owner may allocate amounts to any of the Guarantee Periods
available.
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 at the
then current rate unless (1) less than $1,000 would remain in the Guarantee
Period Account on the expiration date, or (2) unless 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 Sub-Account investing
in the DGPF Cash Reserve Sub-Account. Where amounts have been renewed
automatically in a new Guarantee Period, the Company will give the Owner an
additional 30 days to transfer out of the Guarantee Period Account without
application of a Market Value Adjustment.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "F. Death Benefit" under
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE. All other transfers,
withdrawals, or a surrender prior to the end of a Guarantee Period will be
subject
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to a Market Value Adjustment, which may increase or decrease the value. 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 by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)]to the power of n/365 - 1
<TABLE>
<S> <C> <C>
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 Valuation Date to
the end of the current Guarantee Period.
</TABLE>
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 is also affected by the minimum guaranteed rate of 3%. 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 -- THE MARKET VALUE
ADJUSTMENT.
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
will then 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 the value in the Guarantee Period Account on the last day of the
Guarantee Period 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" under
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
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 Withdrawals" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE. In addition, the following provisions also apply to
withdrawals from a Guarantee Period Account: (1) a Market Value Adjustment will
apply to all withdrawals 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 from or added to the amount withdrawn.
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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 the 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.
A. GENERAL
THE COMPANY. 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 was 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.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department provide that the investments of a segregated asset account
underlying a variable annuity contract are adequately diversified if no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three investments,
and no more than 90% by any four investments. Under this section of the Code, if
the investments are not adequately diversified, the Contract will not be treated
as an annuity contract, and therefore the income on the 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 Underlying Funds 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.
INVESTOR CONTROL. In order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity contract owners may now be considered the owners of these
assets for federal income tax purposes. Specifically, the IRS has stated in
published rulings that a variable annuity contract owner may be considered the
owner of segregated account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account. This announcement also states
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their
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<PAGE>
investments to particular sub-accounts without being treated as owners of the
underlying assets." As of the date of this Prospectus, no such guidance has been
issued. The Company therefore additionally reserves the right to modify the
Contract as necessary in order to attempt to prevent a contract owner from being
considered the owner of a pro rata share of the assets of the segregated asset
account underlying the variable annuity contracts.
B. 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 408 or 408A 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 "E. Individual Retirement Annuities" below.
C. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. 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. 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.
WITHDRAWALS AFTER ANNUITIZATION. A withdrawal from a qualified or non-qualified
contract may create significant adverse tax consequences. It is possible that
the Internal Revenue Service may take the view that when withdrawals (other than
annuity payments) are taken during the annuity payout phase of the Contract, all
amounts received by the taxpayer are taxable at ordinary income rates as amounts
"not received as an annuity." In addition, such amounts may be taxable to the
recipient without regard to the Owner's investment in the Contract or any
investment gain that might be present in the current annuity value.
For example, assume that a Contract owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 during the annuity payout phase.
Under this view, the Contract owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, such as those under age 59 1/2,
additional tax penalties may also apply.
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
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<PAGE>
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments begin 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 the investment in the
Contract is recovered, the entire payment is taxable. If the annuitant dies
before cost basis is recovered, a deduction for the difference is allowed on the
Owner'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); or
- 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.
The requirement of "substantially equal" periodic payments 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 is also 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 later of 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, 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 any LED-type 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.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
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 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
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<PAGE>
tax-exempt employers for their employees may invest in annuity contracts.
Contributions and investment earnings are not taxable to employees until
distributed; however, with respect to payments made after February 28, 1986, a
Contract owned by a state or local government or a tax-exempt organization will
not be treated as an annuity under Section 72 as well.
D. 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.
E. INDIVIDUAL RETIREMENT ANNUITIES
Federal income taxation of assets held inside an individual retirement annuity
and of earnings on those assets is deferred until distribution of plan benefits
begin. As such, it is not necessary to purchase a variable annuity contract
solely to obtain its tax deferral feature. However, other features offered under
this Contract and described in the Prospectus -- such as the minimum guaranteed
death benefit, the guaranteed fixed annuity rates and the wide variety of
investment options -- may make this Contract a suitable investment for your
individual retirement annuity.
Sections 408 and 408A of the Code permits eligible individuals to contribute to
an individual retirement program known as an Individual Retirement Annuity
("IRA"). Note: This term covers all IRAs permitted under Sections 408 and 408A
of the Code, including Roth IRAs. 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 Contract will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to cancel the Contract as described in this Prospectus. See "C. Right to
Cancel."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) for their employees using 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.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequently as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans may in the future be confirmed quarterly
rather than by immediate confirmations.) The Owner should review the information
in all statements carefully. All errors or corrections must be reported to the
Company immediately to assure proper crediting to the Contract. The Company will
assume that all transactions are accurately reported on confirmation statements
and quarterly/annual statements unless the Owner notifies the Principal Office
in writing within 30 days after receipt of the statement.
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
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<PAGE>
Account or the affected Sub-Account, the Company may withdraw 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 variable accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Underlying Funds also are issued to other unaffiliated
insurance companies ("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 the Company and the Underlying Funds
do not currently foresee any such disadvantages to either variable life
insurance owners or variable annuity owners, the Company and the trustees of the
Underlying Funds 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 the trustees were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
The Company reserves the right, subject to compliance with applicable law, to:
(1) transfer assets from the Variable Account or Sub-Account to another of
the Company's variable accounts or sub-accounts having assets of the same
class,
(2) to operate the Variable Account or any Sub-Account as a management
investment company under the 1940 Act or in any other form permitted by
law,
(3) to deregister the Variable Account under the 1940 Act in accordance with
the requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for
the Fund shares held by a Sub-Account, in the event that Fund shares are
unavailable for investment, or if the Company determines that further
investment in such Fund shares is inappropriate in view of the purpose of
the Sub-Account,
(5) to change the methodology for determining the net investment factor,
(6) to change the names of the Variable Account or of the Sub-Accounts. In
no event will the changes described be made without notice to Owners in
accordance with the 1940 Act, and
(7) to combine with other Sub-Accounts or other Separate Accounts of the
Company.
If any of these substitutions or changes are made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
48
<PAGE>
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 (or any laws, regulations or rules of any
jurisdiction in which the Company is doing business), including but not limited
to requirements for annuity contracts and retirement plans under the Code and
pertinent regulations or any state statute or regulation. Any such changes will
apply uniformly to all Contracts that are affected. Owners will be given written
notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners. 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 that are received. The Company also will vote
shares in a Sub-Account that it owns and which are not attributable to Contracts
in the same proportion. If the 1940 Act or any rules thereunder should be
amended, or if the present interpretation of the 1940 Act or such rules should
change, and as a result the Company determines that it is permitted to vote
shares in its own right, whether or not such shares are attributable to the
Contract, the Company reserves the right to do so.
The number of votes which an Owner 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 Owner will be determined by dividing the reserve
held in each Sub-Account for the Owner's variable annuity by the net asset value
of one Underlying Fund share. Ordinarily, the Owner'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. ("NASD"). The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contracts. 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 does not pay commissions to broker-dealers which sell the Contract.
However, a broker-dealer may assess an advisory fee as compensation for his or
her services. 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 the cost of promotional and other sales expenses
through profits from the Company's General Account, which may include amounts
derived from mortality and risk charges.
Owners may direct any inquiries to their financial representative or to Annuity
Client Services, 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-423-5252.
49
<PAGE>
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Separate
Account.
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, D.C., upon payment of the SEC's prescribed fees.
50
<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 this 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 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.
SALES RESTRICTIONS. Certain states may impose restrictions on payments and
transfers to the Fixed Account.
A-1
<PAGE>
APPENDIX B
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)] to the power of n/365 - 1
A payment of $50,000 is made on the Issue Date and no additional payments are
made. 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 (2,555 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.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.00935) to the power of 7 - 1
= .06728
The market value adjustment = the market value factor multiplied by the withdrawal
= .06728 X $62,985.60
= $4,237.90
</TABLE>
*Uncapped is a straight application of the Market Value Adjustment formula when
the value produced is less than the cap.
