<PAGE>
File Nos. 33-71054
811-8814
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Post-Effective Amendment No. 10
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
First Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to Paragraph (b) of Rule 485
---
X on May 1, 1999 pursuant to Paragraph (b) of Rule 485
---
60 days after filing pursuant to Paragraph (a) (1) of Rule 485
---
on (date) pursuant to Paragraph (a) (1) of Rule 485
---
this post-effective amendment designates a new effective
--- date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("the 1933
Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31,
1998 was filed on or before March 30, 1999.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
1. . . . . . . . . .Cover Page
2. . . . . . . . . .Special Terms
3. . . . . . . . . .Prospectus A: Summary of Fees and Expenses; Summary of
Contract Features
Prospectus B: Summary of Fees and Expenses; Summary of
Policy Features
4. . . . . . . . . .Condensed Financial Information; Performance Information
5. . . . . . . . . .Description of the Companies, the Variable Accounts, and
Delaware Group Premium Fund, Inc.
6. . . . . . . . . .Charges and Deductions
7. . . . . . . . . .Description of the Contract
8. . . . . . . . . .Electing the Form of Annuity and the Annuity Date;
Description of Variable Annuity Payout Options; Annuity
Benefit Payments
9. . . . . . . . . .Death Benefit
10 . . . . . . . . .Payments; Computation of Values
11 . . . . . . . . .Surrender; Withdrawals; Charge for Surrender and
Withdrawal; Withdrawal without Surrender Charge; Texas
Optional Retirement Program
12 . . . . . . . . .Federal Tax Considerations
13 . . . . . . . . .Legal Matters
14 . . . . . . . . .Statement of Additional Information-Table of Contents
FORM N-4 ITEM NO.. .CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
15 . . . . . . . . .Cover Page
16 . . . . . . . . .Table of Contents
17 . . . . . . . . .General Information and History
18 . . . . . . . . .Services
19 . . . . . . . . .Underwriters
20.. . . . . . . . .Underwriters
21 . . . . . . . . .Performance Information
22 . . . . . . . . .Annuity Benefit Payments
23 . . . . . . . . .Financial Statements
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
DELAWARE MEDALLION III
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1999 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
(the contract owner) and Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or First Allmerica Financial
Life Insurance Company (for contracts issued in Hawaii and New York). 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 17 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 deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, 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 pre-tax 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) periodic payments for your lifetime; (2) periodic payments for your
lifetime, but for not less than 10 years; (3) periodic payments for your
lifetime with the guarantee that if payments to you are less than the
accumulated value at annuitization, a refund of the remaining value will be
paid; (4) periodic payments for your lifetime and your survivor's lifetime; (5)
periodic payments guaranteed for your lifetime and your survivor's lifetime with
the payment to the survivor being reduced to 2/3; and (6) periodic payments for
a specified period of 1 to 30 years. Other annuity options may be offered by the
Company.
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.
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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 ($1,000 in Washington). In all cases, each subsequent payment must be
at least $50.
4. INVESTMENT OPTIONS
You may allocate money to the Sub-Accounts investing in the following investment
series:
<TABLE>
<S> <C>
Growth & Income Series Emerging Markets Series
Devon Series Delaware Balanced Series
DelCap Series Convertible Securities Series
Aggressive Growth Series Delchester Series
Social Awareness Series Capital Reserves Series
REIT Series Strategic Income Series
Small Cap Value Series Cash Reserve Series
Trend Series Global Bond Series
International Equity 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 on
the date the fee is assessed or if the contract is issued to and maintained by
the Trustees of a 401(k) plan. We also deduct insurance charges at a total
annual rate of 1.40% of the average 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. In addition, if you elect the optional Minimum
Guaranteed Annuity Payout Rider, we will deduct a monthly charge against the
accumulated value of your contract at an annual rate of 0.25% for a rider with a
ten-year waiting period and at an annual rate of 0.15% for a rider with a
fifteen-year waiting period.
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 annual $30
contract fee (which is represented as 0.03%), the 1.40% insurance charges and
the investment charges for each investment series. Optional rider charges are
not included. 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,
surrender charges are assessed in addition to the Total Annual Charges. For year
10, the example shows the aggregate of all the annual charges assessed for 10
years, without a surrender charge. The premium tax is assumed to be 0%
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in both examples. The following chart does not reflect the optional Minimum
Guaranteed Annuity Payout Rider charge which, if elected, would increase the
Total Annual Insurance Charges.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSE AT
THE END OF
TOTAL ANNUAL TOTAL ANNUAL TOTAL ------------------------
INSURANCE INVESTMENT ANNUAL (1) (2)
INVESTMENT SERIES CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- --------------------------------------------------------- --------------- --------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Growth & Income Series................................... 1.43% 0.75% 2.18% $ 83 $ 248
Devon Series............................................. 1.43% 0.71% 2.14% $ 83 $ 244
DelCap Series............................................ 1.43% 0.85% 2.28% $ 84 $ 258
Aggressive Growth 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% 0.95% 2.38% $ 85 $ 268
Emerging Markets Series.................................. 1.43% 1.50% 2.93% $ 90 $ 322
Delaware Balanced Series................................. 1.43% 0.75% 2.18% $ 83 $ 248
Convertible Securities Series............................ 1.43% 0.82% 2.25% $ 84 $ 255
Delchester Series........................................ 1.43% 0.75% 2.18% $ 83 $ 248
Capital Reserves Series.................................. 1.43% 0.69% 2.12% $ 82 $ 242
Strategic Income Series.................................. 1.43% 0.80% 2.23% $ 83 $ 253
Cash Reserve Series...................................... 1.43% 0.54% 1.97% $ 81 $ 226
Global Bond Series....................................... 1.43% 0.85% 2.28% $ 84 $ 258
</TABLE>
* The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
The charges reflect any expense reimbursement or fee waiver. For more detailed
information, see the Fee Table in the Prospectus.
6. TAXES
Under current tax rules, you do 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 may 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 years 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 nonnatural person.)
The surrender charges are also waived if after the contract is issued and before
you attain age 65, you become disabled. Under New York contracts, the disability
must also exist for a continuous period of at least four months. Also, except in
New York and New Jersey where not permitted by state law, you may receive your
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money without a surrender charge, if, after the contract is issued, you are
diagnosed with a fatal illness or are confined in a medical care facility for
the later of one year, or 90 days from issue.
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 Sub-Accounts investing in the underlying series you choose.
The first chart below illustrates past returns on a calendar year basis for each
of the 17 Delaware Group Premium Fund, Inc. Sub-Accounts of Allmerica Financial
Life Insurance and Annuity Company's Separate Account VA-K based on the
inception dates of each of the Sub-Accounts. The second chart illustrates the
same information for the 17 Sub-Accounts of First Allmerica Financial Life
Insurance Company's Separate Account VA-K. Each Company offers the same Sub-
Accounts, however, the Allmerica Financial Life Insurance and Annuity Company's
Separate Account VA-K has had Sub-Accounts investing in these series for a
longer period of time than the First Allmerica Financial Life Insurance
Company's Separate Account VA-K. The performance figures reflect the contract
fee, the insurance charges, and the investment charges and other expenses of the
underlying series. They do not reflect the surrender charges which, if applied,
would reduce such performance. In addition, they do not reflect the optional
Minimum Guaranteed Annuity Payout Rider charge which, if elected, would reduce
such performance. Please note that past performance is not a guarantee of future
results.
