<PAGE>
FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
DELAWARE MEDALLION III
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1998 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT. THE
CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
PLEASE READ THE PROSPECTUS CAREFULLY.
1. THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT
The Delaware Medallion III variable annuity contract is a contract between you
and First Allmerica Financial Life Insurance Company. It is designed to help you
accumulate assets for your retirement or other important financial goals on a
tax-deferred basis. Delaware Medallion III combines the concept of professional
money management with the attributes of an annuity contract.
Delaware Medallion III offers a diverse selection of investment portfolios. You
may allocate your payments among any of 16 investment portfolios of the Delaware
Group Premium Fund, Inc., the Guarantee Period Accounts and the Fixed Account
(the Guarantee Period Accounts and/or the Fixed Account may not be available in
certain jurisdictions.) This range of investment choices enables you to allocate
your money to meet your particular investment needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you withdraw prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
contract's growth during the accumulation phase.
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments for your lifetime; (2) monthly payments for your
lifetime, but for not less than 10 years; (3) monthly payments for your lifetime
with the guarantee that if payments to you are less than the accumulated value a
refund of the remaining value will be paid; (4) monthly payments for your
lifetime and your survivor's lifetime; (5) monthly payments for your lifetime
and your survivor's lifetime with the payment to the survivor being reduced to
2/3; and (6) monthly payments for a specified period of 1 to 30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making payments
into this contract. Payments are not limited as to frequency, but there are
certain limitations as to amount. Currently, the initial payment must be at
least $600. In all cases, each subsequent payment must be at least $50.
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4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following investment series:
<TABLE>
<S> <C>
Decatur Total Return Emerging Markets Series
Series
Devon Series Delaware Series
DelCap Series Convertible Securities
Series
Social Awareness Series Delchester Series
REIT Series Capital Reserves Series
Small Cap Value Series Strategic Income Series
Trend Series Cash Reserve Series
International Equity Global Bond Series
Series
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods during which interest rates are guaranteed. The Fixed Account
guarantees principal and a minimum rate of interest (never less than 3%
compounded annually).
5. EXPENSES
Each year and upon surrender, a $30 contract fee is deducted from your contract.
The contract fee is waived if the value of the contract is $50,000 or more or if
the contract is issued to and maintained by the Trustees of a 401(k) plan. We
also deduct insurance charges which amount to 1.40% annually of the daily value
of your contract value allocated to the variable investment options. The
insurance charges include a mortality and expense risk charge of 1.25% and an
administrative expense charge of 0.15%. There are also investment management
fees and other series operating expenses that vary by investment series.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 1% and
7% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence. There is currently no
charge for processing investment option transfers. We reserve the right to
assess a charge, not to exceed $25, for transfers after your 12 free transfers.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the $30 contract
fee (which is represented as 0.03%), the 1.40% insurance charges and the
investment charges for each investment series. The next two columns show you two
examples of the charges, in dollar amounts, you would pay under a contract. The
examples assume you invest $1,000 in an investment series which earns 5%
annually and that you withdraw your money: (1) at the end of year 1, and (2) at
the end of year 10. For year 1, the Total Annual Charges are assessed as well as
the surrender charges.
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For year 10, the example shows the aggregate of all the annual charges assessed
for 10 years, but there is no surrender charge. The premium tax is assumed to be
0% in both examples.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSE AT THE
END OF
-----------------
TOTAL ANNUAL TOTAL ANNUAL TOTAL ANNUAL (1) (2)
INVESTMENT SERIES INSURANCE CHARGES INVESTMENT CHARGES CHARGES 1 YEAR 10 YEARS
- ------------------------------------------ ------------------- --------------------- --------------- ------ --------
<S> <C> <C> <C> <C> <C>
Decatur Total Return Series............... 1.43% 0.71% 2.14% $83 $244
Devon Series.............................. 1.43% 0.80% 2.23% $83 $253
DelCap Series............................. 1.43% 0.85% 2.28% $84 $258
Social Awareness Series................... 1.43% 0.85% 2.28% $84 $258
REIT Series*.............................. 1.43% 0.85% 2.28% $84 $258
Small Cap Value Series.................... 1.43% 0.85% 2.28% $84 $258
Trend Series.............................. 1.43% 0.85% 2.28% $84 $258
International Equity Series............... 1.43% 0.90% 2.33% $84 $263
Emerging Markets Series................... 1.43% 1.50% 2.93% $90 $322
Delaware Series........................... 1.43% 0.67% 2.10% $82 $240
Convertible Securities Series............. 1.43% 0.85% 2.28% $84 $258
Delchester Series......................... 1.43% 0.70% 2.13% $83 $243
Capital Reserves Series................... 1.43% 0.75% 2.18% $83 $248
Strategic Income Series................... 1.43% 0.80% 2.23% $83 $253
Cash Reserve Series....................... 1.43% 0.64% 2.07% $82 $237
Global Bond Series........................ 1.43% 0.85% 2.28% $84 $258
</TABLE>
* For this newly formed Fund, the charges have been estimated.
The charges reflect any expense reimbursement or fee waiver. For more detailed
information, see the Fee Table in the Prospectus.
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your investment and partly earnings. You will be
subject to income taxes on the earnings portion of each payment. However, if
your contract is funded with pre-tax or tax deductible dollars (such as a
pension or profit sharing plan contribution), then the entire payment will be
taxable.
7. WITHDRAWALS
You can withdraw money from your contract at any time during the accumulation
phase. Any payment invested for more than seven years can be withdrawn without a
surrender charge. For amounts invested seven year or less, you can withdraw,
without a charge, the GREATEST of: (1) 100% of cumulative earnings; (2) 15% of
the contract value per calendar year; or (3) if you are the Owner and Annuitant,
an amount based on your life expectancy. (Similarly, no surrender charge will
apply if an amount is withdrawn based on the Annuitant's life expectancy if the
Owner is a trust or other non-natural person.)
Surrender charges will also be waived if you, the Owner, become disabled after
the contract is issued and before age 65. Under New York contracts, the
disability must also exist for a continuous period of at least four months. In
addition, except in New York where not permitted by state law, the surrender
charge will be waived if, after the contract is issued, you are diagnosed with a
fatal illness or confined in a medical care facility for the later of one year
from issue or 90 days.
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Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
guarantee period will be subject to a market value adjustment which may increase
or decrease the value in the account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the investment series you choose. The following chart illustrates
past returns for each investment series based on the Sub-Account inception date.
The performance figures reflect the contract fee, the insurance charges, the
investment charges and all other expenses of the investment series. They do not
reflect the surrender charges and if applied would reduce such performance. Past
performance is not a guarantee of future results
<TABLE>
<CAPTION>
CALENDAR YEAR
-------------------------------------
INVESTMENT SERIES 1997 1996 1995
- ----------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Decatur Total Return Series................................ 29.19% 18.99% 34.23%
Devon Series............................................... N/A N/A N/A
DelCap Series.............................................. 13.28% 12.82% 27.73%
Social Awareness Series.................................... N/A N/A N/A
REIT Series................................................ N/A N/A N/A
Small Cap Value Series..................................... 31.06% 20.80% 22.11%
Trend Series............................................... 19.66% 9.40% 37.28%
International Equity Series................................ 5.10% 18.31% 12.28%
Emerging Markets Series.................................... N/A N/A N/A
Delaware Series............................................ 24.64% 14.24% 24.81%
Convertible Securities Series.............................. N/A N/A N/A
Delchester Series.......................................... 12.04% 11.16% 13.88%
Capital Reserves Series.................................... 6.09% 2.54% 12.56%
Strategic Income Series.................................... N/A N/A N/A
Cash Reserve Series........................................ 3.62% 3.42% 4.08%
Global Bond Series......................................... -0.54% N/A N/A
</TABLE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (a) the
accumulated value increased for any positive market value adjustment; (b) gross
payments, decreased proportionately to reflect any prior withdrawals; or (c) the
death benefit that would have been payable on the most recent contract
anniversary, increased for subsequent payments and decreased proportionately for
subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract remains in force and
prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine Provision."
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DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Capital Reserves Series, Cash Reserve Series, Strategic
Income Series or Fixed Account to one or more of the other investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
11. INQUIRIES
If you need more information you may contact us at 1-800-533-2124 or send
correspondence to:
Delaware Medallion
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts, issued either on a group basis or as
individual contracts by First Allmerica Financial Life Insurance Company (the
"Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are referred to herein collectively as the "Contract(s)."