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 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 (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,992.38 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.05)] to the power of 2555/365 - 1
= (1.02857) to the power of 7 - 1
= .21798
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
= Minimum of (.21798 X $62,985.60 or $8,349.25)
= Minimum of ($13,729.78 or $8,349.25)
= $8,349.25
</TABLE>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
B-2
<PAGE>
APPENDIX C
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 65-year-old male annuitizes his contract
exactly two years after the Issue Date. The annuitization amount is $250,000.
Further assume that he selects a variable Life with Period Certain annuity
payout option of Single Life with Payments Guaranteed for 10 Years, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
Annuity Value purchases 1,370 Annuity Units and the first monthly annuity
benefit payment is equal to $1,370. The following examples assume a net return
of 8% (gross return of 8.65%).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the tenth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Benefit Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $477.27
PAYMENT WITHDRAWALS
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the tenth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Benefit Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 X 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Annuity Benefit Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 X (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $1,779.80
C-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF THE UNDERLYING FUNDS
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE DELAWARE MEDALLION FREEDOM PROSPECTUS OF
SEPARATE ACCOUNT VA-K, DATED _______, 2000 ("THE PROSPECTUS"). THE PROSPECTUS
MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS
01653, TELEPHONE 1-800-533-2124.
DATED ________, 2000
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY....................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY..................................................3
SERVICES...........................................................3
UNDERWRITERS.......................................................4
ANNUITY BENEFIT PAYMENTS...........................................4
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM............................................................5
FINANCIAL STATEMENTS...............................................F-1
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "Variable Account") is a separate investment account
of Allmerica Financial Life Insurance and Annuity Company (the "Company")
authorized by vote of its 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 (the "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, 1999, the
Company had over $17 billion in assets and over $26 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 a 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 among the five oldest life insurance companies in America. As of
December 31, 1999, First Allmerica and its subsidiaries (including the Company)
had over $25 billion in combined assets and over $43 billion in life insurance
in force.
Currently, 35 Sub-Accounts of the Variable Account are available under the
Delaware Medallion Freedom contract (the "Contract"). Each Sub-Account
invests in a corresponding investment portfolio of Delaware Group Premium
Fund ("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American Fund
("Alger"), Alliance Variable Products Series Fund, Inc. ("Alliance"),
Franklin Templeton Variable Insurance Products Trust ("FT VIP"), and Pioneer
Variable Contracts Trust ("Pioneer VCT").
The Fund is an open-end, diversified management investment company. Eighteen
different investment series of DGPF are available under the Contract: the DGPF
Growth & Income Series, DGPF High Yield Series (formerly Delchester Series),
DGPF Capital Reserves Series, DGPF Cash Reserve Series,
2
<PAGE>
DGPF Growth Opportunities Series (formerly DelCap Series), DGPF U.S. Growth
Series, DGPF Select Growth Series (formerly Aggressive Growth Series), DGPF
Balanced Series (formerly Delaware Balanced Series), DGPF Small Cap Value
Series, DGPF Trend Series, DGPF Global Bond Series, DGPF International Equity
Series, DGPF Strategic Income Series, DGPF Devon Series, DGPF Emerging Markets
Series, DGPF Convertible Securities Series, DGPF REIT Series, and DGPF Social
Awareness Series. Four funds of AVIF are available under the Contract: the AIM
V.I. Growth Fund, AIM V.I. International Equity Fund, AIM V.I. Value Fund and
AIM V.I. High Yield Fund. Three portfolios of Alger are available under the
Contract: the Alger American MidCap Growth Portfolio, Alger American Small
Capitalization Portfolio and Alger American Leveraged AllCap Portfolio. Four
Alliance portfolios are available under the Contract: the Alliance Premier
Growth Portfolio, Alliance Growth and Income Portfolio, Alliance Growth
Portfolio and Alliance Technology Portfolio. Four funds of FT VIP are available
under the Contract: the Franklin Small Cap Fund, Mutual Shares Securities Fund,
Templeton Growth Securities Fund and Templeton International Securities Fund.
Two Pioneer VCT portfolios are available under the Contract: the Pioneer
Emerging Markets VCT Portfolio and Pioneer Mid-Cap Value VCT Portfolio
(together, the "Underlying Funds"). Each Underlying Fund has its own investment
objectives and certain attendant risks.
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 (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of 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. Underlying Fund shares owned by the Sub-Accounts are held on
an open account basis. A Sub-Account's ownership of Underlying Fund shares is
reflected on the records of the Underlying Fund and is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account VA-K of the Company as of December
31, 1999 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
3
<PAGE>
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 and general distributor for the Contract pursuant to a contract with
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. 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 Company intends to recoup the cost of promotional and other sales expenses
through profits from the Company's general account, which may include 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.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all Delaware contracts funded by Separate Account VA-K (including contracts not
described in the Prospectus) for the years 1997, 1998 and 1999 were $23,626,446,
$27,689,469 and $12,570,803.
No commissions will be paid for sales of Contract A3030-99. However, a
representative of Allmerica Investments or an independent broker-dealer may
assess an advisory fee as compensation for his or her services.
No commissions were retained by Allmerica Investments for sales of all Delaware
contracts funded by Separate Account VA-K (including contracts not described in
the Prospectus) for the years 1997, 1998 and 1999.
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 $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
4
<PAGE>
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period.....................................$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period.........................................$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses................................$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2).................0.000335
(5) Annual Charge (one-day equivalent of 0.65% per annum)......................................0.000018
(6) Net Investment Rate (4) - (5)..............................................................0.000317
(7) Net Investment Factor 1.000000 + (6).......................................................1.000317
(8) Accumulation Unit Value -- Current Period (1) x (7)......................................$ 1.135360
</TABLE>
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
$1.134600.
The method for determining the amount of annuity benefit payments is described
in detail under "Variable 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 Owner has 40,000 Accumulation Units in a Variable Account, and that the value
of an Accumulation Unit on the Valuation Date used to determine the amount of
the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulated 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, the first monthly
payment would be $44.80 ($44,800 divided by $1,000) multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit Value for the assumed investment return of
3.0% 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 3.0% assumed investment
return used in the annuity rate calculations. When the Annuity Unit Value of
$1.100000 is divided into the first monthly payment the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this same
number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation Period
applicable to the next annuity payment is 1.000190. Multiplying this factor by
.999919 (the one-day adjustment factor for the assumed investment return of 3.0%
per annum) produces a factor of 1.000109. 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 $1.105121 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
$1.105121, which produces a current monthly payment of $295.71.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent
permitted by law, the Company reserves the right to offer Enhanced Automatic
Transfer Program(s) from time to
5
<PAGE>
time. If you elect to participate, the Company will credit an enhanced interest
rate to payments made to the Enhanced Automatic Transfer Program. Eligible
payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source account,
- must be automatically transferred out of the Fixed Account to one or more
Sub- Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
You may be able to establish more than one Enhanced Automatic Transfer Program.
Payments made to the Contract during the same month will be part of the same
Enhanced Automatic Transfer Program if the length of the time period is the same
and the enhanced rate is the same. The allocation for all of the amounts in the
same program will be in accordance with the instructions for the most recent
payment to this program. The monthly transfer will be made on the date
designated for the initial payment to this program. The amount allocated will be
determined by dividing the amount in the program by the number of remaining
months. For example, for a six-month program, the first automatic transfer will
be 1/6th of the balance; the second automatic transfer will be 1/5th of the
balance, and so on.
Payments to different Enhanced Automatic Transfer Programs will be handled in
accordance with the instructions for each particular program.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Separate Account VA-K.
6
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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 consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States 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 provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</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)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</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)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</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)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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 First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary effective
November 30, 1998. Its results of operations are included for eleven months of
1998 and for the month of December, 1997.
The statutory 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 the Company 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
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
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 the Company 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 the Company believes may not be collectible in
full. In establishing reserves, the Company 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.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is held for disposal.
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 are included
in realized investment gains or losses.