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION) OF ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
INVESTMENT SERIES 1998 1997 1996 1995 1994 1993
- -------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income Series.......... 9.15% 29.19% 19.00% 34.24% -1.61% 13.83%
Devon Series.................... 22.25% N/A N/A N/A N/A N/A
DelCap Series................... 16.78 % 13.28 % 12.83 % 27.74 % -4.90 % 10.01 %
Aggressive Growth Series........ N/A N/A N/A N/A N/A N/A
Social Awareness Series......... 13.81 % N/A N/A N/A N/A N/A
REIT Series..................... N/A N/A N/A N/A N/A N/A
Small Cap Value Series.......... -6.43 % 31.06 % 20.81 % 22.12 % -0.64 % N/A
Trend Series.................... 14.15 % 19.66 % 9.41 % 37.29 % -1.90 % N/A
International Equity Series..... 8.41 % 5.10 % 18.32 % 12.29 % 1.20 % 14.35 %
Emerging Markets Series......... -33.45 % N/A N/A N/A N/A N/A
Delaware Balanced Series........ 16.64 % 24.64 % 14.25 % 24.82 % -1.55 % 6.66 %
Convertible Securities Series... -2.55 % N/A N/A N/A N/A N/A
Delchester Series............... -3.48 % 12.04 % 11.17 % 13.89 % -4.23 % 14.71 %
Capital Reserves Series......... 5.21 % 6.09 % 2.55 % 12.57 % -4.05 % 6.32 %
Strategic Income Series......... 1.18 % N/A N/A N/A N/A N/A
Cash Reserve Series............. 3.58 % 3.62 % 3.43 % 4.09 % 2.21 % 1.04 %
Global Bond Series.............. 6.31 % -0.54 % N/A N/A N/A N/A
</TABLE>
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SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION) OF FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
--------------------------------------------------
INVESTMENT SERIES 1998 1997 1996 1995
- -------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series...................... 9.20% 29.19% 18.99% 34.23%
Devon Series................................ 22.21% N/A N/A N/A
DelCap Series............................... 16.89 % 13.28 % 12.82 % 27.73 %
Aggressive Growth Series.................... N/A N/A N/A N/A
Social Awareness Series..................... 13.80 % N/A N/A N/A
REIT Series................................. N/A N/A N/A N/A
Small Cap Value Series...................... -6.38 % 31.06 % 20.80 % 22.11 %
Trend Series................................ 14.14 % 19.66 % 9.40 % 37.28 %
International Equity Series................. 8.47 % 5.10 % 18.31 % 12.28 %
Emerging Markets Series..................... -33.42 % N/A N/A N/A
Delaware Balanced Series.................... 16.69 % 24.64 % 14.24 % 24.81 %
Convertible Securities Series............... -2.57 % N/A N/A N/A
Delchester Series........................... -3.59 % 12.04 % 11.16 % 13.88 %
Capital Reserves Series..................... 5.21 % 6.09 % 2.54 % 12.56 %
Strategic Income Series..................... 1.09 % N/A N/A N/A
Cash Reserve Series......................... 3.55 % 3.62 % 3.42 % 4.08 %
Global Bond Series.......................... 6.33 % -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 compounded daily at the annual rate of 5%, decreased proportionately to
reflect any prior withdrawals (in Hawaii and New York, the 5% compounding is not
available; therefore, (b) equals gross payments decreased proportionately to
reflect 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 compounded daily at the annual rate of 5%
(except in Hawaii and New York). 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 compounded daily at the
annual rate of 5% (except in Hawaii and New York) 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."
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.
There is no charge for this service.
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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.
There is no charge for this service.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge
and guarantees you a minimum amount of fixed annuity lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout benefit base (less any applicable premium
taxes) is the value that will be annuitized should you exercise the rider. In
order to exercise the rider, a fixed annuitization option involving a life
contingency must be selected. Annuitization under this rider will occur at the
guaranteed annuity purchase rates listed under the Annuity Option Tables in your
contract. The minimum guaranteed annuity payout benefit base is equal to the
greatest of:
(a) the accumulated value increased by any positive market value adjustment,
if applicable; or
(b) the accumulated value on the effective date of the rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the
rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive market value adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
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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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus provides important information about
the Delaware Medallion III variable annuity contracts
issued by Allmerica Financial Life Insurance and
PLEASE READ THIS Annuity Company. The contract is a flexible payment
PROSPECTUS CAREFULLY tax-deferred combination variable and fixed annuity
BEFORE INVESTING AND offered on both a group and individual basis.
KEEP IT FOR FUTURE The Variable Account, known as Separate Account VA-K
REFERENCE. is subdivided into Sub- Accounts. Each Sub-Account
offered under this contract invests exclusively in
shares of one of the following series of Delaware
Group Premium Fund, Inc.:
<TABLE>
<C> <S> <C> <C>
ANNUITIES INVOLVE Growth & Income Series Small Cap Value Series Delchester Series
RISKS INCLUDING Devon Series Trend Series Capital Reserves Series
POSSIBLE LOSS OF DelCap Series International Equity Series Strategic Income Series
PRINCIPAL. Aggressive Growth Series Emerging Markets Series Cash Reserve Series
Social Awareness Series Delaware Balanced Series Global Bond Series
REIT Series Convertible Securities Series
</TABLE>
The Fixed Account is part of the Company's General
Account and pays an interest rate guaranteed for
one year from the time a payment is received. The
Guarantee Period Accounts offer fixed rates of
interest for specified periods ranging from 2 to
10 years. A Market Value Adjustment is applied to
payments removed from a Guarantee Period Account
before the end of the specified period. The Market
THIS ANNUITY IS Value Adjustment may be positive or negative.
NOT: Payments allocated to a Guarantee Period Account
- A BANK DEPOSIT OR GPA are held in the Company's Separate Account.