The following is a summary of information about the Contract. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as Separate Account VA-K. The assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in shares of one of the
following series of Delaware Group Premium Fund, Inc. ("DGPF"):
<TABLE>
<S> <C> <C>
Decatur Total Return Trend Series Delchester Series
Series
Devon Series International Equity Capital Reserves
Series Series
DelCap Series Emerging Markets Series Strategic Income
Series
Social Awareness Series Delaware Series Cash Reserve Series
REIT Series Convertible Securities Global Bond Series
Series
Small Cap Value Series
</TABLE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation phase, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in a Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period,
the value may be increased or decreased by a Market Value Adjustment. Amounts
allocated to the Guarantee Period Accounts in the accumulation phase are held in
the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
("SAI"), dated May 1, 1998, as may be amended from time to time, filed with the
Securities and Exchange Commission and incorporated herein by reference. The
Table of Contents of the SAI is listed on page 4 of this Prospectus. The SAI is
available upon request and without charge. To obtain the SAI, fill out and
return the attached request card, or contact Annuity Client Services, telephone
1-800-533-2124.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
<PAGE>
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................. 4
SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 7
ANNUAL AND TRANSACTION EXPENSES....................................................... 11
CONDENSED FINANCIAL INFORMATION....................................................... 14
PERFORMANCE INFORMATION............................................................... 15
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC..................................................... 20
INVESTMENT OBJECTIVES AND POLICIES.................................................... 21
INVESTMENT ADVISORY SERVICES TO DGPF.................................................. 23
DESCRIPTION OF THE CONTRACT........................................................... 23
A. Payments........................................................................ 23
B. Right to Revoke Contract........................................................ 24
C. Transfer Privilege.............................................................. 24
Automatic Transfers and Automatic Account Rebalancing Options................. 24
D. Surrender....................................................................... 25
E. Withdrawals..................................................................... 26
Systematic Withdrawals........................................................ 26
Life Expectancy Distributions................................................. 26
F. Death Benefit................................................................... 27
Death of the Annuitant Prior to the Annuity Date.............................. 27
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date..... 27
Payment of the Death Benefit Prior to the Annuity Date........................ 28
Death of the Annuitant On or After the Annuity Date........................... 28
G. The Spouse of the Owner as Beneficiary.......................................... 28
H Assignment....................................................................... 28
I. Electing the Form of Annuity and the Annuity Date............................... 28
J. Description of Variable Annuity Payout Options.................................. 29
K. Annuity Benefit Payments........................................................ 30
The Annuity Unit.............................................................. 30
Determination of the First and Subsequent Annuity Benefit Payments............ 30
L. NORRIS Decision................................................................. 31
M. Computation of Values............................................................ 31
The Accumulation Unit......................................................... 31
Net Investment Factor......................................................... 32
CHARGES AND DEDUCTIONS................................................................ 32
A. Variable Account Deductions..................................................... 32
Mortality and Expense Risk Charge............................................. 32
Administrative Expense Charge................................................. 33
Other Charges................................................................. 33
B. Contract Fee.................................................................... 33
C. Premium Taxes................................................................... 33
D. Contingent Deferred Sales Charge................................................ 34
Charge for Surrender and Withdrawal........................................... 34
Reduction or Elimination of Surrender Charge.................................. 35
Withdrawal Without Surrender Charge........................................... 36
Surrenders.................................................................... 36
Charge at the Time Annuity Benefit Payments Begin............................. 37
E. Transfer Charge................................................................. 37
GUARANTEE PERIOD ACCOUNTS............................................................. 37
</TABLE>
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<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS............................................................ 39
A. Qualified and Non-Qualified Contracts........................................... 40
B. Taxation of the Contracts in General............................................ 40
Withdrawals Prior to Annuitization............................................ 40
Annuity Payouts After Annuitization........................................... 40
Penalty on Distribution....................................................... 40
Assignments or Transfers...................................................... 41
Non-Natural Owners............................................................ 41
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 41
C. Tax Withholding................................................................. 41
D. Provisions Applicable to Qualified Employer Plans............................... 42
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 42
Individual Retirement Annuities............................................... 42
Tax-Sheltered Annuities....................................................... 42
Texas Optional Retirement Program............................................. 43
REPORTS............................................................................... 43
LOANS (QUALIFIED CONTRACTS ONLY)...................................................... 43
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 43
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 44
VOTING RIGHTS......................................................................... 44
DISTRIBUTION.......................................................................... 44
LEGAL MATTERS......................................................................... 45
FURTHER INFORMATION................................................................... 45
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................................ A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT....................... B-1
APPENDIX C -- DIFFERENCES UNDER THE DELAWARE MEDALLION I VARIABLE
ANNUITY CONTRACT (FORM A3019-94GRC)................................... C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................................. 3
UNDERWRITERS......................................................................... 3
ANNUITY BENEFIT PAYMENTS............................................................. 4
EXCHANGE OFFER....................................................................... 5
PERFORMANCE INFORMATION.............................................................. 7
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate, and to which all or a portion of a payment
or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period, and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding series
of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, International Equity Series, Emerging Markets Series, Delaware
Series, Convertible Securities Series, Delchester Series, Capital Reserves
Series, Strategic Income Series, Cash Reserve Series, and Global Bond Series of
Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading and, on such other days (other than a day
during
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which no payment, withdrawal or surrender of a Contract was received) when there
is a sufficient degree of trading in an Underlying Fund's portfolio securities
such that the current net asset value of the Sub-Accounts may be affected
materially.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain
Underlying Funds.
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SUMMARY
WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY?
The Delaware Medallion III variable annuity contract is an insurance contract
designed to help you, the Owner, accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Contract combines the
concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- - a customized investment portfolio;
- - experienced professional investment advisers;
- - tax deferral on earnings;
- - guarantees that can protect your family during the accumulation phase;
- - income that can be guaranteed for life;
- - issue age up to your 90th birthday.
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the Sub-Accounts investing in series of the Delaware Group Premium Fund, Inc.
("DGPF), to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. The Contract's Accumulated Value is based on the investment
performance of the Funds and any accumulations in the Guarantee Period and Fixed
Accounts. No income taxes are paid on any earnings under the Contract unless and
until Accumulated Values are withdrawn. In addition, during the accumulation
phase, the beneficiaries receive certain protections and guarantees in the event
of the Annuitant's death. See discussion below: "WHAT HAPPENS UPON MY DEATH
DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years; and
- - periodic payments over a specified number of years (1-30); under this option
you may reserve the right to convert remaining payments to a lump-sum payout
by electing a "commutable" option.
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<PAGE>
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, First Allmerica Financial
Life Insurance Company (the "Company"). Each Contract has an Owner (or an Owner
and a Joint Owner, in which case one of the two must be the Annuitant), an
Annuitant and one or more beneficiaries. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual who receives annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of payments are flexible, subject only to a $600
minimum for the initial payment and a $50 minimum for any additional payments.
(A lower initial payment amount is permitted for certain qualified plans and
where monthly payments are being forwarded directly from a financial
institution.) In addition, a minimum of $1,000 is always required to establish a
Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account.
YOU HAVE A CHOICE OF 16 SUB-ACCOUNTS INVESTING IN THE FOLLOWING SERIES OF DGPF:
<TABLE>
<S> <C>
Decatur Total Return Series Emerging Markets Series
Devon Series Delaware Series
DelCap Series Convertible Securities
Series
Social Awareness Series Delchester Series
REIT Series Capital Reserves Series
Small Cap Value Series Strategic Income Series
Trend Series Cash Reserve Series
International Equity Series Global Bond Series
</TABLE>
Each Underlying Fund operates pursuant to different investment objectives,
discussed below, and this range of investment options enables you to allocate
your money among the Funds to meet your particular investment needs.
SOME FUNDS MAY NOT BE AVAILABLE IN ALL STATES.
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently offers nine Guarantee Periods ranging from two to ten
years in duration. Once declared, the Guaranteed Interest Rate will not change
during the duration of the Guarantee Period. If amounts allocated to a Guarantee
Period Account are transferred, surrendered or applied to any annuity option at
any time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
account's value; however, this adjustment will never be applied against your
principal. In addition, earnings in the Guarantee Period Accounts 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."
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be
8
<PAGE>
declared periodically at the Company's discretion. Furthermore, the initial rate
in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account, see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO IS THE INVESTMENT ADVISER?
Delaware Management Company, Inc. ("Delaware Management") is the investment
adviser for the Decatur Total Return Series, Devon Series, DelCap Series, Social
Awareness Series, REIT Series, Small Cap Value Series, Trend Series, Delaware
Series, Convertible Securities Series, Delchester Series, Capital Reserves
Series, Strategic Income Series, and Cash Reserve Series. The investment adviser
for the International Equity Series, Emerging Markets Series and the Global Bond
Series is Delaware International Advisers Ltd. ("Delaware International").