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 products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company 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 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, disability income 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
3.0% to 6.0% for life insurance and 3 1/2% 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, variable
universal life and variable annuities 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.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity 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 and losses are estimates of payments to be
made for reported claims and estimates of claims incurred but not reported for
individual life and disability income policies. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
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.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
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 insurance and individual and group annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual disability income insurance premiums are
recognized as revenue over the related contract periods. The unexpired portion
of these premiums is recorded as unearned premiums. 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 include annuity benefit claims in excess of a guaranteed
minimum fund value, and 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, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a 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 insurance 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 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 as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from policy reserves,
policy acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. The Company is currently assessing the impact of adoption of Statement No.
133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $9.8 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement had no effect on the results
of operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 130 for the first quarter of 1998, which resulted
primarily in reporting unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
million respectively, of additional paid-in capital to the Company. The nature
of the 1997 contribution was $19.2 million in cash and $21.4 million in other
assets including Somerset Square, Inc.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. 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 Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
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....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
-------------------------------------------
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....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities.................. $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license 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 liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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 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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate 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.
The carrying values of mortgage loans and the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 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 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $3.3
===== ===== ==== ====
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- ---- ----
Total................................................... $11.2 $ 4.8 $6.6 $9.4
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $5.4 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 1998, AFLIAC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. There were no mortgage loans or fixed maturities on
non-accrual status at December 31, 1998. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
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 $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</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>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
------------- ------------- ----- ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $2.0
Equity securities........................................... $ 52.6 $17.5 $0.9
1997
Fixed maturities............................................ $702.9 $11.4 $5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement 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.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</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 income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on its 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, the Company 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 Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In the Company's opinion, adequate tax liabilities have
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
respectively.
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.
No dividends were declared by the Company during 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 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 Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement
No. 113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
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
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Amounts recoverable from reinsurers at December 31, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
Adjustment for cession of disability income insurance..... -- -- (38.6)
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- -- 50.3
-------- ------ ------
Balance at end of year...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unsettled claims. Changes in prior estimates are recorded in results of
operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. Due to the reinsurance agreement
whereby the Company has ceded substantially all of its disability income
business to a highly rated reinsurer, the Company believes that no material
adverse development of losses will occur. However, the amount of the liabilities
could be revised in the near term if the estimates used in determining the
liability are revised.
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
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFLIAC recognized a $21.0 million pre-tax expense during the third
quarter of 1998 related to this litigation. Although the Company believes that
this expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated 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.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
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
primarily because policy acquisition costs are expensed when incurred,
investment 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. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of Separate Account VA-K 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
constituting the Separate Account VA-K of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1999, the results of each of their operations
and changes in each of their net assets for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity Company; 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 auditing standards generally accepted in
the United States, 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 securities at December 31, 1999 by
correspondence with the Fund, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROWTH CAPITAL CASH
& INCOME* DELCHESTER RESERVES RESERVE DELCAP
-------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ... $ 349,508,644 $ 90,824,883 $ 34,246,246 $ 52,634,528 $ 207,725,031
Investment income receivable ........................... - 296,299 61,107 84,233 -
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ 28,365 - - - 959
-------------- ------------- -------------- ------------- ---------------
Total assets ...................................... 349,537,009 91,121,182 34,307,353 52,718,761 207,725,990
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - 47 738 - -
-------------- ------------- -------------- ------------- ---------------
Net assets ......................................... $ 349,537,009 $ 91,121,135 $ 34,306,615 $ 52,718,761 $ 207,725,990
-------------- ------------- -------------- ------------- ---------------
-------------- ------------- -------------- ------------- ---------------
Net asset distribution by category:
Variable annuity contracts ........................... $ 349,537,009 $ 91,121,135 $ 34,306,615 $ 52,718,761 $ 207,725,990
-------------- ------------- -------------- ------------- ---------------
-------------- ------------- -------------- ------------- ---------------
Units outstanding, December 31, 1999 ................... 136,760,076 59,310,720 25,020,304 42,241,413 60,264,460
Net asset value per unit, December 31, 1999 ............ $ 2.555841 $ 1.536335 $ 1.371151 $ 1.248035 $ 3.446907
<CAPTION>
DELAWARE INTERNATIONAL SMALL CAP
BALANCED* EQUITY VALUE TREND
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ... $ 163,859,243 $ 99,496,112 $ 80,826,915 $ 145,667,613
Investment income receivable ........................... - - - -
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ 284,341 250 - -
--------------- -------------- -------------- --------------
Total assets ...................................... 164,143,584 99,496,362 80,826,915 145,667,613
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - - - -
--------------- -------------- -------------- --------------
Net assets ......................................... $ 164,143,584 $ 99,496,362 $ 80,826,915 $ 145,667,613
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
Net asset distribution by category:
Variable annuity contracts ........................... $ 164,143,584 $ 99,496,362 $ 80,826,915 $ 145,667,613
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
Units outstanding, December 31, 1999 ................... 76,644,230 49,477,637 47,718,011 42,569,718
Net asset value per unit, December 31, 1999 ............ $ 2.141630 $ 2.010936 $ 1.693845 $ 3.421860
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
GLOBAL STRATEGIC EMERGING CONVERTIBLE
BOND INCOME DEVON MARKETS SECURITIES
--------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ... $ 5,625,287 $ 17,931,717 $ 66,333,384 $ 8,631,451 $ 6,657,124
Investment income receivable ........................... - - - - -
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - - - - -
--------------- -------------- ------------- ------------- --------------
Total assets ...................................... 5,625,287 17,931,717 66,333,384 8,631,451 6,657,124
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - - - 26 -
--------------- -------------- ------------- ------------- --------------
Net assets ......................................... $ 5,625,287 $ 17,931,717 $ 66,333,384 $ 8,631,425 $ 6,657,124
--------------- -------------- ------------- ------------- --------------
--------------- -------------- ------------- ------------- --------------
Net asset distribution by category:
Variable annuity contracts ........................... $ 5,625,287 $ 17,931,717 $ 66,333,384 $ 8,631,425 $ 6,657,124
--------------- -------------- ------------- ------------- --------------
--------------- -------------- ------------- ------------- --------------
Units outstanding, December 31, 1999 ................... 5,051,629 17,658,435 48,519,392 10,077,989 5,601,254
Net asset value per unit, December 31, 1999 ............ $ 1.113559 $ 1.015476 $ 1.367152 $ 0.856463 $ 1.188506
<CAPTION>
SOCIAL AGGRESSIVE U.S.