OBLIGATION; A Statement of Additional Information dated May 1,
- FEDERALLY INSURED; 1999 containing more information about this
- ENDORSED BY ANY annuity is on file with the Securities and
BANK OR Exchange Commission and is incorporated by
GOVERNMENTAL reference into this Prospectus. A copy may be
AGENCY. obtained free of charge by completing the attached
request card or by calling Annuity Client Services
at 1-800-533-2124. The Table of Contents of the
Statement of Additional Information is listed on
page 3 of this Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 4
SUMMARY OF FEES AND EXPENSES.......................................................... 6
SUMMARY OF CONTRACT FEATURES.......................................................... 11
PERFORMANCE INFORMATION............................................................... 17
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND DELAWARE GROUP PREMIUM FUND,
INC.................................................................................. 18
INVESTMENT OBJECTIVES AND POLICIES.................................................... 20
INVESTMENT ADVISORY SERVICES TO DGPF.................................................. 21
DESCRIPTION OF THE CONTRACT........................................................... 22
A. Payments........................................................................ 22
B. Right to Cancel Individual Retirement Annuity................................... 23
C. Right to Cancel All Other Contracts............................................. 23
D. Transfer Privilege.............................................................. 23
Automatic Transfers and Automatic Account Rebalancing Options................. 24
E. Surrender....................................................................... 24
F. Withdrawals..................................................................... 25
Systematic Withdrawals........................................................ 25
Life Expectancy Distributions................................................. 26
G. Death Benefit................................................................... 26
Death of the Annuitant Prior to the Annuity Date.............................. 26
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........................ 27
Death of the Annuitant On or After the Annuity Date........................... 27
H. The Spouse of the Owner as Beneficiary.......................................... 28
I. Assignment...................................................................... 28
J. Electing the Form of Annuity and the Annuity Date............................... 28
K. Description of Variable Annuity Payout Options.................................. 29
L. Annuity Benefit Payments........................................................ 30
Determination of the First Variable Annuity Benefit Payment................... 30
The Annuity Unit.............................................................. 30
Determination of the Number of Annuity Units.................................. 31
Dollar Amount of Subsequent Variable Annuity Benefit Payments................. 31
M. Optional Minimum Guaranteed Annuity Payout Rider................................. 31
N. NORRIS Decision................................................................. 33
O. Computation of Values........................................................... 33
The Accumulation Unit......................................................... 33
Net Investment Factor......................................................... 34
CHARGES AND DEDUCTIONS................................................................ 34
A. Variable Account Deductions..................................................... 34
Mortality and Expense Risk Charge............................................. 34
Administrative Expense Charge................................................. 35
Other Charges................................................................. 35
B. Contract Fee.................................................................... 35
C. Optional Minimum Guaranteed Annuity Payout Rider Charge......................... 35
D. Premium Taxes................................................................... 36
E. Surrender Charge................................................................ 36
Charge for Surrender and Withdrawal........................................... 36
Reduction or Elimination of Surrender Charge and Additional Amounts
Credited...................................................................... 37
Withdrawal Without Surrender Charge........................................... 38
Surrenders.................................................................... 39
Charge at the Time Annuity Benefit Payments Begin............................. 39
</TABLE>
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<TABLE>
<S> <C>
E. Transfer Charge................................................................. 39
GUARANTEE PERIOD ACCOUNTS............................................................. 39
FEDERAL TAX CONSIDERATIONS............................................................ 41
A. Qualified and Non-Qualified Contracts........................................... 42
B. Taxation of the Contracts in General............................................ 43
Withdrawals Prior to Annuitization............................................ 43
Annuity Payouts After Annuitization........................................... 43
Penalty on Distribution....................................................... 43
Assignments or Transfers...................................................... 44
Nonnatural Owners............................................................. 44
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 44
C. Tax Withholding................................................................. 44
D. Provisions Applicable to Qualified Employer Plans............................... 44
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 44
Individual Retirement Annuities............................................... 45
Tax-Sheltered Annuities....................................................... 45
Texas Optional Retirement Program............................................. 45
STATEMENTS AND REPORTS................................................................ 45
LOANS (QUALIFIED CONTRACTS ONLY)...................................................... 46
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 46
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 47
VOTING RIGHTS......................................................................... 47
DISTRIBUTION.......................................................................... 47
LEGAL MATTERS......................................................................... 48
YEAR 2000 COMPLIANCE.................................................................. 48
FURTHER INFORMATION................................................................... 49
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................................ A-1
APPENDIX B -- PERFOMANCE TABLES (ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY)............................................................................. B-1
APPENDIX C -- PEFORMANCE TABLES (FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY).... C-1
APPENDIX D -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT....................... D-1
APPENDIX E -- THE DEATH BENEFIT....................................................... E-1
APPENDIX F -- CONDENSED FINANCIAL INFORMATION......................................... F-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................... 2
TAXATION OF THE CONTRACT, THE SEPARATE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................................. 3
UNDERWRITERS......................................................................... 3
ANNUITY BENEFIT PAYMENTS............................................................. 4
EXCHANGE OFFER....................................................................... 6
PERFORMANCE INFORMATION.............................................................. 8
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus 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 unit of measure used to calculate the value of 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. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: An investment option under the Contract that guarantees principal
and a fixed interest rate, and which is part of the Company's General Account.
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.
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 (OR YOU): 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 investing 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, surrender charge, and Market Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, REIT Series, Small
Cap Value Series, Trend Series, International
4
<PAGE>
Equity Series, Emerging Markets Series, Delaware Balanced Series, Convertible
Securities Series, Delchester Series, Capital Reserves Series, Strategic Income
Series, Cash Reserve Series, and Global Bond Series of Delaware Group Premium
Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading and, on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current unit value of the Sub-Accounts may be affected
materially.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and 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.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Delaware
Medallion III Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual 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 "D.
Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
(1) CONTRACT CHARGES: PAYMENT CHARGE
------------ -----------
<S> <C> <C>
SURRENDER CHARGE:* 0 - 1 7.0%
This charge may be assessed upon surrender, 2 6.0%
withdrawal or annuitization under any 3 5.0%
commutable period certain option or a 4 4.0%
noncommutable period certain option of less 5 3.0%
than ten years. The charge is a percentage of 6 2.0%
payments applied to the amount surrendered (in 7 1.0%
excess of any amount that is free of surrender More than 7 0.0%
charge) within the 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.
ANNUAL CONTRACT FEE: $30
The fee is deducted annually and upon
surrender 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.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly
basis at the end of each month.)
On an annual basis as a percentage of
Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity Payout 0.25%
Rider with ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout 0.15%
Rider with a fifteen-year waiting period:
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average
daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----------
Total Asset Charges: 1.40%
</TABLE>
6
<PAGE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
(3) ANNUAL FUND EXPENSES: The following table shows the expenses of the
Underlying Series as a percentage of average net assets for the year ended
December 31, 1998 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1999). For more information concerning fees and
expenses, see the prospectus of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT
FEE TOTAL FUND
(AFTER ANY OTHER EXPENSES (AFTER EXPENSES (AFTER ANY
FUND VOLUNTARY WAIVERS) ANY REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ----------------------------------------------- -------------------- ----------------------- --------------------------
<S> <C> <C> <C>
Growth & Income Series......................... 0.64% 0.11% 0.75%(2)
Devon Series................................... 0.65% 0.06% 0.71%(2)
DelCap Series.................................. 0.74% 0.11% 0.85%(1)(2)
Aggressive Growth Series(@).................... 0.68% 0.17% 0.85%(1)(2)
Social Awareness Series........................ 0.71% 0.14% 0.85%(1)(2)
REIT Series(@)................................. 0.58% 0.27% 0.85%(1)(2)
Small Cap Value Series......................... 0.75% 0.10% 0.85%(2)
Trend Series................................... 0.75% 0.10% 0.85%(2)
International Equity Series.................... 0.82% 0.13% 0.95%(1)(2)
Emerging Markets Series........................ 1.08% 0.42% 1.50%(1)(2)
Delaware Balanced Series....................... 0.65% 0.10% 0.75%(2)
Convertible Securities Series.................. 0.75% 0.07% 0.82%(2)
Delchester Series.............................. 0.65% 0.10% 0.75%(2)
Capital Reserves Series........................ 0.50% 0.19% 0.69%(2)
Strategic Income Series........................ 0.64% 0.16% 0.80%(1)(2)
Cash Reserve Series............................ 0.45% 0.09% 0.54%(2)
Global Bond Series............................. 0.68% 0.17% 0.85%(1)(2)
</TABLE>
(@) The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
(1) For the fiscal year ended December 31, 1998, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.86% for DelCap Series, 0.89% for Social
Awareness Series, 1.02% for REIT Series, 1.67% for Emerging Markets Series,
0.81% for Strategic Income Series, 0.92% for Global Bond Series, 0.98% for
International Equity Series and are anticipated to be 0.92% for Aggressive
Growth Series.