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account. You will incur no current
taxes on transfers while your money remains in the Contract. See "C. Transfer
Privilege." The first 12 transfers in a Contract year are guaranteed to be free
of a transfer charge. For each subsequent transfer in a Contract year, the
Company does not currently charge but reserves the right to assess a processing
charge guaranteed never to exceed $25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy and the Owner is a trust or other
non-natural person.) A 10% tax penalty may apply on all amounts deemed to be
earnings if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but may be subject to the surrender charge for payments that have not been
invested in the Contract for more than seven years. (A Market Value Adjustment
may apply to any withdrawal made from a Guarantee Period Account prior to the
expiration of the Guarantee Period.)
You may also withdraw all or a portion of your money without a surrender charge
if, after the Contract is issued and before age 65, you become disabled. Under
New York Contracts, the disability also must exist for a continuous period of at
least four months. In addition, except in New York where not permitted by state
law, the surrender charge will be waived if, after the Contract is issued, you
are diagnosed with a fatal illness or confined to a medical care facility until
the later of one year from the issue date or 90 days. For details and
restrictions, see "Reduction or Elimination of Surrender Charge."
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
highest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, decreased proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until
9
<PAGE>
the second anniversary, at which time the death benefit will be equal to the
greatest of (a) the Contract's then current Accumulated Value increased by any
positive Market Value Adjustment; (b) gross payments or (c) the locked-in value
of the death benefit at the first anniversary. The greatest of (a), (b) or (c)
will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract remains in force and
prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "F.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on each Contract anniversary and
upon surrender, a $30 Contract fee will be deducted from the Contract. The
Contract fee is waived for Contracts issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity payout options, you may be subject to a
contingent deferred sales charge. If applicable, this charge will be between 1%
and 7% of payments withdrawn, based on when the payments were made.
A deduction for state and local premium taxes, if any, may be made as described
under "C. Premium Taxes."
The Company will deduct a daily Mortality and Expense Risk Charge and
Administrative Expense Charge equal to 1.25% and 0.15%, respectively, of the
average daily net assets invested in each Underlying Fund. The Funds will incur
certain management fees and expenses which are more fully described in "Other
Charges" and in the DGPF prospectus which accompanies this Prospectus.
CAN I EXAMINE THE CONTRACT?
Yes. The Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of the Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However,
under any Contract issued in New York or if the Contract was issued as an
Individual Retirement Annuity ("IRA"), you will generally receive a refund of
your entire payment. (In certain states the refund under an IRA may be the
greater of (1) your payment or (2) the amounts allocated to the Fixed and
Guarantee Period Accounts plus the Accumulated Value of amounts in the
Sub-Accounts, plus any fees or charges previously deducted.) See "B. Right to
Revoke Contract."
CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
10
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and are deducted as
described under "Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
CONTRACT CHARGES: PAYMENT CHARGE
------------ -----------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, 2 6.0%
withdrawal or annuitization under any commutable 3 5.0%
period certain option or a noncommutable period 4 4.0%
certain option of less than ten years. The 5 3.0%
charge is a percentage of payments applied to 6 2.0%
the amount surrendered (in excess of any amount 7 1.0%
that is without surrender charge) within the More than 7 0%
indicated time period.
TRANSFER CHARGE: None
The Company currently makes no 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.
CONTRACT FEE:
The fee is deducted annually and upon surrender $30
prior to the Annuity Date when Accumulated Value
is less than $50,000. The fee is waived for
Contracts issued to and maintained by the
trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily
net assets)
Mortality and Expense Risk Charge 1.25%
Administrative Expense Charge 0.15%
-----------
Total Asset Charge 1.40%
</TABLE>
11
<PAGE>
FUND EXPENSES: The following table shows the expenses of the Underlying Funds as
of December 31, 1997 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1998.) For more information concerning fees and
expenses, see the prospectus of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER EXPENSES (AFTER
MANAGEMENT ANY APPLICABLE TOTAL
FUND FEES REIMBURSEMENTS) EXPENSES
- ------------------------------------------------------------------ --------------- ----------------------- -------------
<S> <C> <C> <C>
Decatur Total Return Series....................................... 0.60% 0.11% 0.71%(2)
Devon Series...................................................... 0.54% 0.26% 0.80%(1)(2)
DelCap Series..................................................... 0.63% 0.22% 0.85%(1)(2)
Social Awareness Series........................................... 0.20% 0.65% 0.85%(1)(2)
REIT Series(@).................................................... 0.75% 0.10% 0.85%(1)(2)
Small Cap Value Series............................................ 0.60% 0.25% 0.85%(1)(2)
Trend Series...................................................... 0.62% 0.23% 0.85%(1)(2)
International Equity Series....................................... 0.75% 0.15% 0.90%(2)(3)
Emerging Markets Series........................................... 0.30% 1.20% 1.50%(1)(2)
Delaware Series................................................... 0.60% 0.07% 0.67%(2)
Convertible Securities Series..................................... 0.05% 0.80% 0.85%(1)(2)
Delchester Series................................................. 0.60% 0.10% 0.70%(2)
Capital Reserves Series........................................... 0.60% 0.15% 0.75%(2)
Strategic Income Series........................................... 0.22% 0.58% 0.80%(1)(2)
Cash Reserve Series............................................... 0.50% 0.14% 0.64%(2)
Global Bond Series................................................ 0.52% 0.33% 0.85%(1)(2)
</TABLE>
(@) Estimated after expense reimbursement.
(1) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.91% for Devon Series, 0.87% for DelCap
Series, 1.40% for Social Awareness Series (formerly known as "Quantum Series"),
0.90% for Small Cap Value Series (formerly known as "Value Series"), 0.88% for
Trend Series, 90% for International Equity Series, 2.45% for Emerging Markets
Series, 2.30% for Convertible Securities Series, 1.23% for Strategic Income
Series and 1.08% for Global Bond Series.
(2) The investment adviser for the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The Investment
Adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International"). Effective May 1, 1998 through October 31, 1998, the investment
advisers for the Series of DGPF have agreed voluntarily to waive their
management fees and reimburse each Series for expenses to the extent that total
expenses will not exceed 1.50% for the Emerging Markets Series; 0.95% for the
International Equity Series; 85% for DelCap Series, Social Awareness Series,
REIT Series, Small Cap Value Series, Trend Series, Convertible Securities Series
and Global Bond Series and 0.80% for all other Series. The fee ratios shown
above have been restated, if necessary, to assume that the new voluntary
limitations took effect on January 1, 1997. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(3) Effective July 1, 1997, the management fee of the International Equity
Series was voluntarily limited to a rate of 0.95% of the average daily net
assets, replacing a prior limitation of 0.80%. In 1997, the total annual
expenses of the International Equity Series was 0.90% and the management fee was
0.75%.
The following examples demonstrate the cumulative expenses which would be paid
by the Owner at 1-year, 3-year, 5-year, and 10-year intervals under certain
contingencies. Each example assumes a $1,000 investment in a Sub-Account and a
5% annual return on assets. Because the expenses of the Underlying Funds differ,
separate examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
12
<PAGE>
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable time period, you surrender your Contract or
annuitize* under a commutable period certain option of less than ten years, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series.................................................. $83 $112 $143 $244
Devon Series................................................................. $83 $115 $147 $253
DelCap Series................................................................ $84 $116 $150 $258
Social Awareness Series...................................................... $84 $116 $150 $258
REIT Series.................................................................. $84 $116 $150 $258
Small Cap Value Series....................................................... $84 $116 $150 $258
Trend Series................................................................. $84 $116 $150 $258
International Equity Series.................................................. $84 $118 $152 $263
Emerging Markets Series...................................................... $90 $135 $181 $322
Delaware Series.............................................................. $82 $111 $141 $240
Convertible Securities Series................................................ $84 $116 $150 $258
Delchester Series............................................................ $83 $112 $142 $243
Capital Reserves Series...................................................... $83 $113 $145 $248
Strategic Income Series...................................................... $83 $115 $147 $253
Cash Reserve Series.......................................................... $82 $110 $139 $237
Global Bond Series........................................................... $84 $116 $150 $258
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a life
option or any non-commutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
Decatur Total Return Series.................................................. $21 $ 66 $113 $244
Devon Series................................................................. $22 $ 69 $118 $253
DelCap Series................................................................ $23 $ 70 $120 $258
Social Awareness Series...................................................... $23 $ 70 $120 $258
REIT Series.................................................................. $23 $ 70 $120 $258
Small Cap Value Series....................................................... $23 $ 70 $120 $258
Trend Series................................................................. $23 $ 70 $120 $258
International Equity Series.................................................. $23 $ 72 $123 $263
Emerging Markets Series...................................................... $29 $ 90 $153 $322
Delaware Series.............................................................. $21 $ 65 $111 $240
Convertible Securities Series................................................ $23 $ 70 $120 $258
Delchester Series............................................................ $21 $ 66 $113 $243
Capital Reserves Series...................................................... $22 $ 67 $115 $248
Strategic Income Series...................................................... $22 $ 69 $118 $253
Cash Reserve Series.......................................................... $21 $ 64 $110 $237
Global Bond Series........................................................... $23 $ 70 $120 $258
</TABLE>
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year under
an option, including a life contingency, or under any non-commutable period
certain option of ten years or more.