AWARENESS REIT GROWTH GROWTH
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ... $ 28,893,606 $ 2,400,637 $ 51,915,376 $ 5,837,807
Investment income receivable ........................... - - - -
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - - - -
--------------- -------------- -------------- --------------
Total assets ...................................... 28,893,606 2,400,637 51,915,376 5,837,807
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................ - - - -
--------------- -------------- -------------- --------------
Net assets ......................................... $ 28,893,606 $ 2,400,637 $ 51,915,376 $ 5,837,807
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
Net asset distribution by category:
Variable annuity contracts ........................... $ 28,893,606 $ 2,400,637 $ 51,915,376 $ 5,837,807
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
Units outstanding, December 31, 1999 ................... 17,918,215 2,775,139 36,670,808 5,522,139
Net asset value per unit, December 31, 1999 ............ $ 1.612527 $ 0.865051 $ 1.415714 $ 1.057164
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROWTH CAPITAL
& INCOME* DELCHESTER RESERVES
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 7,618,039 $ 10,507,332 $ 2,150,648
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees ........................... 4,893,990 1,350,780 475,110
Administrative expense fees ............................... 587,279 162,093 57,014
--------------- --------------- ---------------
Total expenses .......................................... 5,481,269 1,512,873 532,124
--------------- --------------- ---------------
Net investment income (loss) ............................ 2,136,770 8,994,459 1,618,524
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 29,497,638 676,436 -
Net realized gain (loss) from sales of investments ........ 4,815,449 (4,767,574) (363,412)
--------------- --------------- ---------------
Net realized gain (loss) ................................ 34,313,087 (4,091,138) (363,412)
Net unrealized gain (loss) ................................ (53,560,662) (9,163,176) (1,672,013)
--------------- --------------- ---------------
Net realized and unrealized gain (loss) ................ (19,247,575) (13,254,314) (2,035,425)
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations ... $ (17,110,805) $ (4,259,855) $ (416,901)
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
CASH DELAWARE
RESERVE DELCAP BALANCED*
-------------- ----------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 2,309,948 $ - $ 3,809,768
-------------- ----------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... 612,630 1,769,484 2,344,677
Administrative expense fees ............................... 73,516 212,338 281,362
-------------- ----------------- --------------
Total expenses .......................................... 686,146 1,981,822 2,626,039
-------------- ----------------- --------------
Net investment income (loss) ............................ 1,623,802 (1,981,822) 1,183,729
-------------- ----------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... - 6,615,969 7,696,194
Net realized gain (loss) from sales of investments ........ - 12,421,879 2,626,185
-------------- ----------------- --------------
Net realized gain (loss) ................................ - 19,037,848 10,322,379
Net unrealized gain (loss) ................................ - 59,398,541 (29,423,327)
-------------- ----------------- --------------
Net realized and unrealized gain (loss) ................ - 78,436,389 (19,100,948)
-------------- ----------------- --------------
Net increase (decrease) in net assets from operations ... $ 1,623,802 $ 76,454,567 $ (17,917,219)
-------------- ----------------- --------------
-------------- ----------------- --------------
<CAPTION>
INTERNATIONAL SMALL CAP
EQUITY VALUE TREND
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 1,970,553 $ 1,159,809 $ 7,312
-------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... 1,182,400 1,108,551 1,121,177
Administrative expense fees ............................... 141,888 133,026 134,541
-------------- ------------- --------------
Total expenses .......................................... 1,324,288 1,241,577 1,255,718
-------------- ------------- --------------
Net investment income (loss) ............................ 646,265 (81,768) (1,248,406)
-------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 143,917 475,819 -
Net realized gain (loss) from sales of investments ........ 8,373,138 156,431 22,549,927
-------------- ------------- --------------
Net realized gain (loss) ................................ 8,517,055 632,250 22,549,927
Net unrealized gain (loss) ................................ 3,787,998 (6,635,501) 32,900,821
-------------- ------------- --------------
Net realized and unrealized gain (loss) ................ 12,305,053 (6,003,251) 55,450,748
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ... $ 12,951,318 $ (6,085,019) $ 54,202,342
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GLOBAL STRATEGIC
BOND INCOME DEVON
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 297,858 $1,085,477 $ 459,987
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees ........................... 76,267 243,104 951,188
Administrative expense fees ............................... 9,153 29,173 114,143
--------------- --------------- ---------------
Total expenses .......................................... 85,420 272,277 1,065,331
--------------- --------------- ---------------
Net investment income (loss) ............................ 212,438 813,200 (605,344)
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 34,207 - 889,308
Net realized gain (loss) from sales of investments ........ (46,687) (304,817) 160,531
--------------- --------------- ---------------
Net realized gain (loss) ................................ (12,480) (304,817) 1,049,839
Net unrealized gain (loss) ................................ (504,304) (1,461,430) (9,460,934)
--------------- --------------- ---------------
Net realized and unrealized gain (loss) ................ (516,784) (1,766,247) (8,411,095)
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations ... $ (304,346) $ (953,047) $ (9,016,439)
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
EMERGING CONVERTIBLE SOCIAL
MARKETS SECURITIES AWARENESS
-------------- ----------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 92,882 $ 191,155 $ 114,494
-------------- ----------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... 66,910 74,503 347,968
Administrative expense fees ............................... 8,030 8,940 41,756
-------------- ----------------- --------------
Total expenses .......................................... 74,940 83,443 389,724
-------------- ----------------- --------------
Net investment income (loss) ............................ 17,942 107,712 (275,230)
-------------- ----------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... - - -
Net realized gain (loss) from sales of investments ........ (320,945) (22,020) 775,753
-------------- ----------------- --------------
Net realized gain (loss) ................................ (320,945) (22,020) 775,753
Net unrealized gain (loss) ................................ 2,484,270 265,135 2,373,993
-------------- ----------------- --------------
Net realized and unrealized gain (loss) ................ 2,163,325 243,115 3,149,746
-------------- ----------------- --------------
Net increase (decrease) in net assets from operations ... $ 2,181,267 $ 350,827 $ 2,874,516
-------------- ----------------- --------------
-------------- ----------------- --------------
<CAPTION>
AGGRESSIVE U.S.
REIT GROWTH(a) GROWTH(b)
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 28,456 $ - $ -
-------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... 22,964 153,177 4,321
Administrative expense fees ............................... 2,756 18,381 518
-------------- ------------- --------------
Total expenses .......................................... 25,720 171,558 4,839
-------------- ------------- --------------
Net investment income (loss) ............................ 2,736 (171,558) (4,839)
-------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... - - -
Net realized gain (loss) from sales of investments ........ (22,061) 241,793 -
-------------- ------------- --------------
Net realized gain (loss) ................................ (22,061) 241,793 -
Net unrealized gain (loss) ................................ (91,316) 12,361,423 224,532
-------------- ------------- --------------
Net realized and unrealized gain (loss) ................ (113,377) 12,603,216 224,532
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ... $ (110,641) $ 12,431,658 $ 219,693
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
(a) For the Period 5/3/99 to 12/31/99.
(b) For the Period 11/16/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH & INCOME* DELCHESTER
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -------------------------------
1999 1998 1999 1998
--------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 2,136,770 $ 1,221,149 $ 8,994,459 $ 9,079,330
Net realized gain (loss) .......................................... 34,313,087 21,670,642 (4,091,138) (260,126)
Net unrealized gain (loss) ........................................ (53,560,662) 6,856,148 (9,163,176) (12,862,981)
--------------- ------------- -------------- ---------------
Net increase (decrease) in net assets from operations ............. (17,110,805) 29,747,939 (4,259,855) (4,043,777)
--------------- ------------- -------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 27,868,493 100,763,563 7,046,401 30,566,475
Withdrawals ....................................................... (41,156,686) (19,418,404) (12,103,782) (7,054,162)
Contract benefits ................................................. (9,638,560) (7,579,190) (2,708,930) (2,098,590)