(2) The investment adviser for the Growth & Income Series (formerly known as
"Decatur Total Return Series"), Devon Series, DelCap Series, Aggressive Growth
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Balanced Series (formerly known as "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, 1999
through October 31, 1999, 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; 0.85% for
DelCap Series, Aggressive Growth Series, Social Awareness Series, REIT Series,
Small Cap Value Series, Trend Series, Convertible Securities
7
<PAGE>
Series and Global Bond Series and 0.80% for all other Series. The fee ratios
shown above have been restated, if necessary, to reflect the new voluntary
limitations which took effect on May 1, 1999. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds. Pursuant to a vote of the
Fund's shareholders on March 17, 1999, a new management fee structure based on
average daily net assets was approved. The above ratios have been restated to
reflect the new management fee structure which took effect on May 1, 1999.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. Pursuant to the rules of the Securities and
Exchange Commission ("SEC"), the Contract fee has been reflected in the examples
by a method intended to show the "average" impact of the Contract fee on an
investment in the Variable Account. The total Contract fees collected under the
Contracts by the Company are divided by the total average net assets
attributable to the Contracts. 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. 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.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF LESSER THAN THOSE SHOWN.
(1)(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 a 5%
annual return on assets and no Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 83 $ 113 $ 145 $ 248
Devon Series................................................................. $ 83 $ 112 $ 143 $ 244
DelCap Series................................................................ $ 84 $ 116 $ 150 $ 258
Aggressive Growth 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.................................................. $ 85 $ 119 $ 154 $ 268
Emerging Markets Series...................................................... $ 90 $ 135 $ 181 $ 322
Delaware Balanced Series..................................................... $ 83 $ 113 $ 145 $ 248
Convertible Securities Series................................................ $ 84 $ 115 $ 148 $ 255
Delchester Series............................................................ $ 83 $ 113 $ 145 $ 248
Capital Reserves Series...................................................... $ 82 $ 112 $ 142 $ 242
Strategic Income Series...................................................... $ 83 $ 115 $ 147 $ 253
Cash Reserve Series.......................................................... $ 81 $ 107 $ 134 $ 226
Global Bond Series........................................................... $ 84 $ 116 $ 150 $ 258
</TABLE>
8
<PAGE>
(1)(b) 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 a 5%
annual return on assets and election of a Minimum Guaranteed Annuity Payout
Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series $ 85 $ 121 $ 157 $ 273
Devon Series................................................................. $ 85 $ 120 $ 155 $ 269
DelCap Series................................................................ $ 86 $ 124 $ 162 $ 283
Aggressive Growth Series..................................................... $ 86 $ 124 $ 162 $ 283
Social Awareness Series...................................................... $ 86 $ 124 $ 162 $ 283
REIT Series.................................................................. $ 86 $ 124 $ 162 $ 283
Small Cap Value Series....................................................... $ 86 $ 124 $ 162 $ 283
Trend Series................................................................. $ 86 $ 124 $ 162 $ 283
International Equity Series.................................................. $ 87 $ 126 $ 167 $ 293
Emerging Markets Series...................................................... $ 92 $ 142 $ 193 $ 345
Delaware Balanced Series..................................................... $ 85 $ 121 $ 157 $ 273
Convertible Securities Series................................................ $ 86 $ 123 $ 160 $ 280
Delchester Series............................................................ $ 85 $ 121 $ 157 $ 273
Capital Reserves Series...................................................... $ 85 $ 119 $ 154 $ 267
Strategic Income Series...................................................... $ 86 $ 122 $ 159 $ 278
Cash Reserve Series.......................................................... $ 83 $ 115 $ 147 $ 252
Global Bond Series........................................................... $ 86 $ 124 $ 162 $ 283
</TABLE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable 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 and no
Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 22 $ 67 $ 115 $ 248
Devon Series................................................................. $ 21 $ 66 $ 113 $ 244
DelCap Series................................................................ $ 23 $ 70 $ 120 $ 258
Aggressive Growth 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.................................................. $ 24 $ 73 $ 125 $ 268
Emerging Markets Series...................................................... $ 29 $ 90 $ 153 $ 322
Delaware Balanced Series..................................................... $ 22 $ 67 $ 115 $ 248
Convertible Securities Series................................................ $ 23 $ 69 $ 119 $ 255
Delchester Series............................................................ $ 22 $ 67 $ 115 $ 248
Capital Reserves Series...................................................... $ 21 $ 65 $ 112 $ 242
Strategic Income Series...................................................... $ 22 $ 69 $ 118 $ 253
Cash Reserve Series.......................................................... $ 20 $ 61 $ 105 $ 226
Global Bond Series........................................................... $ 23 $ 70 $ 120 $ 258
</TABLE>
9
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable 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 and
election of a Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series $ 24 $ 75 $ 128 $ 273
Devon Series................................................................. $ 24 $ 74 $ 126 $ 269
DelCap Series................................................................ $ 25 $ 78 $ 133 $ 283
Aggressive Growth Series..................................................... $ 25 $ 78 $ 133 $ 283
Social Awareness Series...................................................... $ 25 $ 78 $ 133 $ 283
REIT Series.................................................................. $ 25 $ 78 $ 133 $ 283
Small Cap Value Series....................................................... $ 25 $ 78 $ 133 $ 283
Trend Series................................................................. $ 25 $ 78 $ 133 $ 283
International Equity Series.................................................. $ 26 $ 81 $ 138 $ 293
Emerging Markets Series...................................................... $ 32 $ 97 $ 165 $ 345
Delaware Balanced Series..................................................... $ 24 $ 75 $ 128 $ 273
Convertible Securities Series................................................ $ 25 $ 77 $ 131 $ 280
Delchester Series............................................................ $ 24 $ 75 $ 128 $ 273
Capital Reserves Series...................................................... $ 24 $ 73 $ 125 $ 267
Strategic Income Series...................................................... $ 25 $ 76 $ 130 $ 278
Cash Reserve Series.......................................................... $ 22 $ 68 $ 117 $ 252
Global Bond Series........................................................... $ 25 $ 78 $ 133 $ 283
</TABLE>
* The Contract fee is not deducted after annuitization. A surrender charge may
be assessed at the time of annuitization if you elect a noncommutable period
certain option of less than ten years or any commutable period certain option.
No charge is assessed if you elect a life contingency option, or a noncommutable
period certain option of ten years or more.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
10
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY?
The Delaware Medallion III variable annuity contract ("Contract") is an
insurance contract designed to help you, the Owner, accumulate assets for your
retirement or other important financial goals on a tax-deferred basis. The
Contract 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 payments that you can receive 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, you may
allocate your initial payment and any additional payments you choose to make
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 you
withdraw money. In addition, during the accumulation phase, the beneficiaries
receive certain protections in the event of the Annuitant's death. See
discussion below: "WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with any remaining 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.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See "M.
Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Annuitant a minimum
11
<PAGE>
amount of fixed annuity lifetime income during the annuity payout phase, subject
to certain conditions. On each Contract anniversary a Minimum Guaranteed Annuity
Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout Benefit
Base (less any applicable premium taxes) is the value that will be annuitized
should you exercise the Rider. In order to exercise the Rider, a fixed
annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in your Contract. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). 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 ($1,000 in Washington) and a $50 minimum for any
additional payments. (A lower initial payment amount is permitted for certain
qualified plans and where monthly payments are being forwarded directly from a
financial institution.) In addition, a minimum of $1,000 is always required to
establish a Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
You may allocate payments among the Sub-Accounts, the Guarantee Period Accounts,
and the Fixed Account.
12
<PAGE>
YOU HAVE A CHOICE OF 17 SUB-ACCOUNTS INVESTING IN THE FOLLOWING SERIES OF DGPF:
<TABLE>
<S> <C>
Growth & Income Series Emerging Markets Series
Devon Series Delaware Balanced Series
DelCap Series Convertible Securities
Series
Aggressive Growth Series Delchester Series
Social Awareness Series Capital Reserves Series
REIT Series Strategic Income Series
Small Cap Value Series Cash Reserve Series
Trend Series Global Bond Series
International Equity 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 SERIES MAY NOT BE AVAILABLE IN CERTAIN 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, except in California where assets are held in the
Company's General Account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company 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."
THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account, see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO IS THE INVESTMENT ADVISER?
Delaware Management Company, Inc. ("Delaware Management") is the investment
adviser for the Growth & Income Series, Devon Series, DelCap Series, Aggressive
Growth Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Balanced 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 ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts, and the Fixed Account.
You will incur no current taxes on transfers while your
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money remains in the Contract. See "D. Transfer Privilege." The first 12
transfers in a Contract year are guaranteed to be free of a transfer charge. For
each subsequent transfer in a Contract year, the Company does not currently
charge but reserves the right to assess a processing charge guaranteed never to
exceed $25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (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% federal 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 payments that have not been invested in the Contract for more
than seven years may be subject to a surrender charge. (A Market Value
Adjustment may apply to any withdrawal made from a Guarantee Period Account
prior to the expiration of the Guarantee Period.)
In addition, you may 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.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
greatest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, with interest compounding daily at the annual rate of 5%,
starting on the date each payment is applied, and continuing throughout your
investments' entire accumulation phase, (5% compounding not available in
Hawaii and New York) 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 compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals 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 compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) 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.
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(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on each Contract anniversary and
upon surrender, the Company will deduct a $30 Contract fee 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 surrender
charge. If applicable, this charge will be between 1% and 7% of payments
withdrawn, based on when the payments were originally made.
A deduction for state and local premium taxes, if any, may be made as described
under "D. Premium Taxes."
The Company will deduct, on a daily basis, an annual 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.
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider for an additional charge. If you elect the Rider, a
separate monthly charge is deducted from the Contract's Accumulated Value at the
end of each month within which the Rider has been in effect. The charge is
assessed by multiplying the Accumulated Value on the last day of each month and
on the date the Rider is terminated by 1/12th of the following annual percentage
rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "M. Optional Minimum
Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE CONTRACT."
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, if
state law requires 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 this refund 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 Cancel Individual Retirement Annuity,"
and "C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT?
You can make several changes 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.
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- - You may change your allocation of payments.
- - You may make transfers of accumulated value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by state law).
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PERFORMANCE INFORMATION
The Delaware Medallion III Contract was first offered to the public by Allmerica
Financial Life Insurance and Annuity Company in 1996 and by First Allmerica
Financial Life Insurance Company in 1997. The Company, however, may advertise
"total return" and "average annual total return" performance information based
on (1) the periods that the Sub-Accounts have been in existence and (2) the
periods that the Underlying Funds have been in existence. Performance results in
Tables 1A and 2A are calculated with all charges assumed to be those applicable
to the Contract, the Sub-Accounts and the Underlying Funds, and also assume that
the Contract is surrendered at the end of the applicable period. Performance
results in Tables 1B and 2B do not include the Contract fee and assume that the
Contract 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.
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 surrender charge which
would be assessed if the investment were completely withdrawn at the end of the
specified period. The calculation is not adjusted to reflect the deduction of a
Minimum Guaranteed Annuity Payout Rider Charge. 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
Contract fee and assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B of Appendix B and C is calculated in
exactly the same manner as those in Tables 1A and 1B of Appendix B and C
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.
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Performance Tables for Contracts issued by Allmerica Financial Life Insurance
and Annuity Company can be found in Appendix B. Performance Tables for Contracts
issued by First Allmerica Financial Life Insurance Company can be found in
Appendix C. 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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
Contract features.
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.
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirect wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998,
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First Allmerica and its subsidiaries had over $27 billion in combined assets and
over $48 billion of life insurance in force. Effective October 16, 1995, First
Allmerica converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. First Allmerica is a wholly owned subsidiary of AFC. First
Allmerica's principal office ("Principal Office") is located at 440 Lincoln
Street, Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
referred to as Separate Account VA-K (the "Variable Account"). The Variable
Accounts of Separate Account VA-K were authorized by votes of the Board of
Directors of the Companies on November 1, 1990.
Each Variable Account meets the definition of a "separate account" under federal
securities laws, and is registered with the SEC as a unit investment trust under
the 1940 Act. This registration does not involve the supervision or management
of investment practices or policies of the Variable Accounts by the SEC.
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 17 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. Obligations under the
Contracts are obligations of the Company. Under Delaware and Massachusetts law,
the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
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 serve as an investment vehicle for various separate
accounts supporting variable insurance contracts. DGPF currently has 17
investment portfolios, each issuing a series of shares: Growth & Income Series,
Devon Series, DelCap Series, Aggressive Growth Series, Social Awareness Series,
REIT Series, Small Cap Value Series, Trend Series, International Equity Series,
Emerging Markets Series, Delaware Balanced 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 Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, REIT Series, Small
Cap Value Series, Trend Series, Delaware Balanced Series, Convertible Securities
Series, Delchester Series, Capital Reserves Series, Strategic Income Series, and
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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.
GROWTH & INCOME SERIES -- seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Fund formerly was known as
Decatur Total Return Series.
DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Series formerly was known as the Growth Series.
AGGRESSIVE GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
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.
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.
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. It
seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The Series is an
international fund. As such, under normal market conditions, at least 65% of the
Series' assets will
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<PAGE>
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 BALANCED SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series formerly was
known as Delaware 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.
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. It seeks
to achieve its objective by using a multi-sector investment approach, investing
primarily in three sectors of the fixed-income securities market: high yield,
higher-risk securities; investment grade fixed-income securities; and foreign
government and other foreign fixed- income securities. The Series also may
invest in U.S. equity securities.
CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
There is no assurance that the investment objectives of the Underlying Funds
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Fund in which it invests, you will be notified of the change.
No material changes in the investment policy of the Variable Account or any
Sub-Accounts will be made without approval pursuant to the applicable state
insurance laws. If you have Contract value in that Sub-Account, the Company will
transfer it without charge, on written request by you, to another Sub-Account or
to the General Account. The Company must receive your written request within
sixty (60) days of the later of (1) the effective date of such change in the
investment policy, or (2) the receipt of the notice of your right to transfer.
INVESTMENT ADVISORY SERVICES TO DGPF
Investment advisers are paid an annual fee based on the average daily net assets
of their respective Underlying Series for management services. The Cash Reserve
Series management fee rate is as follows: 0.45% on the first $500 million, 0.40%
on the next $500 million, 0.35% on the next $1,500 million and 0.30% on assets
in excess of $2,500 million; the Capital Reserves Series management fee rate is
as follows: 0.50% on the first $500 million, 0.475% on the next $500 million,
0.45% on the next $1,500 million and 0.425% on assets in excess of $2,500
million; the Growth & Income Series, Delchester Series, Delaware Balanced
Series, Devon Series and Strategic Income Series management fee rate is as
follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55%
on the next $1,500 million and 0.50% on assets in excess of $2,500 million;
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the DelCap Series, Aggressive Growth Series, Small Cap Value Series, Trend
Series, Social Awareness Series, REIT Series, Convertible Securities Series and
Global Bond Series management fee rate is as follows: 0.75% on the first $500
million, 0.70% on the next $500 million, 0.65% on the next $1,500 million and
0.60% on assets in excess of $2,500 million; the International Equity Series
management fee rate is as follows: 0.85% on the first $500 million, 0.80% on the
next $500 million, 0.75% on the next $1,500 million and 0.70% on assets in
excess of $2,500 million; and the Emerging Markets Series management fee rate is
as follows: 1.25% on the first $500 million, 1.20% on the next $500 million,
1.15% on the next $1,500 million and 1.10% on assets in excess of $2,500
million.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. 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.