Pursuant to requirements of the Investment Company Act of 1940 ("1940 Act") the
Contract fee has been reflected in the examples by a method intended to show the
"average" impact of the Contract fee on an
13
<PAGE>
investment in the Variable Account. The total Contract fees collected under the
Contract by the Company are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.03, and the amount of the
Contract fee is assumed to be $0.30 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $50,000. Lower costs apply
to Contracts issued and maintained as part of a 401(k) plan.
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994
- ------------------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
DECATUR TOTAL RETURN SERIES
Unit Value:
Beginning of Period................................................. 1.608 1.351 1.006 1.000
End of Period....................................................... 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in thousands)............. 1,311 1,044 670 455
DEVON SERIES*
Unit Value:
Beginning of Period................................................. N/A N/A N/A N/A
End of Period....................................................... 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............. 106 N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period................................................. 1.453 1.287 1.008 1.000
End of Period....................................................... 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in thousands)............. 355 493 300 149
SOCIAL AWARENESS SERIES*
Unit Value:
Beginning of Period................................................. N/A N/A N/A N/A
End of Period....................................................... 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............. 101 N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................................................. 1.478 1.223 1.002 1.000
End of Period....................................................... 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)............. 235 204 146 82
TREND SERIES
Unit Value:
Beginning of Period................................................. 1.536 1.404 1.022 1.000
End of Period....................................................... 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)............. 1,579 285 1,486 790
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................................................. 1.335 1.128 1.004 1.000
End of Period....................................................... 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)............. 554 2,244 358 193
EMERGING MARKETS SERIES*
Unit Value:
Beginning of Period................................................. N/A N/A N/A N/A
End of Period....................................................... 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............. 1 N/A N/A N/A
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994
- ------------------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
DELAWARE SERIES
Unit Value:
Beginning of Period................................................. 1.415 1.238 0.991 1.000
End of Period....................................................... 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)............. 420 405 304 173
CONVERTIBLE SECURITIES SERIES*
Unit Value:
Beginning of Period................................................. N/A N/A N/A N/A
End of Period....................................................... 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............. 84 N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period................................................. 1.240 1.116 0.980 1.000
End of Period....................................................... 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in thousands)............. 1,388 1,003 670 287
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................................................. 1.144 1.115 0.991 1.000
End of Period....................................................... 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)............. 287 208 195 181
STRATEGIC INCOME SERIES*
Unit Value:
Beginning of Period................................................. N/A N/A N/A N/A
End of Period....................................................... 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............. 276 N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period................................................. 1.096 1.059 1.018 1.000
End of Period....................................................... 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)............. 401 125 126 302
GLOBAL BOND SERIES
Unit Value:
Beginning of Period................................................. 1.107 1.000 1.000 N/A
End of Period....................................................... 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in thousands)............. 7 N/A N/A N/A
</TABLE>
* The date of inception of the Sub-Accounts investing in the Devon Series, the
Social Awareness Series, the Emerging Markets Series, the Convertible Securities
Series and the Strategic income series was 5/1/97.
PERFORMANCE INFORMATION
The Delaware Medallion III Contract was first offered to the public in 1997. The
Company, however, may advertise "total return" and "average annual total return"
performance information based on the periods that the Sub-Accounts have been in
existence and the periods that the Underlying Funds have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Funds, and,
in Tables 1A and 2A, assuming that the Contract is surrendered at the end of the
applicable period and, alternatively, in Tables 1B and 2B, assuming that it is
not surrendered at the end of the applicable period. Both the total return and
yield figures are based on historical earnings and are not intended to indicate
future performance.
15
<PAGE>
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Cash Reserve Series refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Cash Reserve
Series refers to the annualized income generated by an investment in the
Sub-Account over a specified 30-day or one-month period. The yield is calculated
by assuming that the income generated by the investment during that 30-day or
one-month period is generated each period over a 12-month period and is shown as
a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the $30
annual Contract fee, the Underlying Fund charges and the contingent deferred
sales charge which would be assessed if the investment were completely withdrawn
at the end of the specified period. Quotations of supplemental average total
returns, as shown in Table 1B, are calculated in exactly the same manner and for
the same periods of time except that it does not reflect the contingent deferred
sales charge but assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Fund's lifetime, which may predate the Sub-Account's
inception date. These performance calculations are based on the assumption that
the Sub-Account corresponding to the applicable Underlying Fund was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm
16
<PAGE>
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
17
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION
ENDED OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------------------------- ------------ ------- ----------
<S> <C> <C> <C>
Decatur Total Return Series................................................ 22.19% N/A 21.39%
Devon Series............................................................... N/A N/A 19.06%
DelCap Series.............................................................. 6.54% N/A 13.64%
Social Awareness Series.................................................... N/A N/A 20.17%
REIT Series................................................................ N/A N/A N/A
Small Cap Value Series..................................................... 24.06% N/A 19.21%
Trend Series............................................................... 12.66% N/A 17.47%
International Equity Series................................................ -1.15% N/A 8.71%
Emerging Markets Series.................................................... N/A N/A -17.28%
Delaware Series............................................................ 17.64% N/A 15.83%
Convertible Securities Series.............................................. N/A N/A 8.70%
Delchester Series.......................................................... 5.37% N/A 8.66%
Capital Reserves Series.................................................... -0.22% N/A 4.62%
Strategic Income Series.................................................... N/A N/A -1.06%
Cash Reserve Series........................................................ -2.55% N/A 2.53%
Global Bond Series......................................................... -6.46% N/A 2.67%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL
RETURN
FOR YEAR SINCE
ENDED INCEPTION OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------------------------- ----------- ------- ------------
<S> <C> <C> <C>
Decatur Total Return Series................................................ 29.19% N/A 22.03%
Devon Series............................................................... N/A N/A 26.06%
DelCap Series.............................................................. 13.28% N/A 14.40%
Social Awareness Series.................................................... N/A N/A 27.17%
REIT Series................................................................ N/A N/A N/A
Small Cap Value Series..................................................... 31.06% N/A 19.90%
Trend Series............................................................... 19.66% N/A 18.18%
International Equity Series................................................ 5.10% N/A 9.57%
Emerging Markets Series.................................................... N/A N/A -12.04%
Delaware Series............................................................ 24.64% N/A 16.55%
Convertible Securities Series.............................................. N/A N/A 15.58%
Delchester Series.......................................................... 12.04% N/A 9.54%
Capital Reserves Series.................................................... 6.09% N/A 5.62%
Strategic Income Series.................................................... N/A N/A 5.20%
Cash Reserve Series........................................................ 3.62% N/A 3.49%
Global Bond Series......................................................... -0.54% N/A 5.95%
</TABLE>
18
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
- ---------------------------------------------------------------------------- ------------ ------- ------------
<S> <C> <C> <C>
Decatur Total Return Series................................................. 22.19% 17.93% 11.47%
Devon Series................................................................ N/A N/A 19.10%
DelCap Series............................................................... 6.54% 10.91% 10.72%
Social Awareness Series..................................................... N/A N/A 20.19%
REIT Series................................................................. N/A N/A N/A
Small Cap Value Series...................................................... 24.06% N/A 17.22%
Trend Series................................................................ 12.66% N/A 14.93%
International Equity Series................................................. -1.15% 9.67% 9.47%
Emerging Markets Series..................................................... N/A N/A -17.29%
Delaware Series............................................................. 17.64% 12.93% 12.28%
Convertible Securities Series............................................... N/A N/A 8.71%
Delchester Series........................................................... 5.37% 8.85% 8.97%
Capital Reserves Series..................................................... -0.22% 4.03% 5.34%
Strategic Income Series..................................................... N/A N/A -1.07%
Cash Reserve Series......................................................... -2.55% 2.32% 3.63%
Global Bond Series.......................................................... -6.46% N/A 2.68%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