Contract charges .................................................. (86,087) (64,275) (24,905) (22,198)
Transfers between sub-accounts (including fixed account), net ..... (21,976,944) (1,623,886) (17,348,358) (1,325,228)
Other transfers from (to) the General Account ..................... 21,536,289 12,093,225 7,474,755 3,291,412
Net increase (decrease) in investment by Sponsor ................. - - - -
--------------- ------------- -------------- ---------------
Net increase (decrease) in net assets from contract transactions .. (23,453,495) 84,171,033 (17,664,819) 23,357,709
--------------- ------------- -------------- ---------------
Net increase (decrease) in net assets ............................. (40,564,300) 113,918,972 (21,924,674) 19,313,932
NET ASSETS:
Beginning of year ................................................. 390,101,309 276,182,337 113,045,809 93,731,877
--------------- ------------- -------------- ---------------
End of year ....................................................... $349,537,009 $390,101,309 $91,121,135 $113,045,809
--------------- ------------- -------------- ---------------
--------------- ------------- -------------- ---------------
<CAPTION>
CAPITAL RESERVES CASH RESERVE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 1,618,524 $ 1,364,233 $ 1,623,802 $ 1,402,925
Net realized gain (loss) .......................................... (363,412) (27,161) - -
Net unrealized gain (loss) ........................................ (1,672,013) 317,186 - -
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (416,901) 1,654,258 1,623,802 1,402,925
-------------- ------------- -------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 1,719,002 11,052,806 8,736,216 23,203,992
Withdrawals ....................................................... (5,743,623) (2,372,737) (18,294,285) (5,207,009)
Contract benefits ................................................. (1,514,596) (1,105,861) (3,608,065) (1,120,184)
Contract charges .................................................. (5,970) (5,462) (5,719) (4,317)
Transfers between sub-accounts (including fixed account), net ..... (2,541,432) 1,861,393 21,862,668 (4,113,162)
Other transfers from (to) the General Account ..................... 3,902,204 1,181,979 3,164,733 (2,900,560)
Net increase (decrease) in investment by Sponsor ................. - - - -
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from contract transactions .. (4,184,415) 10,612,118 11,855,548 9,858,760
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets ............................. (4,601,316) 12,266,376 13,479,350 11,261,685
NET ASSETS:
Beginning of year ................................................. 38,907,931 26,641,555 39,239,411 27,977,726
-------------- ------------- -------------- --------------
End of year ....................................................... $34,306,615 $38,907,931 $52,718,761 $39,239,411
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DELCAP DELAWARE BALANCED*
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
--------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ (1,981,822) $ (1,504,449) $ 1,183,729 $ 890,882
Net realized gain (loss) .......................................... 19,037,848 11,636,622 10,322,379 12,510,592
Net unrealized gain (loss) ........................................ 59,398,541 7,674,824 (29,423,327) 11,816,010
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets from operations ............. 76,454,567 17,806,997 (17,917,219) 25,217,484
--------------- ------------- --------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 10,204,762 16,930,008 17,138,761 40,643,905
Withdrawals ....................................................... (17,824,377) (7,564,963) (19,845,098) (7,987,124)
Contract benefits ................................................. (3,840,589) (2,178,722) (4,241,892) (3,847,322)
Contract charges .................................................. (35,659) (31,390) (37,166) (28,390)
Transfers between sub-accounts (including fixed account), net ..... 12,328,395 (5,338,420) (19,746,919) 10,706,018
Other transfers from (to) the General Account ..................... 5,035,708 1,365,104 17,019,625 8,669,227
Net increase (decrease) in investment by Sponsor ................. - - - -
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets from contract transactions .. 5,868,240 3,181,617 (9,712,689) 48,156,314
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets ............................. 82,322,807 20,988,614 (27,629,908) 73,373,798
NET ASSETS:
Beginning of year ................................................. 125,403,183 104,414,569 191,773,492 118,399,694
--------------- ------------- --------------- --------------
End of year ....................................................... $207,725,990 $125,403,183 $ 164,143,584 $191,773,492
--------------- ------------- --------------- --------------
--------------- ------------- --------------- --------------
<CAPTION>
INTERNATIONAL EQUITY SMALL CAP VALUE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 646,265 $ 1,798,980 $ (81,768) $ (657,890)
Net realized gain (loss) .......................................... 8,517,055 3,509,062 632,250 2,964,682
Net unrealized gain (loss) ........................................ 3,787,998 1,253,698 (6,635,501) (9,004,444)
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. 12,951,318 6,561,740 (6,085,019) (6,697,652)
-------------- ------------- -------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 4,955,881 15,238,339 4,776,486 31,957,489
Withdrawals ....................................................... (9,017,773) (4,962,570) (7,658,378) (4,167,414)
Contract benefits ................................................. (2,379,042) (1,710,191) (2,151,358) (1,946,353)
Contract charges .................................................. (23,161) (21,915) (22,468) (19,890)
Transfers between sub-accounts (including fixed account), net ..... (2,218,145) (5,233,280) (11,808,444) (6,544,055)
Other transfers from (to) the General Account ..................... 4,113,403 2,196,776 4,216,858 3,760,321
Net increase (decrease) in investment by Sponsor ................. - - - -
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from contract transactions .. (4,568,837) 5,507,159 (12,647,304) 23,040,098
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets ............................. 8,382,481 12,068,899 (18,732,323) 16,342,446
NET ASSETS:
Beginning of year ................................................. 91,113,881 79,044,982 99,559,238 83,216,792
-------------- ------------- -------------- --------------
End of year ....................................................... $99,496,362 $91,113,881 $80,826,915 $99,559,238
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
* Name changed. See Note 1.
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
TREND GLOBAL BOND
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
--------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ (1,248,406) $ (831,181) $ 212,438 $ 209,816
Net realized gain (loss) .......................................... 22,549,927 8,719,951 (12,480) (7,426)
Net unrealized gain (loss) ........................................ 32,900,821 1,728,900 (504,304) 109,623
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets from operations ............. 54,202,342 9,617,670 (304,346) 312,013
--------------- ------------- --------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 6,651,292 14,280,685 405,605 1,339,335
Withdrawals ....................................................... (9,109,090) (3,358,771) (375,846) (328,238)
Contract benefits ................................................. (2,008,634) (2,913,025) (71,707) (187,197)
Contract charges .................................................. (24,003) (18,361) (1,218) (996)
Transfers between sub-accounts (including fixed account), net ..... 17,684,095 (3,939,068) (712,082) 213,652
Other transfers from (to) the General Account ..................... 3,812,689 1,620,358 837,534 147,228
Net increase (decrease) in investment by Sponsor ................. - - - -
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets from contract transactions .. 17,006,349 5,671,818 82,286 1,183,784
--------------- ------------- --------------- --------------
Net increase (decrease) in net assets ............................. 71,208,691 15,289,488 (222,060) 1,495,797
NET ASSETS:
Beginning of year ................................................. 74,458,922 59,169,434 5,847,347 4,351,550
--------------- ------------- --------------- --------------
End of year ....................................................... $145,667,613 $74,458,922 $ 5,625,287 $ 5,847,347
--------------- ------------- --------------- --------------
--------------- ------------- --------------- --------------
<CAPTION>
STRATEGIC INCOME DEVON
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 813,200 $ (18,355) $ (605,344) $ (381,816)
Net realized gain (loss) .......................................... (304,817) (7,039) 1,049,839 276,974
Net unrealized gain (loss) ........................................ (1,461,430) 62,975 (9,460,934) 8,087,869
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (953,047) 37,581 (9,016,439) 7,983,027
-------------- ------------- -------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 2,014,030 13,508,105 13,220,185 29,931,090
Withdrawals ....................................................... (1,212,840) (425,805) (6,508,556) (1,495,920)
Contract benefits ................................................. (392,638) (157,849) (1,704,351) (1,644,148)
Contract charges .................................................. (2,799) (1,073) (16,066) (5,604)
Transfers between sub-accounts (including fixed account), net ..... (3,828,744) (1,929,736) (7,084,214) 12,164,583
Other transfers from (to) the General Account ..................... 3,646,257 1,968,136 11,575,951 4,322,548