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 is 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 completed 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 it pending
completion of the outstanding underwriting requirements. Subsequent payments
will be credited as of the Valuation Date received at the Principal Office on
the basis of accumulation unit value next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. Currently, the initial payment must be at least
$600 ($1,000 in Washington). Under a salary deduction or monthly automatic
payment plan, the minimum initial payment is $50. In all cases, each subsequent
payment must be at least $50. Where the contribution on behalf of an employee
under an employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee if the plan's average
annual contribution per eligible plan participant is at least $600. The minimum
allocation to a Guarantee Period Account is $1,000. If less than $1,000 is
allocated to a Guarantee Period Account, the Company reserves the right to apply
that amount to the Cash Reserve Series.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. 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 may 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 or PIN number. All transfer instructions by telephone are tape
recorded.
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B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel 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 cancellation 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"
provision on the cover 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. RIGHT TO CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was purchased as an IRA or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used. At the time the Contract is issued, the "Right to Examine"
provision on the cover of the Contract will specifically indicate what the
refund will be and the time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, the Owner may transfer amounts among
accounts upon written or telephone request to the Company. As of the date of
this Prospectus, transfers may be made to and among all of the available
Sub-Accounts. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts which may be used
during the life of the Contract. 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. Transfers from a
Guarantee Period Account prior to the expiration of the Guarantee Period will be
subject to a Market Value Adjustment.
The first twelve transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
in a Contract year, but reserves the right to assess a charge, guaranteed never
to exceed $25, to reimburse it for the expense of processing these additional
transfers.
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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.
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 use 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 used for
automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under that
request count as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Currently, Dollar Cost
Averaging and Automatic Account Rebalancing may not be in effect simultaneously.
Either option may be elected at no additional charge when the Contract is
purchased or at a later date.
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Surrender Value, less any tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
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After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender 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 Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the 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 surrender 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 a minimum of $100. Except in New York, where no specific
balance is required, no withdrawal will be permitted if the Accumulated Value
remaining under the Contract would be reduced to less than $1,000. Withdrawals
will be paid in accordance with the time limitations described under "E.
Surrender."
After the Annuity Date, withdrawals are permitted only if the Contract is
annuitized under a commutable period certain option. Annuity Units equivalent in
value to the amount withdrawn will be cancelled.
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,
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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 may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) 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. Under the Company's LED option, 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. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the death benefit is equal to
the greatest of (a) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (b) gross payments compounded daily at the
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annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (except in Hawaii and New York where (b)
equals 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 compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals 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 compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) 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 E, "THE DEATH BENEFIT" 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 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.
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H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon the death of
the Owner. The spouse will then become the Owner and Annuitant subject to the
following: (1) any value in the Guarantee Period Accounts will be transferred to
the 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.
I. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment. For important tax
consequences which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Annuitant's 85th
birthday, if the Annuitant's age on the issue date of the Contract is 75 or
under; or (2) within ten years from the issue date of the Contract and before
the Annuitant's 90th birthday, if the Annuitant's age on the issue date is
between 76 and 90. The Owner may elect to change the Annuity Date by sending a
request to the Principal Office at least one month before the 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. In no event will the maximum annuitization age
exceed 90. 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 option, 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
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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. Beneficiaries
entitled to receive remaining payments under either a commutable or
noncommutable period certain option may elect instead to receive a lump sum
settlement.
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity options may be funded through the Growth & Income
Series, the Delaware Balanced 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. This variable annuity is payable during the payee's life. It would be
possible under this option for the payee's to receive only one annuity benefit
payment if the payee dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if the payee dies before the due date of
the third annuity benefit payment, and so on. Payments will continue, however,
during the lifetime of the payee, no matter how long he or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is a variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2), then periodic variable annuity benefit payments will continue to
the beneficiary until the number of such payments equals the number determined
in (1).
Where: (1) is the dollar amount of the Accumulated Value at
annuitization 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
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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 and may be
commutable or noncommutable. A commutable option provides the payee with the
right to request a lump sum payment of any remaining balance after annuity
payments have commenced. Under a noncommutable period certain option, the
Annuitant may not request a lump sum payment.
The period certain option does not involve a life contingency. In the computing
payments under this option, the Company deducts a charge for annuity rate
guarantees, which includes a factor for mortality risks. 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
elections made prior to the date of any change in this practice. See "FEDERAL
TAX CONSIDERATIONS" for a discussion of the possible adverse tax consequences of
selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners 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.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten years
or more (six or more years under New York Contracts), the dollar amount 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 years under New York Contracts), the dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the death
benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
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 net
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investment factor of the Sub-Account for the current Valuation Period and
divided by the assumed interest rate for the current Valuation Period The
assumed interest rate, discussed below, is incorporated in the variable annuity
options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed annuity lifetime income during
the annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
31
<PAGE>
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Contract anniversary following the expiration of a ten
or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the Rider,
unless such termination occurs on or within thirty days after any Contract
anniversary and in conjunction with the repurchase of a Minimum Guaranteed
Annuity Payout Rider with a waiting period of equal or greater length at its
then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The Spouse
of the Owner as Beneficiary."
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Contract during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for
32
<PAGE>
purposes of illustration only and are not intended as a representation of past
or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
GUARANTEED
CONTRACT MINIMUM GUARANTEED
ANNIVERSARY BENEFIT MINIMUM ANNUAL
AT EXERCISE BASE INCOME(1)
- ------------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K.
Description of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
NOTE: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date
and/or repurchasing the benefit will impact the Program to Protect Principal and
Provide Growth Potential offered under the GPA Accounts since the Minimum
Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis from
all accounts including the GPA Accounts. See "GUARANTEE PERIOD ACCOUNTS."
N. 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.
O. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account, and will reflect the investment performance,
expenses and charges of
33
<PAGE>
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. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT" and
"GUARANTEE PERIOD ACCOUNTS."
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 assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other payee) lives, and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company
34
<PAGE>
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.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. 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 0.80% for mortality risk and 0.45% 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 below under "B. Contract Fee") and
for the administrative expense charge are designed to reimburse the Company for
the cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Variable Account and the Contract include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses, and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the 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 if the Accumulated Value on any of these
dates 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 and Additional Amounts Credited" provision below.
C. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts, the Fixed Account and the Guarantee Period Accounts (based on the
relative value that the Accumulation Units of the Sub-Accounts, the dollar
amounts in
35
<PAGE>
the Fixed Account and the dollar amounts in the Guarantee Period Accounts bear
to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<CAPTION>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
<S> <C>
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout Rider" under "DESCRIPTION OF THE CONTRACT," above.
D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for the Contract at the time the payments are
received); or
(2) the premium tax charge is deducted in total 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.
E. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender 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 surrender 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 invested in the Contract for more than seven
years; 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, 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 surrender charge. If a
withdrawal is attributable all or in part to New Payments, a surrender 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 surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments, to which the withdrawal is
attributed have remained credited under the Contract.
36
<PAGE>
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 oldest New Payment and then from the next
oldest 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 surrender charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
0 - 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total surrender charge exceed a maximum limit of 7% of
total gross New Payments. Such total charge equals the aggregate of all
applicable surrender charges for surrender, withdrawals and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by state law, the Company will waive the surrender
charge in the event that the 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 four 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 and New Jersey
where not permitted by state law, the Company will waive the surrender charge in
the event that an Owner (or the Annuitant, if the Owner is not an individual)
is: (1) admitted to a medical car facility 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 surrender charges have been waived under any of the situations discussed
above, no additional payments under the Contract will be accepted unless
required by state law.