- --------------------------------------------------------------------- ------------ ------- ------------
<S> <C> <C> <C>
Decatur Total Return Series.......................................... 29.19% 18.24% 11.47%
Devon Series......................................................... N/A N/A 26.10%
DelCap Series........................................................ 13.28% 11.30% 10.80%
Social Awareness Series.............................................. N/A N/A 27.19%
REIT Series.......................................................... N/A N/A N/A
Small Cap Value Series............................................... 31.06% N/A 17.68%
Trend Series......................................................... 19.66% N/A 15.42%
International Equity Series.......................................... 5.10% 10.08% 9.74%
Emerging Markets Series.............................................. N/A N/A -12.05%
Delaware Series...................................................... 24.64% 13.29% 12.28%
Convertible Securities Series........................................ N/A N/A 15.59%
Delchester Series.................................................... 12.04% 9.28% 8.97%
Capital Reserves Series.............................................. 6.09% 4.54% 5.34%
Strategic Income Series.............................................. N/A N/A 5.19%
Cash Reserve Series.................................................. 3.62% 2.85% 3.63%
Global Bond Series................................................... -0.54% N/A 5.96%
</TABLE>
19
<PAGE>
* The dates of inception of the Underlying Funds are: 10/29/92 for the
International Equity Series; 12/27/93 for the Small Cap Value and Trend Series;
7/02/91 for the DelCap Series; 7/28/88 for the Delaware Series, the Decatur
Total Return Series, the Delchester Series, the Capital Reserves Series, and the
Cash Reserve Series; 5/1/96 for Global Bond Series; and 5/1/97 for the Devon
Series, the Social Awareness Series, the Emerging Markets Series, the
Convertible Securities Series and the Strategic Income Series.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY. The Company, organized under the laws of Massachusetts in 1844, is
the fifth oldest life insurance company in America. As of December 31, 1997, the
Company and its subsidiaries had over $16.3 billion in combined assets and over
$43.8 billion of life insurance in force. Effective October 16, 1995, the
Company 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. The Company is a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The Company's principal office ("Principal
Office") is located at 440 Lincoln Street, Worcester MA 01653, Telephone
508-855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
The Company is a chartered member 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 ACCOUNT. The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contract are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 16 Sub-Accounts available under the Contract. Each
Sub-Account is administered and accounted for as part of the general business of
the Company, but the income, capital gains or capital losses of each Sub-Account
are allocated to such Sub-Account without regard to other income, capital gains,
or capital losses of the Company. Under Delaware law, the assets of the Variable
Account may not be charged with any liabilities arising out of any other
business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of a
"separate account" under federal securities law, and is registered with the SEC
as a unit investment trust under the 1940 Act. The registration of the Variable
Account and DGPF does not involve the supervision by the SEC of management or
investment practices or Contracts of the Variable Account, the Company, DGPF or
the Underlying Funds.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE VARIABLE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE VARIABLE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE CONTRACT
DESCRIBED IN THIS PROSPECTUS.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. ("DGPF") is
an open-end, diversified management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of DGPF or its separate investment series.
DGPF was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance contracts. DGPF
currently has 16 investment portfolios, each issuing a series of
20
<PAGE>
shares: Decatur Total Return Series, Devon Series, DelCap Series, Social
Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bond Series
(collectively, the "Underlying Funds"). The assets of each Underlying Fund are
held separate from the assets of the other Underlying Funds. Each Underlying
Fund operates as a separate investment vehicle, and the income or losses of one
Underlying Fund have no effect on the investment performance of another
Underlying Fund. Shares of the Underlying Funds are not offered to the general
public but solely to separate accounts of life insurance companies.
The investment adviser for the Decatur Total Return Series, Devon Series, DelCap
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The investment
adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International").
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds of DGPF is
set forth below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THE
PROSPECTUSES OF THE FUNDS WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statement of Additional Information of DGPF is
available upon request.
DECATUR TOTAL RETURN SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Fund formerly was known as
the Equity/Income Series.
DEVON SERIES -- seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
exhibit the potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Fund formerly was known as the Growth Series.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium- to large-sized companies
expected to grow over time. This Fund was formerly known as the Quantum Series.
REIT SERIES -- seeks to achieve maximum long-term total return by investing in
securities of companies primarily engaged in the real estate industry.
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. This Fund was formerly known as the
Value Series.
TREND SERIES -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective. This Fund formerly was known as
the Emerging Growth Series.
21
<PAGE>
INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. The Series is an international fund. As such, under normal
market conditions, at least 65% of the Series' assets will be invested in equity
securities of issuers organized or having a majority of their assets or deriving
a majority of their operating income in at least three countries that are
considered to be emerging or developing.
DELAWARE SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Fund formerly was
known as the Multiple Strategy Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, which may include privately
placed convertible securities.
DELCHESTER SERIES -- seeks as high a current income as possible by investing in
rated and unrated corporate bonds (including high-yield bonds commonly known as
"junk bonds"), U.S. government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in this
Series. This Fund formerly was known as High Yield Series.
CAPITAL RESERVES SERIES -- seeks a high, stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short- and intermediate-term securities.
STRATEGIC INCOME SERIES -- seeks high current income and total return by using a
multi-sector investment approach, investing primarily in three sectors of the
fixed-income securities market: high yield, higher-risk securities; investment
grade fixed-income securities; and foreign government and other foreign
fixed-income securities. The Fund also may invest in U.S. equity securities.
CASH RESERVE SERIES -- seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments. This Fund formerly was known as Money Market Series.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
There is no assurance that the investment objectives of the Underlying Funds
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Fund in which it invests, you will be notified of the change.
No material changes in the investment policy of the Variable Account or any
Sub-Accounts will be made without approval pursuant to the applicable state
insurance laws. If you have Contract value in that Sub-Account, the Company will
transfer it without charge, on written request by you, to another Sub-Account or
to the General Account. The Company must receive your written request within
sixty (60) days of the later of (1) the effective date of such change in the
investment policy, or (2) the receipt of the notice of your right to transfer.
22
<PAGE>
INVESTMENT ADVISORY SERVICES TO DGPF
For managing the portfolios of the Underlying Funds and making the investment
decisions, investment advisers are paid an annual fee by their respective
Underlying Funds. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Delaware Series and Devon Series; 0.65% of the average daily
net assets of the Strategic Income Series and 0.75% of the average daily net
assets of the DelCap Series, Small Cap Value Series, Trend Series, Social
Awareness Series, REIT Series and Convertible Securities Series. For Delaware
International Advisors, Ltd., this fee is equal to 0.75% of the average daily
net assets of the International Equity Series and the Global Bond Series, and
1.25% of the Emerging Markets Series.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application for certain classes of
annuity Contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract and allocated among the
requested accounts as of the date that all underwriting requirements are
properly met. If all underwriting requirements are not complied with within five
business days of the Company's receipt of the initial payment, the payment will
be returned immediately unless the Owner specifically consents to the holding of
the initial payment until completion of any outstanding underwriting
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600.
Under a salary deduction or monthly automatic payment plan, the minimum initial
payment is $50. In all cases, each subsequent payment must be at least $50.
Where the contribution on behalf of an employee under an employer-sponsored
retirement plan is less than $600 but more than $300 annually, the Company may
issue a Contract on the employee if the plan's average annual contribution per
eligible plan participant is at least $600. The minimum allocation to a
Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Cash Reserve Series.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. The
Owner may change allocation instructions for new payments pursuant to a written
or telephone request. If telephone requests are elected by the Owner, a properly
completed authorization must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures the Company follows for transactions initiated by
telephone include requirements that callers on behalf of an Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded.
23
<PAGE>
B. RIGHT TO REVOKE CONTRACT
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any local agency of the
Company. Mailing or delivery must occur within ten days after receipt of the
Contract for revocation to be effective.
Within seven days the Company will provide a refund equal to gross payment(s)
received. In some states, however, the refund may equal the greater of a)gross
payments, or (b) the amounts allocated to the Fixed and Guarantee Period
Accounts plus the Accumulated Value of amounts in the Sub-Accounts plus any
amounts deducted under the Contract or by the Underlying Funds for taxes,
charges or fees. At the time the Contract is issued, the "Right to Examine
Contract" provision on the cover page of the Contract will specifically indicate
whether the refund will be equal to gross payments or equal to the greater of
(a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among accounts 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 Money Market Portfolio.
Currently, the Company makes no charge for transfers. The first twelve transfers
in a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company does not currently charge
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing transfers.