Net increase (decrease) in investment by Sponsor ................. - - - -
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from contract transactions .. 223,266 12,961,778 9,482,949 43,272,549
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets ............................. (729,781) 12,999,359 466,510 51,255,576
NET ASSETS:
Beginning of year ................................................. 18,661,498 5,662,139 65,866,874 14,611,298
-------------- ------------- -------------- --------------
End of year ....................................................... $ 17,931,717 $18,661,498 $66,333,384 $65,866,874
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EMERGING MARKETS
YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 17,942 $ (43,939)
Net realized gain (loss) .......................................... (320,945) (257,060)
Net unrealized gain (loss) ........................................ 2,484,270 (1,411,656)
--------------- ---------------
Net increase (decrease) in net assets from operations ............. 2,181,267 (1,712,655)
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 839,979 1,805,607
Withdrawals ....................................................... (524,075) (110,356)
Contract benefits ................................................. (59,274) (35,621)
Contract charges .................................................. (1,527) (756)
Transfers between sub-accounts (including fixed account), net ..... 1,829,268 (380,176)
Other transfers from (to) the General Account ..................... 463,039 338,220
Net increase (decrease) in investment by Sponsor ................. - -
--------------- ---------------
Net increase (decrease) in net assets from contract transactions .. 2,547,410 1,616,918
--------------- ---------------
Net increase (decrease) in net assets ............................. 4,728,677 (95,737)
NET ASSETS:
Beginning of year ................................................. 3,902,748 3,998,485
--------------- ---------------
End of year ....................................................... $ 8,631,425 $ 3,902,748
--------------- ---------------
--------------- ---------------
<CAPTION>
CONVERTIBLE SECURITIES SOCIAL AWARENESS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------------------
1999 1998 1999 1998
--------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 107,712 $ (3,899) $ (275,230) $ (175,889)
Net realized gain (loss) .......................................... (22,020) (120,251) 775,753 89,124
Net unrealized gain (loss) ........................................ 265,135 (80,974) 2,373,993 2,159,220
--------------- --------------- ------------ -------------
Net increase (decrease) in net assets from operations ............. 350,827 (205,124) 2,874,516 2,072,455
--------------- --------------- ------------ -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 728,916 2,676,237 3,446,482 11,110,820
Withdrawals ....................................................... (338,218) (358,490) (1,889,501) (507,801)
Contract benefits ................................................. (71,859) (1,927) (402,668) (258,555)
Contract charges .................................................. (871) (381) (7,961) (1,830)
Transfers between sub-accounts (including fixed account), net ..... (549,598) 1,111,771 (2,852,207) 4,677,106
Other transfers from (to) the General Account ..................... 1,136,577 686,411 1,916,500 2,972,908
Net increase (decrease) in investment by Sponsor ................. - - - -
--------------- --------------- ------------ -------------
Net increase (decrease) in net assets from contract transactions .. 904,947 4,113,621 210,645 17,992,648
--------------- --------------- ------------ -------------
Net increase (decrease) in net assets ............................. 1,255,774 3,908,497 3,085,161 20,065,103
NET ASSETS:
Beginning of year ................................................. 5,401,350 1,492,853 25,808,445 5,743,342
--------------- --------------- ------------ -------------
End of year ....................................................... $ 6,657,124 $ 5,401,350 $28,893,606 $ 25,808,445
--------------- --------------- ------------ -------------
--------------- --------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
AGGRESSIVE
REIT GROWTH U.S. GROWTH
YEAR ENDED PERIOD PERIOD PERIOD
DECEMBER 31, FROM 5/1/98* FROM 5/3/99* FROM 11/16/99*
1999 TO 12/31/98 TO 12/31/99 TO 12/31/99
-------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 2,736 $ (4,717) $ (171,558) $ (4,839)
Net realized gain (loss) .......................................... (22,061) (3,467) 241,793 -
Net unrealized gain (loss) ........................................ (91,316) (7,197) 12,361,423 224,532
-------------- ------------ --------------- ---------------
Net increase (decrease) in net assets from operations ............. (110,641) (15,381) 12,431,658 219,693
-------------- ------------ --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 509,832 861,911 5,904,056 581,852
Withdrawals ....................................................... (94,410) (1,289) (1,343,440) (12,695)
Contract benefits ................................................. (8,371) - (70,324) -
Contract charges .................................................. (214) (40) (2,908) (70)
Transfers between sub-accounts (including fixed account), net ..... (26,400) 214,472 32,318,745 4,789,592
Other transfers from (to) the General Account ..................... 1,018,022 53,146 2,677,616 259,467
Net increase (decrease) in investment by Sponsor ................. - - (27) (32)
-------------- ------------ --------------- ---------------
Net increase (decrease) in net assets from contract transactions .. 1,398,459 1,128,200 39,483,718 5,618,114
-------------- ------------ --------------- ---------------
Net increase (decrease) in net assets ............................. 1,287,818 1,112,819 51,915,376 5,837,807
NET ASSETS:
Beginning of year ................................................. 1,112,819 - - -
-------------- ------------ --------------- ---------------
End of year ....................................................... $ 2,400,637 $ 1,112,819 $51,915,376 $ 5,837,807
-------------- ------------ --------------- ---------------
-------------- ------------ --------------- ---------------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Separate Account VA-K, which funds the Delaware Medallion variable annuity
contracts (the Delaware contracts) in addition to other contracts (the Allmerica
Advantage and ExecAnnuity Plus variable annuity contracts), 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 contracts 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
Separate Account VA-K are clearly identified and distinguished from the other
assets and liabilities of the Company. Separate Account VA-K cannot be charged
with liabilities arising out of any other business of the Company.
Separate Account VA-K is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account VA-K
currently offers eighteen Sub-Accounts under the Delaware contracts. Each
Sub-Account invests exclusively in a corresponding investment portfolio of the
Delaware Group Premium Fund (DGPF), managed by Delaware Management Company, or
Delaware International Advisers Ltd. DGPF is an open-end, diversified management
investment company registered under the 1940 Act.
Effective May 1, 1999, Decatur Total Return Fund was renamed Growth and
Income Fund and Delaware Fund was renamed Delaware Balanced Fund.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of DGPF. Realized gains and losses on
securities sold are determined using 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 (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of Separate Account
VA-K. Therefore, no provision for income taxes has been charged against Separate
Account VA-K.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
-------------------- ------------------ ------------------- ----------------
<S> <C> <C> <C>
Growth & Income* . . . . . . . . . . . . 20,535,173 $341,070,143 $ 17.020
Delchester . . . . . . . . . . . . . . . 12,240,550 109,876,648 7.420
Capital Reserves . . . . . . . . . . . . 3,658,787 35,861,794 9.360
Cash Reserve . . . . . . . . . . . . . . 5,263,453 52,634,528 10.000
DelCap . . . . . . . . . . . . . . . . . 7,275,833 120,858,418 28.550
Delaware Balanced* . . . . . . . . . . . 9,449,783 155,202,043 17.340
International Equity . . . . . . . . . . 5,340,639 86,777,475 18.630
Small Cap Value . . . . . . . . . . . . 5,262,169 80,713,110 15.360
Trend . . . . . . . . . . . . . . . . . 4,327,618 100,808,311 33.660
Global Bond . . . . . . . . . . . . . . 578,138 6,039,985 9.730
Strategic Income . . . . . . . . . . . . 1,856,285 19,260,511 9.660
Devon . . . . . . . . . . . . . . . . . 4,870,292 66,601,246 13.620
Emerging Markets . . . . . . . . . . . . 1,027,554 8,164,246 8.400
Convertible Securities . . . . . . . . . 579,384 6,426,730 11.490
Social Awareness. . . . . . . . . . . . 1,766,113 24,002,746 16.360
REIT . . . . . . . . . . . . . . . . . . 276,890 2,499,149 8.670
Aggressive Growth . . . . . . . . . . . 3,632,986 39,553,953 14.290
U. S. Growth . . . . . . . . . . . . . 551,257 5,613,275 10.590
</TABLE>
* Name changed. See Note 1.
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 0.15% 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 and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is $50,000 or less on
contracts issued on Form A3019-92 and Form A3022-93 (Delaware Medallion I & II),
less than $50,000 on contracts issued on Form A3025-96 (Delaware Medallion III)
and less than $75,000 on contracts issued on Form A3028-99 (Delaware Golden
Medallion). The fee is currently waived for the above contracts issued to and
maintained by the trustee of a 401(k) plan.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account VA-K, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers.