In addition, from time to time the Company may allow a reduction in or
elimination of the surrender charges, 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
37
<PAGE>
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, surrender 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 surrender charge
will not discriminate unfairly among purchasers of the Contract. The Company
will not make any changes to the charge where prohibited by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the surrender
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 surrender 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
surrender charge was applied; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution Option (see "Life Expectancy Distributions"
above) 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 surrender
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.
38
<PAGE>
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 surrender 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 surrender 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 surrender 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.
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses a
period certain option or a non-commutable period certain option for less than
ten years (less than six years under New York Contracts), a surrender 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 surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable period
certain option for ten years or more (six years or more under New York
Contracts). 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 surrender 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.
F. 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 to reimburse it for
the expense of processing transfers.
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, except
in California where it is accounted for in the Company's General Account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; 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%.
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To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when the Contract initially was issued, and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date (subject to the
Fixed Account limitations in some states; see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT"). Transfers from a Guarantee Period Account on any date
other than on the day following the expiration of that Guarantee Period will be
subject to a Market Value Adjustment. The Company establishes a separate
investment account each time the Owner allocates or transfers amounts to a
Guarantee Period except that amounts allocated to the same Guarantee Period on
the same day will be treated as one Guarantee Period Account. The minimum that
may be allocated to establish a Guarantee Period Account is $1,000. If less than
$1,000 is allocated, the Company reserves the right to apply that amount to the
Cash Reserve Series. The Owner may allocate amounts to any of the Guarantee
Periods available.
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 Sub-Account investing in the Cash Reserve
Series. Where amounts automatically have been renewed in a new Guarantee Period,
it is the Company's current practice to give the Owner an additional 30 days to
transfer out of the Guarantee Period Account without application of a Market
Value Adjustment. This practice may be discontinued or changed at the Company's
discretion. Under Contracts issued in New York, the Company will transfer monies
out of the 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.
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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 D, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals,
(including withdrawals made as part of a pro-rata deduction for charges under a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue) in
order to ensure that on the last day of the Guarantee Period, the value in the
Guarantee Period Account will equal the amount of the entire initial payment.
The required amount then will be allocated to the pre-selected Guarantee Period
Account and the remaining balance to the other investment options selected by
the Owner in accordance with the procedures described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a surrender charge applies to
the withdrawal, it will be calculated as set forth under "D. Surrender 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.
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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 prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract,
and therefore the income on the Contract, for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Portfolios of the Fund in this Contract 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.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account. This
announcement also states that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The Company therefore additionally reserves the right to modify the Contract as
necessary in order to attempt to prevent a contract owner from being considered
the owner of a pro rata share of the assets of the segregated asset account
underlying the variable annuity contracts.
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.
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B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. This section
governs the taxation of annuities. The following discussion concerns annuities
subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. 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, 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 any LED-type option prior to age 59 1/2. Subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
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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.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72. In addition, plan assets are treated as property of the employer,
and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Contract
made before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of a non-qualified
Contract. Individuals purchasing a qualified Contract should review carefully
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish
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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 of the Code including Roth IRAs. IRAs are subject to limits on
the amounts that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
other types of retirement plans may be "rolled over," on a tax-deferred basis,
to an IRA. Purchasers of an IRA Contract will be provided with supplementary
information as may be required by the IRS or other appropriate agency, and will
have the right to cancel the Contract as described in this Prospectus. See "B.
Right to Cancel Individual Retirement Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES (TSAS). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to the Owner
each time a transaction is made affecting the Contract Value. (Certain
transactions made under recurring payment plans such as Dollar Cost Averaging
may in the future be confirmed quarterly rather than by immediate
confirmations.) The Owner should review the information in all statements
carefully. All errors or corrections must be reported to the Company immediately
to assure proper crediting to the Contract. The Company will assume that all
transactions are accurately reported on confirmation
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statements and quarterly/annual statements unless the Owner notifies the
Principal Office in writing within 30 days after receipt of the statement.
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 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.
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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.
The Company pays commissions, not to exceed 6.5% 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.
47
<PAGE>
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account which may include amounts derived from mortality and risk
charges. 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 surrender charge 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
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial
48
<PAGE>
completion of the Year 2000 project, through December 31, 1998. The total
remaining cost of the project is estimated between $20-30 million.
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.
49
<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 surrender charge is imposed if such event occurs before the
payments attributable to the surrender or withdrawal have been credited to the
Contract for at least seven full Contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the
Annuitant's 61st birthday. On and after the Annuitant's 61st
birthday, no additional Fixed Account allocations will be
accepted. If a Contract is issued on or after the Annuitant's 60th
birthday up through and including the Annuitant's 81st birthday,
Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no
additional allocations to the Fixed Account will be permitted. If
a Contract is issued after the Annuitant's 81st birthday, no
payments to the Fixed Account will be permitted at any time.
In Oregon, if the Contract is issued after the Annuitant's 81st birthday, no
payments or transfers to the Fixed Account will be permitted.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Cash Reserve
Series.
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. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, contact your financial representative or call 1-800-366-1492.
A-1
<PAGE>
APPENDIX B
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT TOTAL RETURN SINCE
INCEPTION FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE ENDED 12/31/98 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 4/27/92 2.66% 16.59% 15.29%
Devon Series............................................. 5/1/97 15.25% N/A 26.55%
DelCap Series............................................ 4/9/92 9.83% 11.96% 11.55%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 7.04 % N/A 21.69 %
REIT Series.............................................. 5/7/98 N/A N/A -15.28 %
Small Cap Value Series................................... 1/2/94 -12.00 % N/A 11.95 %
Trend Series............................................. 12/30/93 7.36 % 14.52 % 14.77 %
International Equity Series.............................. 10/29/92 1.96 % 8.20 % 9.12 %
Emerging Markets Series.................................. 5/1/97 -37.40 % N/A -29.70 %
Delaware Balanced Series................................. 4/30/92 9.70 % 14.79 % 13.35 %
Convertible Securities Series............................ 5/1/97 -8.35 % N/A 4.10 %
Delchester Series........................................ 4/27/92 -9.22 % 4.88 % 6.92 %
Capital Reserves Series.................................. 4/30/92 -1.05 % 3.75 % 4.81 %
Strategic Income Series.................................. 5/1/97 -4.84 % N/A 0.60 %
Cash Reserve Series...................................... 4/22/92 -2.58 % 2.81 % 2.67 %