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Funds that it may provide such
services for. The Company does not charge the Owner for providing additional
support services.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Capital Reserves Series, the Strategic
Income Series, the Cash Reserve Series, or the Fixed Account (the "source
account") to one or more of the Funds. Automatic transfers may not be made into
the Fixed Account, the Guarantee Period Accounts or, if applicable, the Fund
being used as the source account. If an automatic transfer would reduce the
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Funds. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
24
<PAGE>
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information, see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
percentage allocations specified by the Owner. As frequently as specified by the
Owner, the Company will review the percentage allocations in the Funds and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue in accordance with the most recent percentage allocation mix
received until the Owner's request to terminate or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be reallocated in accordance with the existing mix on the next scheduled
date unless the Owner's request to change the mix is received by the Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
D. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Surrender Value. The Owner must return the Contract and a signed,
written request for surrender, satisfactory to the Company, to the Principal
office. The amount payable to the Owner upon surrender will be based on the
Contract's Accumulated Value as of the Valuation Date on which the request and
the Contract are received at the Principal Office.
After the Annuity Date, only Contracts under which a commutable period certain
option was elected may be surrendered. The Surrender Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
25
<PAGE>
E. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must send a signed, written request for withdrawal, satisfactory to
the Company, to the Company's Principal Office. The written request must
indicate the dollar amount the Owner wishes to receive and the accounts from
which such amount is to be withdrawn. The amount withdrawn equals the amount
requested by the Owner plus any applicable contingent deferred sales charge, as
described under "CHARGES AND DEDUCTIONS." In addition, amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment, as described under "GUARANTEE
PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "D. Surrender."
After the Annuity Date, only a Contract under which a commutable period certain
option was elected may have withdrawals taken. A withdrawal after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program." For important
tax consequences which may result from withdrawals, see "FEDERAL TAX
CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of withdrawals
("systematic withdrawals") from amounts in the Sub-Accounts and/or the Fixed
Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who is also
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option, by
returning a properly signed LED request form to the Principal Office. The LED
option permits the Owner to make systematic withdrawals from the Contract over
his or her lifetime. The amount withdrawn from the Contract changes each year,
because life expectancy changes each year that a person lives. For example,
actuarial tables indicate that a person age 70 has a life expectancy of 16
years, but a person who attains age 86 has a life expectancy of another 6.5
years.
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If an Owner elects the LED option, in each Contract year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner also may elect to receive distributions under an LED
option which is determined on the joint life expectancy of the Owner and a
beneficiary. The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or
annual distributions, and may terminate the LED option at any time. The LED
Option will terminate automatically on the maximum Annuity Date permitted under
the Contract at which time an Annuity Option must be elected. The Company also
may offer other systematic withdrawal options.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS, B. Taxation of the Contracts in General."
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "D. Surrender" and "E.
Withdrawal" under "DESCRIPTION OF THE CONTRACT," and "FEDERAL TAX
CONSIDERATIONS."
F. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided in "G. The Spouse of the
Owner as Beneficiary." The amount of the death benefit and the time requirements
for receipt of payment may vary depending upon whether the Annuitant or an Owner
dies first, and whether death occurs prior to or after the Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (a) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (b) gross payments, decreased proportionately
to reflect withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (c) the death benefit that would
have been payable on the most recent contract anniversary, increased for
subsequent payments and decreased proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract remains in force and
prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken. See APPENDIX C, "DIFFERENCES
UNDER THE DELAWARE MEDALLION I VARIABLE ANNUITY CONTRACT" for specific examples
of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If an
Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by
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any positive Market Value Adjustment. The death benefit never will be reduced by
a negative Market Value Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period not more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Cash Reserve Series. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Cash Reserve Series. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
G. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon the death of
the Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Cash Reserve Series; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value also will be added to the Cash
Reserve Series. Additional payments may be made; however, a surrender charge
will apply to these amounts. All other rights and benefits provided in the
Contract will continue, except that any subsequent spouse of such new Owner will
not be entitled to continue the Contract upon such new Owner's death.
H. ASSIGNMENT
The Contract, other than that sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment. For important tax
consequences which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
I. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under; or (2) within ten years from the issue date of the
Contract and before the Annuitant's
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90th birthday, if the Annuitant's age on the issue date is between 76 and 90.
The Owner may elect to change the Annuity Date by sending a request to the
Principal Office at least one month before the Annuity date. The new Annuity
Date must be the first day of any month occurring before the Annuitant's 90th
birthday, and must be within the life expectancy of the Annuitant. The Company
shall determine such life expectancy at the time a change in Annuity Date is
requested. The Code and the terms of qualified plans impose limitations on the
age at which annuity benefit payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the accounts
selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the Fixed Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required under some state laws). The Company reserves
the right to increase these minimum amounts. If the annuity payout option
selected does not produce an initial payment which meets this minimum, a single
payment will be made. Once the Company begins making annuity benefit payments,
the Annuitant cannot make withdrawals or surrender the annuity except in the
case where a commutable period certain option has been elected. Only
beneficiaries entitled to receive remaining payments for a "period certain" may
elect to instead receive a lump sum settlement.
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
J. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity options may be funded through the Decatur Total
Return Series, the Delaware Series, and the Capital Reserves Series. The Company
also provides these same options funded through the Fixed Account (fixed annuity
payout option). Regardless of how payments were allocated during the
accumulation period, any of the variable annuity payout options or the fixed
payout options may be selected, or any of the variable annuity payout options
may be selected in combination with any of the fixed annuity payout options.
Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This is a
variable annuity payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
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UNIT REFUND VARIABLE LIFE ANNUITY. This is a variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2), then periodic variable annuity benefit payments will continue to
the beneficiary until the number of such payments equals the number determined
in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the
dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the
payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continuing during
the lifetime of the survivor. The amount of each payment to the survivor is
based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This is a variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant or the beneficiary in
the Contract. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity provides periodic
payments for a stipulated number of years ranging from one to 30. This option
may be commutable, that is, the payee reserves the right to receive a lump sum
in place of installments, or it becomes noncommutable. The payee must reserve
this right at the time benefits begin.
The period certain option does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made. Although not
contractually required to do so, the Company currently follows a practice of
permitting persons receiving payments under the period certain option to elect
to convert to a variable annuity involving a life contingency. The Company may
discontinue or change this practice at any time, but not with respect to
election of the option made prior to the date of any change in this practice.
See "FEDERAL TAX CONSIDERATIONS" for a discussion of the possible adverse tax
consequences of selecting a period certain option.
K. ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and non-commutable period certain options of ten or more
years (six or more years under New York contracts), the annuity value is the
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Accumulated Value less any premium taxes and adjusted for any Market Value
Adjustment. For commutable period certain options or any period certain option
less than ten years (less than six years under New York Contracts), the value is
the Surrender Value less any premium tax. For a death benefit annuity, the
annuity value will be the amount of the death benefit. The annuity rates in the
Contract are based on a modification of the 1983(a) Individual Mortality Table
on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "L. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
(six or more under New York Contracts) is determined by multiplying (1) the
Accumulated Value applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years (less than six under New York Contracts), the Surrender Value less premium
taxes, if any, is used rather than the Accumulated Value. The dollar amount of
the first variable annuity benefit payment is then divided by the value of an
Annuity Unit of the selected Sub-Accounts to determine the number of Annuity
Units represented by the first payment. This number of Annuity Units remains
fixed under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity unit on the applicable Valuation Date.
After the first payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Accounts. The dollar amount of each fixed amount
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
From time to time, the Company may offer the Owner both fixed and variable
annuity rates more favorable than those contained in the Contract. Any such
rates will be applied uniformly to all Owners of the same class. For an
illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
L. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
M. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected by
the Owner. Allocations to the Sub-Accounts are credited to the Contract in the
form of Accumulation Units. Accumulation Units are
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credited separately for each Sub-Account. The number of Accumulation Units of
each Sub-Account credited to the Contract is equal to the portion of the net
payment allocated to the Sub-Account, divided by the dollar value of the
applicable Accumulation Unit as of the Valuation Date the payment is received at
the Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account, and will reflect
the investment performance, expenses and charges of its Underlying Funds. The
value of an Accumulation Unit was set at $1.00 on the first Valuation Date for
each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets, and
(4) is an administrative charge 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
an hypothetical example see the SAI. Subject to compliance with applicable state
and federal law, the Company reserves the right to change the methodology for
determining the net investment factor.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectus and the SAI of DGPF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
phase and the annuity payout phase. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives, and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
payout phase on all Contracts, including those that do not involve a life
contingency, even though the Company does not bear direct mortality risk with
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
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If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses, and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Funds, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Funds. The prospectus and SAI of
DGPF contain additional information concerning expenses of the Underlying Funds.