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------------- ---------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Growth & Income*
Issuance of Units . . . . . . . . . . 40,007,465 $ 102,451,028 72,256,043 $ 186,713,382
Redemption of Units . . . . . . . . . (49,256,557) (125,904,523) (39,752,778) (102,542,349)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (9,249,092) $ (23,453,495) 32,503,265 $ 84,171,033
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Delchester
Issuance of Units . . . . . . . . . . 21,021,009 $ 32,855,168 33,686,804 $ 58,491,249
Redemption of Units . . . . . . . . . (32,389,697) (50,519,987) (19,740,806) (35,133,540)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (11,368,688) $ (17,664,819) 13,945,998 $ 23,357,709
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Capital Reserves
Issuance of Units . . . . . . . . . . 11,013,177 $ 13,927,088 21,141,167 $ 28,143,452
Redemption of Units . . . . . . . . . (14,058,901) (18,111,503) (13,309,887) (17,531,334)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (3,045,724) $ (4,184,415) 7,831,280 $ 10,612,118
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Cash Reserve
Issuance of Units . . . . . . . . . . 180,807,649 $ 218,009,363 105,766,168 $ 123,292,954
Redemption of Units . . . . . . . . . (171,067,372) (206,153,815) (97,279,155) (113,434,194)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 9,740,277 $ 11,855,548 8,487,013 $ 9,858,760
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
DelCap
Issuance of Units . . . . . . . . . . 38,195,830 $ 84,830,566 18,993,738 $ 36,826,872
Redemption of Units . . . . . . . . . (36,384,881) (78,962,326) (17,565,272) (33,645,255)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 1,810,949 $ 5,868,240 1,428,466 $ 3,181,617
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Delaware Balanced*
Issuance of Units . . . . . . . . . . 23,905,795 $ 52,331,871 32,824,679 $ 70,645,731
Redemption of Units . . . . . . . . . (28,620,839) (62,044,560) (10,224,529) (22,489,417)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (4,715,044) $ (9,712,689) 22,600,150 $ 48,156,314
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
International Equity
Issuance of Units . . . . . . . . . . 50,177,384 $ 104,447,633 36,990,583 $ 63,710,188
Redemption of Units . . . . . . . . . (52,414,991) (109,016,470) (34,088,062) (58,203,029)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (2,237,607) $ (4,568,837) 2,902,521 $ 5,507,159
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Small Cap Value
Issuance of Units . . . . . . . . . . 12,210,723 $ 20,370,936 25,586,584 $ 47,201,731
Redemption of Units . . . . . . . . . (19,629,170) (33,018,240) (13,719,549) (24,161,633)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . (7,418,447) $ (12,647,304) 11,867,035 $ 23,040,098
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Trend
Issuance of Units . . . . . . . . . . 70,875,190 $ 173,266,395 52,031,588 $ 94,450,667
Redemption of Units . . . . . . . . . (64,876,831) (156,260,046) (48,716,468) (88,778,849)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 5,998,359 $ 17,006,349 3,315,120 $ 5,671,818
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
</TABLE>
* Name changed. See Note 1.
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------------- ---------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Global Bond
Issuance of Units . . . . . . . . . . 1,706,916 $ 1,804,952 2,199,754 $ 2,476,492
Redemption of Units . . . . . . . . . (1,646,517) (1,722,666) (1,158,115) (1,292,708)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 60,399 $ 82,286 1,041,639 $ 1,183,784
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Strategic Income
Issuance of Units . . . . . . . . . . 9,646,061 $ 9,582,338 18,654,736 $ 19,875,082
Redemption of Units . . . . . . . . . (9,512,068) (9,359,072) (6,511,537) (6,913,304)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 133,993 $ 223,266 12,143,199 $ 12,961,778
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Devon
Issuance of Units . . . . . . . . . . 33,121,579 $ 47,606,282 39,665,749 $ 53,748,557
Redemption of Units . . . . . . . . . (27,292,550) (38,123,333) (8,559,979) (10,476,008)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 5,829,029 $ 9,482,949 31,105,770 $ 43,272,549
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Emerging Markets
Issuance of Units . . . . . . . . . . 7,305,712 $ 5,153,079 4,671,527 $ 3,320,918
Redemption of Units . . . . . . . . . (3,890,033) (2,605,669) (2,554,039) (1,704,000)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 3,415,679 $ 2,547,410 2,117,488 $ 1,616,918
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Convertible Securities
Issuance of Units . . . . . . . . . . 2,983,224 $ 3,283,031 5,107,726 $ 5,894,804
Redemption of Units . . . . . . . . . (2,175,127) (2,378,084) (1,605,693) (1,781,183)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 808,097 $ 904,947 3,502,033 $ 4,113,621
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Social Awareness
Issuance of Units . . . . . . . . . . 10,069,949 $ 14,336,644 15,736,749 $ 21,256,948
Redemption of Units . . . . . . . . . (9,970,484) (14,125,999) (2,432,652) (3,264,300)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 99,465 $ 210,645 13,304,097 $ 17,992,648
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
REIT
Issuance of Units . . . . . . . . . . 2,216,418 $ 1,965,622 1,267,985 $ 1,159,190
Redemption of Units . . . . . . . . . (676,569) (567,163) (32,694) (30,990)
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 1,539,849 $ 1,398,459 1,235,291 $ 1,128,200
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
Aggressive Growth
Issuance of Units . . . . . . . . . . 43,189,321 $ 47,162,338 - $ -
Redemption of Units . . . . . . . . . (6,518,514) (7,678,620) - -
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 36,670,807 $ 39,483,718 - $ -
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
U.S. Growth
Issuance of Units . . . . . . . . . . 5,550,723 $ 5,647,192 - $ -
Redemption of Units . . . . . . . . . (28,583) (29,078) - -
------------------ ------------------- ---------------- -------------------
Net increase (decrease) . . . . . . 5,522,140 $ 5,618,114 - $ -
------------------ ------------------- ---------------- -------------------
------------------ ------------------- ---------------- -------------------
</TABLE>
SA-13
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the 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
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account VA-K satisfies the current
requirements of the regulations, and it intends that Separate Account VA-K will
continue to meet such requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of DGPF by Separate
Account VA-K during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
-------------------------- -------------- ---------------
<S> <C> <C>
Growth & Income*. . . . . . . . . . . . $ 67,470,944 $ 59,318,850
Delchester. . . . . . . . . . . . . . . 24,462,661 32,470,344
Capital Reserves. . . . . . . . . . . . 10,366,163 12,939,537
Cash Reserve. . . . . . . . . . . . . . 164,741,697 151,299,781
DelCap. . . . . . . . . . . . . . . . . 56,423,133 45,921,705
Delaware Balanced*. . . . . . . . . . . 32,076,672 33,195,957
International Equity. . . . . . . . . . 85,838,201 89,617,129
Small Cap Value. . . . . . . . . . . . 6,910,448 19,163,702
Trend . . . . . . . . . . . . . . . . . 138,462,639 122,704,696
Global Bond . . . . . . . . . . . . . . 1,770,342 1,441,411
Strategic Income. . . . . . . . . . . . 6,139,985 5,103,519
Devon . . . . . . . . . . . . . . . . . 27,365,577 17,598,664
Emerging Markets. . . . . . . . . . . . 4,045,033 1,479,655
Convertible Securities. . . . . . . . . 2,740,407 1,727,748
Social Awareness. . . . . . . . . . . . 8,798,528 8,863,113
REIT. . . . . . . . . . . . . . . . . . 1,785,438 384,243
Aggressive Growth . . . . . . . . . . . 41,429,167 2,117,007
U. S. Growth . . . . . . . . . . . . . 5,613,275 -
-------------- ---------------
$686,440,310 $ 605,347,061
-------------- ---------------
-------------- ---------------
</TABLE>
* Name changed. See Note 1.
SA-14
<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 of Board of Directors Authorizing Establishment of
Registrant dated November 1, 1990 was previously filed on
April 24, 1998 in Registration Statement
No. 33-44830/811-6293, in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
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 (a) Underwriting and Administrative Services Agreement
was previously filed on April 24, 1998 in
Registration Statement No. 33-44830/811-6293,
Post-Effective Amendment No. 14, and is incorporated
by reference herein.
(b) Wholesaling Agreement was previously filed on
April 24, 1998 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 14, and is incorporated by reference herein.
(c) Sales Agreements with Commission Schedule were
previously filed on April 24, 1998 in Registration
Statement No. 33-44830/811-6293, Post-Effective
Amendment No. 14, and are incorporated by reference
herein.
(d) General Agent's Agreement was previously filed on
April 24, 1998 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 14, and is incorporated by reference herein.
(e) Career Agent Agreement was previously filed on
April 24, 1998 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 14, and is incorporated by reference herein.
(f) Registered Representative's Agreement was previously
filed on April 24, 1998 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 14, and is incorporated by reference herein.
EXHIBIT 4 The following documents were previously filed on
November 8, 1999 in Registrant's initial Registration
Statement and are incorporated by reference herein:
<PAGE>
(a) Contract Form A3030-99;
(b) Specification Pages Form A8030-99; and
(c) Enhanced Death Benefit "EDB" Rider with 5%
Accumulation and Ratchet (Form 3263-99).
EXHIBIT 5 Application Form 11255DG is filed herewith.
EXHIBIT 6 The Depositor's Articles of Incorporation, as amended
effective October 1, 1995 to reflect its new name, was
previously filed on September 28, 1995 in Registration
Statement No. 33-44830/811-6293, Post-Effective Amendment
No. 9, and is incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Service Agreement was previously filed on
April 26, 1996 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 10, and is incorporated by reference herein.
(b) An Amendment to the Fidelity Service Agreement,
effective as of January 1, 1997, was previously filed
on May 1, 1997 in Registration Statement
No. 33-44830/811-6293, Post-Effective Amendment
No. 13, and is incorporated by reference herein.
(c) Fidelity Service Contract, effective as of January 1,
1997, was previously filed on May 1, 1997 in
Registration Statement No. 33-44830/811-6293,
Post-Effective Amendment No. 13, and is incorporated
by reference herein.
(d) BFDS Agreements for lockbox and mailroom services
were previously filed on April 24, 1998 in
Registration Statement No. 33-44830/811-6293,
Post-Effective Amendment No. 14, and are incorporated
by reference herein.
(e) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Schedule for Computation of Performance Quotations was
previously filed on November 8, 1999 in Registrant's
initial Registration Statement and is incorporated by
reference herein
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Form of Amendment to Delaware Participation Agreement
was previously filed in April 2000 in Post-Effective
Amendment No. 19 of Registration Statement
No. 33-44830/811-6293, and is incorporated by
reference herein. Participation Agreement with
Delaware Group Premium Fund and Amendment were
previously filed on April 24, 1998 in Registration
Statement No. 33-44830/811-6293, Post-Effective
Amendment No. 14, and are incorporated by reference
herein.
<PAGE>
(b) Form of Amendment to AIM Participation Agreement was
previously filed in April 2000 in Post-Effective
Amendment No. 19 of Registration Statement
No. 33-44830/811-6293, and is incorporated by
reference herein. Participation Agreement with AIM
Variable Insurance Funds, Inc. was previously filed
on August 27, 1998 in Post-Effective Amendment No. 3
of Registration Statement No. 333-11377/811-7799, and
is incorporated by reference herein.
(c) Participation Agreement with Alger was previously
filed in April 2000 in Post-Effective Amendment
No. 7 of Registration Statement
No. 333-09965/811-7767, and is incorporated by
reference herein.
(d) Form of Participation Agreement with Alliance was
previously filed in April 2000 in Post-Effective
Amendment No. 19 of Registration Statement
No. 33-44830/811-6293, and is incorporated by
reference herein.
(e) Form of Participation Agreement with Franklin
Templeton was previously filed in April 2000 in
Post-Effective Amendment No. 19 of Registration
Statement No. 33-44830/811-6293, and is incorporated
by reference herein.
(f) Form of Amendment to Pioneer Participation Agreement
was previously filed in April 2000 in Post-Effective
Amendment No. 14 of Registration Statement
No. 33-85916/811-8848, and is incorporated by
reference herein. Participation Agreement with
Pioneer was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9 of Registration
Statement No. 33-85916/811-8848, and is incorporated
by reference herein.
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant Secretary
Director (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of First
Vice President and Allmerica
Corporate Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992) of First Allmerica
Director and Vice President
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary (since 1999) of
Secretary Allmerica Investments, Inc.; and Secretary (since 1999) of Allmerica
Financial Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First Allmerica (since
Director, Vice President and 2000); Vice President (1999) of Promos Hotel Corporation; Vice President &
General Counsel Deputy General Counsel (1998-1999) of Legg Mason, Inc.; Vice President and
Deputy General Counsel (1995-1998) of USF&G Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice President
Director, Vice President and (since 1991) of First Allmerica; Vice President (since 1998) of Allmerica
Chief Investment Officer Financial Investment Management Services, Inc.; and President (since 1995)
and Director (since 1996) of Allmerica Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President (since
Director 1996) of The Hanover Insurance Company; and Vice President (1993 to 1996)
of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992), President
Director (since 1994) and Chief Executive Officer (since 1996) of Citizens Insurance
Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since 2000) of First Allmerica;
Vice President and Treasurer Associate, Investment Banking (1996 -1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon Brothers, Inc.; Treasurer
(since 2000) of Allmerica Investments, Inc., Allmerica Asset Management,
Inc. and Allmerica Financial Investment Management Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of First
Director and Chairman Allmerica
of the Board
<PAGE>
<CAPTION>
<S> <C>
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice President (since
Director, Vice President 1993), and Treasurer (1993-2000) of First Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director, President and President (since 1995) of Allmerica Financial Life Insurance and Annuity
Chief Executive Officer Company; Director (since 1990) of Allmerica Investments, Inc.; and Director
and President (since 1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Director
Director (since 1998) of The Hanover Insurance Company; Chief Executive Officer
(1996 to 1998) of Travelers Property & Casualty; Senior Vice President
(1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director and Vice President Director (since 1991) of Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management Services, Inc.
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
|_________________________________________________________________________________________________________________________
| | | | | | | | | |
| 100% 100% 100% 100% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
----------------- ----------------- -----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
-------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
-------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
-------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
----------------- -----------------
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
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 Growth & Income Fund, L.P 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
<PAGE>
<CAPTION>
<S> <C> <C>
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable
as SMA Life Assurance Company annuities and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services,
Inc. and 440 Financial Group of
Worcester, Inc.)
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 Investments Insurance Agency 200 Southbridge Parkway Insurance Agency
Inc. of Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency 14211 Commerce Way Insurance Agency
of Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency 1455 Lincoln Parkway Insurance Agency
Inc. of Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Barkley Bldg-Suite 105 Insurance Agency
Inc. of Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency 631 Lakeland East Drive Insurance Agency
<PAGE>
<CAPTION>
<S> <C> <C>
Inc. of Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & 440 Lincoln Street Holding Company
Casualty Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 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
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
<PAGE>
<CAPTION>
<S> <C> <C>
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 30, 2000, there were 6,569 Contract Owners of qualified Contracts
and 13,502 Contract Owners of non-qualified Contracts.
As of April 30, 2000, there were no Contract Form A3030-99 Owners since sales
had not yet begun.
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:
<PAGE>
- VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H,
VA-K, VA-P, Allmerica Select Separate Account II, Group VEL Account,
Separate Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account, Separate Account FUVUL,
Separate Account IMO and Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company.
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select Separate
Account of First Allmerica Financial Life Insurance 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
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
<S> <C>
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance
Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Claudia J. Eckels Vice President
Mary M. Eldridge Secretary/Clerk
Philip L. Heffernan Vice President
J. Kendall Huber Director
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief
Executive Officer
David J. Mueller Vice President, Chief Financial
Officer, Financial Operations
Principal and Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
Eric A. Simonsen Director
</TABLE>
<PAGE>
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), there were no commissions retained by Allmerica
Investments, Inc., the principal underwriter of the Contracts, for
sales of variable contracts funded by the Registrant in 1999. No other
commissions or other compensation was received by the principal
underwriter, directly or indirectly, from the Registrant during the
Registrant's last fiscal year.
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.
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 and any financial statements 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
<PAGE>
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) 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 has duly caused this Pre-Effective Amendment
No. 1 to the 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 1st day of June, 2000.
SEPARATE ACCOUNT VA-K OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
--------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller June 1, 2000
---------------------------
Warren E. Barnes
Edward J. Parry III* Director, Vice President and Chief Financial Officer
---------------------------
Richard M. Reilly* Director, President and Chief Executive Officer
---------------------------
John F. O'Brien* Director and Chairman of the Board
---------------------------
Bruce C. Anderson* Director
---------------------------
Mark R. Colborn* Director and Vice President
---------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment Officer
---------------------------
J. Kendall Huber* Director, Vice President and General Counsel
---------------------------
J. Barry May* Director
---------------------------
James R. McAuliffe* Director
---------------------------
Robert P. Restrepo, Jr.* Director
---------------------------
Eric A. Simonsen* Director and Vice President
---------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
---------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
EXHIBIT TABLE
Exhibit 5 Application Form 11255DG
Exhibit 8(e) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