B. CONTRACT FEE
Currently, a $30 Contract fee is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for a Contract issued to and maintained by
the trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract fee will be deducted from
the value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the class of
"eligible persons" as defined in the "Reduction or Elimination of Surrender
Charge" provision below.
C. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
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(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for the Contract at the time the payments are
received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge, however, is deducted from the
Accumulated Value of the Contract in the case of surrender and/or withdrawal of
the Contract or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments -- accumulated payments not defined as New Payments;
and (3) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any contingent deferred sales charge, surrenders will
be deemed to be taken first from amounts available as a Withdrawal Without
Surrender Charge, if any, then from Old Payments, and then from New Payments.
Amounts available as a Withdrawal Without Surrender Charge followed by Old
Payments may be withdrawn from the Contract at any time without the imposition
of a contingent deferred sales charge. If a withdrawal is attributable all or in
part to New Payments, a contingent deferred sales charge may apply.
CHARGE FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New
Payments are withdrawn, while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
The contingent deferred sales charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
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<PAGE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total contingent deferred sales charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable contingent deferred sales charges for surrender, withdrawals
and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. The Company will waive the
contingent deferred sales charge in the event that an Owner (or the Annuitant,
if the Owner is not an individual) becomes physically disabled after the issue
date of the Contract and before attaining age 65. Under New York Contracts, the
disability also must exist for a continuous period of at least 4 months. The
Company may require proof of such disability and continuing disability,
including written confirmation of receipt and approval of any claim for Social
Security Disability Benefits, and reserves the right to obtain an examination by
a licensed physician of its choice and at its expense. In addition, except in
New York where not permitted by state law, the Company will waive the contingent
deferred sales charge in the event that an Owner (or the Annuitant, if the Owner
is not an individual) is: (1) admitted to a medical care facility after the
issue date of the Contract and remains confined there until the later of one
year after the issue date or 90 consecutive days or (2) first diagnosed by a
licensed physician as having a fatal illness after the issue date of the
Contract;
For purposes of the above provision, "medical care facility" means any
state-licensed facility (or, in a state that does not require licensing a
facility that is operating pursuant to state law), providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where contingent deferred sales charges have been waived under any one of the
three situations discussed above, no additional payments under the Contract will
be accepted unless required by state law.
In addition, where permitted under state law, from time to time the Company may
allow a reduction in or elimination of the contingent deferred sales charge, the
period during which the charge applies, or both, and/or credit additional
amounts on the Contract when the Contract is sold to individuals or groups of
individuals in a manner that reduces sales expenses. The Company will consider
factors such as the following: (1) the size and type of group or class, and the
persistency expected from that group or class; (2) the total amount of payments
to be received and the manner in which payments are remitted; (3) the purpose
for which the Contract is being purchased and whether that purpose makes it
likely that costs and expenses will be reduced; (4) other transactions where
sales expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker- dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
the Contract in connection with financial planning services offered on a
fee-for-service basis). The Company also may reduce or waive the contingent
sales charge and/or credit additional amounts on the Contract where either the
Owner or the Annuitant on the issue date are within the following classes of
individuals ("eligible persons"): employees and registered representatives of
any broker-dealer which has entered into a sales agreement with the Company to
sell the Contract; an employee of the Company, its affiliates or subsidiaries;
officers, directors, trustees and employees of any of the Underlying Funds,
investment managers or Sub-Advisers; and the spouses of and immediate family
members residing in the same household with such eligible persons. "Immediate
family members" means children, siblings, parents and grandparents. Finally, if
permitted under state law, contingent deferred sales charges may be waived under
Section 403(b) Contracts where the amount withdrawn is being contributed to a
life insurance policy issued by the Company as part of the individual's Section
403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to the charge where prohibited
by law.
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Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
annuity contracts issued by the Company for the Contract. See "EXCHANGE OFFER"
in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: The Accumulated Value as of the Valuation Date coincident
with or next following the date of receipt of the request
for withdrawal, reduced by total gross payments not
previously redeemed ("Cumulative Earnings");
Where (2) is: 15% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of
the request for withdrawal, reduced by the total amount
of any prior withdrawals made in the same calendar year
to which no contingent deferred sales charge was applied;
and
Where (3) is: The amount calculated under the Company's life expectancy
distribution Option (see "Life Expectancy Distributions")
whether or not the withdrawal was part of such
distribution (applies only if Annuitant is also an
Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will be deducted first from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a LIFO basis. If more than one withdrawal is made during
the year, on each subsequent withdrawal the Company will waive the contingent
deferred sales charge, if any, until the entire Withdrawal Without Surrender
Charge has been withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding and adjusted for any applicable Market Value
Adjustment. Subject to the same rules that are applicable to withdrawals, the
Company will not assess a contingent deferred sales charge on an amount equal to
the greatest Withdrawal Without Surrender Charge amount available.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the Accumulated Value under the Contract to other
contracts issued by the Company and owned by the trustee, with no deduction for
any otherwise applicable contingent deferred sales charge. Any such reallocation
will be at the Accumulation Unit values for the Sub-Accounts as of the valuation
date on which a written, signed request is received at the Principal Office.
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<PAGE>
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS." If an owner of
an existing fixed annuity contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed contract for the Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
Owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 ("the 1933 Act") or the 1940 Act. Accordingly, the staff of the SEC
has not reviewed the disclosures in this Prospectus relating to the Guarantee
Period Accounts or the Fixed Account. Nevertheless, disclosures regarding the
Guarantee Period Accounts and the Fixed Account of this annuity Contract or any
benefits offered under these accounts may be subject to the provisions of the
1933 Act relating to the accuracy and completeness of statements made in this
Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when the Contract initially was issued, and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date (subject to the
Fixed Account limitations in some states; see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT"). Transfers from a Guarantee Period Account on any date
other than on the day following the expiration of that Guarantee Period will be
subject to a Market Value Adjustment. The Company establishes a separate
investment account each time the Owner allocates or transfers amounts to a
Guarantee Period except that amounts allocated to the same Guarantee Period on
the same day will be treated as one Guarantee Period Account. The minimum that
may be allocated to establish a Guarantee Period Account is $1,000. If less than
$1,000 is allocated, the Company reserves the right to apply
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<PAGE>
that amount to the Cash Reserve Series. 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, unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date, or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Cash Reserve Series. Where amounts have been
renewed automatically in a new Guarantee Period Account, the Company will
transfer monies out of the renewed Guarantee Period Account without application
of a Market Value Adjustment if the Owner's request is received within ten days
of the renewal date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit." A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any Surrender Charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation
Date to the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see "APPENDIX B."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the
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initial payment that must be allocated to the Guarantee Period selected,
assuming no transfers or withdrawals, in order to ensure that on the last day of
the Guarantee Period it will equal the amount of the entire initial payment. The
required amount then will be allocated to the pre-selected Guarantee Period
Account and the remaining balance to the other investment options selected by
the Owner in accordance with the procedures described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "D. Surrender" and "E. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
owner, annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the
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<PAGE>
investments are not adequately diversified, the income on a contract, for any
taxable year of the owner, would be treated as ordinary income received or
accrued by the owner. It is anticipated that the Series of DGPF will comply with
the current diversification requirements. In the event that future IRS
regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in the
Contract's Accumulated Value is not taxable to the Owner until it is withdrawn
from the Contract. If the Contract is surrendered or amounts are withdrawn prior
to the annuity date, any withdrawal of investment gain in value over the cost
basis of the Contract will be taxed as ordinary income. Under the current
provisions of the Code, amounts received under an annuity contract prior to
annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
Contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are commenced
under the Contract, generally a portion of each payment may be excluded from
gross income. The excludable portion generally is determined by a formula that
establishes the ratio that the investment in the Contract bears to the expected
return under the Contract. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all investment in the
Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification,
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other than by reason of death or disability, of distributions which are part of
a series of substantially equal periodic payments that occurs before the Owner's
age 59 1/2 or five years, will subject the Owner to the 10% penalty tax on the
prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72. In addition, plan assets are treated as property of the employer,
and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Contract
made before or after certain dates.
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D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of a non-qualified
Contract. Individuals purchasing a qualified Contract should review carefully
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408(b) 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 revoke the Contract as described in this
Prospectus. See "B. Right to Revoke Individual Retirement Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES (TSAS). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
42
<PAGE>
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the Owner containing a statement of his or her account, including unit
values and other information as required by applicable law, rules and
regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., Contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated instead to the Cash Reserve
Sub-Account.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for, the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund no longer are available for investment or if, in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Contract interest in a Sub-Account without notice
to the Owner and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Variable
Account may, to the extent permitted by law, purchase other securities for other
Contracts or permit a conversion between Contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
underlying fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Funds also are issued to other unaffiliated insurance
companies which issue variable annuities and variable life contracts ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life
43
<PAGE>
owners or variable annuity owners. Although currently the Company and the DGPF
do not foresee any such disadvantages to either variable life insurance owners
or variable annuity owners, the Company and DGPF intend to monitor events in
order to identify any material conflicts between such Owners and to determine
what action, if any, should be taken in response thereto. If it were concluded
that separate funds should be established for variable life and variable annuity
separate accounts, the Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change and will notify Owners of all such changes. If the Company deems it to be
in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Account may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying Fund, together with a form
with which to give voting instructions to the Company. Shares for which no
timely instructions are received will be voted in proportion to the instructions
which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to the Contract in the same proportion. If
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Contract, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Fund. During the
accumulation period, the number of Underlying Fund shares attributable to each
Owner will be determined by dividing the dollar value of the Accumulation Units
of the Sub-Account credited to the Contract by the net asset value of one
Underlying Fund share.
During the annuity payout phase, the number of Underlying Fund shares
attributable to each Annuitant will be determined by dividing the reserve held
in each Sub-Account for the Annuitant's variable annuity by the net asset value
of one Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 and members of the National Association of Securities
Dealers, Inc. (the "NASD.") The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contract. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
44
<PAGE>
The Company pays commissions, not to exceed 6.0% of purchase payments, to
broker-dealers which sell the Contract. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of Contract value. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on a Contract will be retained by the Company.
Owners may direct any inquiries to their financial adviser or to Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-366-1492.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
45
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in the Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
separate account. Allocations to the Fixed Account become part of the assets of
the Company and are used to support insurance and annuity obligations. A portion
or all of net purchase payments may be allocated to accumulate at a fixed rate
of interest in the Fixed Account. Such net amounts are guaranteed by the Company
as to principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If a Contract is surrendered, or if an amount in excess of the Withdrawal
Without Surrender Charge is withdrawn, while the Contract is in force and before
the Annuity Date, a contingent deferred sales charge is imposed if such event
occurs before the payments attributable to the surrender or withdrawal have been
credited to the Contract for at least seven full Contract years.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge Amount is equal to the greater of 15% of the Accumulated Value
or the accumulated earnings in the Contract. The table below presents examples
of the surrender charge resulting from a full surrender based on hypothetical
Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL
ACCUMULATED WITHOUT SURRENDER SURRENDER CHARGE SURRENDER
CONTRACT YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 45,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to
the greater of 15% of the current Accumulated Value or the accumulated earnings
in the Contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals of the
Owner's account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL
ACCUMULATED WITHOUT SURRENDER SURRENDER CHARGE SURRENDER
CONTRACT YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365) - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
B-1
<PAGE>
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)](n/365) - 1
= [(1+.08)/(1+.10)](2555/365) - 1
= (.98182)(7) - 1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 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)](n/365) - 1
= [(1+.08)/(1+.07)](2555/365) - 1
= (1.0093)(7) - 1
= .06694
The market value adjustment = the market value factor multiplied by the withdrawal
= .06694 X $62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.11)](2555/365) - 1
= (.97297)(7) - 1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the negative of the excess interest earned
over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= - $8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.06)](2555/365) - 1
= (1.01887)(7) - 1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
APPENDIX C
DIFFERENCES UNDER THE DELAWARE MEDALLION I
VARIABLE ANNUITY
(FORM A3019-94GRC)
1. The Guarantee Period Accounts are not available under Form A3019-94GRC.
2. The waiver of surrender charge offered under the Delaware Medallion III
Contract (Form A3025-96GRC) for disability prior to age 65, fatal illness or
confinement to a medical care facility is not available under A3019-94GRC. Note:
only the disability waiver is available in NewYork under A3025-96GRC.
3. Joint Owners are not permitted under A3019-94GRC.
4. The death benefit under A3019-94GRC that is payable upon the death of the
Owner/Annuitant is "stepped up" every fifth year rather than annually. Stated
another way, the highest accumulated value on any fifth year anniversary is
locked in rather than the highest accumulated value on any policy anniversary.
In addition, under the death benefit in 3018-94, gross payments are simply
reduced by subsequent withdrawals by subtracting the amount of the withdrawal
from the total gross payments. Under A3025-96, gross payments are reduced
proportionately by withdrawals (in the same proportion that the Accumulated
Value is reduced by the withdrawal.)
5. A3019-94 allows the Owner, in each calendar year, to withdraw without a
surrender charge the greater of (1) 10% of the Accumulated Value as of December
31 of the prior calendar year (in the first calendar year, the amount is 10% of
gross payments), and (2) the life expectancy distribution. The Withdrawal
Without Surrender Charge amount is deducted first from Old Payments, then from
New Payments in the order that such payments were received pursuant to the FIFO
(first-in-first-out) method of accounting.
6. The following transfer provision applies to Form A3019-94GRC:
At any time prior to Annuity Date, subject to the Company's current rules, an
Owner may have amounts transferred among the Sub-Accounts or from the
Sub-Accounts to the General Account. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer request. The
Company will make transfers pursuant to a written request, or, if a properly
completed authorization, is on file pursuant to a telephone request.
Except for General Account transfers made under the automatic transfer option
(Dollar Cost Averaging), transfers from the General Account will only be
permitted if there has been at least a ninety (90) day period since the last
transfer from the General Account and the amount transferred from the General
Account in each transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value under the Policy.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred; (2) the minimum
amount that must remain in a Sub-Account following a transfer; (3) the minimum
period of time between transfers involving the General Account; and (4) the
maximum amount that may be transferred.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT
REBALANCING. The Owner may elect automatic transfers of a predetermined amount,
not less than $100, on a periodic basis (monthly, bimonthly, quarterly,
semi-annually or annually) from the Capital Reserve Series, the Strategic Income
Series, the Cash Reserve Series (the "source account") to one or more of the
Sub-Accounts. Automatic transfers may not be made into the General Account or,
if applicable, the Sub-Account being used as the source account. The General
Account also may be used as the source account from which monthly, bi-monthly or
quarterly automatic transfers will be made to any of the Sub-Accounts provided
that (1) the amount of each monthly
C-1
<PAGE>
transfer cannot exceed 10% of the Policy value in the General Account as of the
date of the first transfer; (2) each bimonthly transfer cannot exceed 20% of the
Policy value in the General Accounts of the date of the first transfer; and (3)
each quarterly transfer cannot exceed 25% of Policy value in the General Account
as of the date of the first transfer. If an automatic transfer would reduce the
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Sub-Accounts. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as requested by the Owner, the
Company will review the percentage allocations in the Sub-Accounts and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue until the Owner's request to terminate or change the option is
received by the Company. As such, subsequent Payments allocated in a manner
different from the percentage allocation mix in effect on the date the payment
is received will be allocated in accordance with the existing mix on the next
scheduled date unless the Owner's timely request to change the mix or terminate
the option is received by the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Policy year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge each Policy year. Currently automatic transfers and automatic rebalancing
may not be in effect simultaneously.
7. The contingent deferred sales charge under 3019-94GRC is:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- ---------------------------
<S> <C>
0-3 7.0%
4 6.0%
5 5.0%
6 4.0%
7 3.0%
More than 7 0%
</TABLE>
8. Because of the differences between the contingent deferred sales charge (see
7. above) and the amount of the free withdrawal (see 5. above), the following
example (a) applies to Owners of 3019-94GRC contract, and should be referred to
rather than example (a) on page 13 of this Prospectus.
C-2
<PAGE>
(a) If the Contract is surrendered or annuitized* under a commutable period
certain option or a non-commutable certain option of less than ten years at the
end of the applicable period, you would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series.................................................. $86 $135 $165 $244
Devon Series................................................................. $87 $137 $170 $253
DelCap Series................................................................ $88 $139 $172 $258
Social Awareness Series...................................................... $88 $139 $172 $258
REIT Series.................................................................. $88 $139 $172 $258
Small Cap Value Series....................................................... $88 $139 $172 $258
Trend Series................................................................. $88 $139 $172 $258
International Equity Series.................................................. $88 $140 $174 $263
Emerging Markets Series...................................................... $94 $157 $203 $322
Delaware Series.............................................................. $86 $134 $163 $240
Convertible Securities Series................................................ $88 $139 $172 $258
Delchester Series............................................................ $86 $135 $165 $243
Capital Reserves Series...................................................... $87 $136 $167 $248
Strategic Income Series...................................................... $87 $137 $170 $253
Cash Reserve Series.......................................................... $86 $133 $162 $237
Global Bond Series........................................................... $88 $139 $172 $258
</TABLE>
C-3