Global Bond Series....................................... 5/1/96 -0.02 % N/A 4.37 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SUB-ACCOUNT TOTAL RETURN SINCE
INCEPTION FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE ENDED 12/31/98 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 4/27/92 9.80% 17.42% 15.85%
Devon Series............................................. 5/1/97 22.33% N/A 29.68%
DelCap Series............................................ 4/9/92 17.17% 12.74% 12.01%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 13.85 % N/A 24.86 %
REIT Series.............................................. 5/7/98 N/A N/A -9.91 %
Small Cap Value Series................................... 1/2/94 -6.11 % N/A 12.56 %
Trend Series............................................. 12/30/93 14.43 % 15.10 % 15.27 %
International Equity Series.............................. 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................. 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................. 4/30/92 16.98 % 15.43 % 13.72 %
Convertible Securities Series............................ 5/1/97 -2.54 % N/A 7.42 %
Delchester Series........................................ 4/27/92 -3.19 % 5.65 % 7.28 %
Capital Reserves Series.................................. 4/30/92 5.29 % 4.36 % 5.02 %
Strategic Income Series.................................. 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series...................................... 4/22/92 3.63 % 3.40 % 2.85 %
Global Bond Series....................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
UNDERLYING FUND FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/98 5 YEARS UNDERLYING FUND
- --------------------------------------------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series............................. 7/28/88 2.66% 16.59% 11.22%
Devon Series....................................... 5/1/97 15.25% N/A 26.55%
DelCap Series...................................... 7/12/91 9.83% 11.96% 10.79%
Aggressive Growth Series........................... N/A N/A N/A N/A
Social Awareness Series............................ 5/1/97 7.04 % N/A 21.69 %
REIT Series........................................ 5/1/98 N/A N/A -15.21 %
Small Cap Value Series............................. 12/27/93 -12.00 % 11.95 % 12.00 %
Trend Series....................................... 12/27/93 7.36 % 14.52 % 14.75 %
International Equity Series........................ 10/29/92 1.96 % 8.20 % 9.12 %
Emerging Markets Series............................ 5/1/97 -37.40 % N/A -29.70 %
Delaware Balanced Series........................... 7/28/88 9.70 % 14.79 % 12.95 %
Convertible Securities Series...................... 5/1/97 -8.35 % N/A 4.10 %
Delchester Series.................................. 7/28/88 -9.22 % 4.88 % 7.71 %
Capital Reserves Series............................ 7/28/88 -1.05 % 3.75 % 5.38 %
Strategic Income Series............................ 5/1/97 -4.84 % N/A 0.60 %
Cash Reserve Series................................ 7/28/88 -2.58 % 2.81 % 3.65 %
Global Bond Series................................. 5/1/96 -0.02 % N/A 4.37 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
UNDERLYING FUND FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/98 5 YEARS UNDERLYING FUND
- --------------------------------------------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series............................. 7/28/88 9.80% 17.42% 11.72%
Devon Series....................................... 5/1/97 22.33% N/A 29.68%
DelCap Series...................................... 7/12/91 17.17% 12.74% 11.19%
Aggressive Growth Series........................... N/A N/A N/A N/A
Social Awareness Series............................ 5/1/97 13.85 % N/A 24.86 %
REIT Series........................................ 5/1/98 N/A N/A -9.84 %
Small Cap Value Series............................. 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series....................................... 12/27/93 14.43 % 15.10 % 15.24 %
International Equity Series........................ 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................ 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series........................... 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series...................... 5/1/97 -2.54 % N/A 7.42 %
Delchester Series.................................. 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................ 7/28/88 5.29 % 4.36 % 5.46 %
Strategic Income Series............................ 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series................................ 7/28/88 3.63 % 3.40 % 3.70 %
Global Bond Series................................. 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-2
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series...................................... 5/1/94 2.70% N/A 18.54%
Devon Series................................................ 5/1/97 15.21% N/A 26.48 %
DelCap Series............................................... 4/20/94 9.94 % N/A 14.32 %
Aggressive Growth Series.................................... N/A N/A N/A N/A
Social Awareness Series..................................... 5/1/97 7.03 % N/A 21.66 %
REIT Series................................................. N/A N/A N/A N/A
Small Cap Value Series...................................... 5/11/94 -11.95 % N/A 13.14 %
Trend Series................................................ 5/11/94 7.35 % N/A 16.72 %
International Equity Series................................. 4/20/94 2.02 % N/A 8.50 %
Emerging Markets Series..................................... 5/1/97 -37.39 % N/A -35.91 %
Delaware Balanced Series.................................... 4/20/94 9.75 % N/A 16.04 %
Convertible Securities Series............................... 5/1/97 -8.36 % N/A 4.06 %
Delchester Series........................................... 5/23/94 -9.33 % N/A 5.76 %
Capital Reserves Series..................................... 6/23/94 -1.05 % N/A 4.95 %
Strategic Income Series..................................... 5/1/97 -4.93 % N/A 0.50 %
Cash Reserve Series......................................... 4/7/94 -2.61 % N/A 2.94 %
Global Bond Series.......................................... 5/1/96 0.00 % N/A 4.39 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series...................................... 5/1/94 9.81% N/A 19.33%
Devon Series................................................ 5/1/97 22.34% N/A 29.66 %
DelCap Series............................................... 4/20/94 17.17 % N/A 15.01 %
Aggressive Growth Series.................................... N/A N/A N/A N/A
Social Awareness Series..................................... 5/1/97 13.86 % N/A 24.86 %
REIT Series................................................. N/A N/A N/A N/A
Small Cap Value Series...................................... 5/11/94 -6.11 % N/A 13.77 %
Trend Series................................................ 5/11/94 14.45 % N/A 17.39 %
International Equity Series................................. 4/20/94 8.80 % N/A 9.43 %
Emerging Markets Series..................................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.................................... 4/20/94 16.98 % N/A 16.67 %
Convertible Securities Series............................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series........................................... 5/23/94 -3.19 % N/A 6.66 %
Capital Reserves Series..................................... 6/23/94 5.29 % N/A 5.57 %
Strategic Income Series..................................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series......................................... 4/7/94 3.62 % N/A 3.54 %
Global Bond Series.......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
C-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 2.70% 16.65% 11.68%
Devon Series.......................................... 5/1/97 15.21% N/A 26.48%
DelCap Series......................................... 7/12/91 9.94% 12.06% 10.88%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 7.03 % N/A 21.66 %
REIT Series........................................... 5/1/98 N/A N/A -15.21 %
Small Cap Value Series................................ 12/27/93 -11.95 % 11.96 % 12.49 %
Trend Series.......................................... 12/27/93 7.35 % 14.47 % 14.97 %
International Equity Series........................... 10/29/92 2.02 % 8.33 % 9.21 %
Emerging Markets Series............................... 5/1/97 -37.39 % N/A -35.91 %
Delaware Balanced Series.............................. 7/28/88 9.75 % 14.38 % 12.83 %
Convertible Securities Series......................... 5/1/97 -8.36 % N/A 4.06 %
Delchester Series..................................... 7/28/88 -9.33 % 4.80 % 7.75 %
Capital Reserves Series............................... 7/28/88 -1.05 % 3.78 % 5.47 %
Strategic Income Series............................... 5/1/97 -4.93 % N/A 0.50 %
Cash Reserve Series................................... 7/28/88 -2.61 % 2.86 % 3.69 %
Global Bond Series.................................... 5/1/96 0.00 % N/A 4.39 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 9.81% 17.42% 11.72%
Devon Series.......................................... 5/1/97 22.34% N/A 29.66%
DelCap Series......................................... 7/12/91 17.17% 12.76% 11.20%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 13.86 % N/A 24.86 %
REIT Series........................................... 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................ 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series.......................................... 12/27/93 14.45 % 15.13 % 15.24 %
International Equity Series........................... 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.............................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series......................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series..................................... 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................... 7/28/88 5.29 % 4.35 % 5.52 %
Strategic Income Series............................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series................................... 7/28/88 3.62 % 3.42 % 3.71 %
Global Bond Series.................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
C-2
<PAGE>
APPENDIX D
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge Amount is equal to the greater of 15% of the Accumulated Value
or the accumulated earnings in the Contract. The table below presents examples
of the surrender charge resulting from a full surrender based on hypothetical
Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
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 SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](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.
D-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>
D-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>
D-3
<PAGE>
APPENDIX E
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- ------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield of 5%, reduced proportionately to
reflect withdrawals. Death Benefit (c) is the death benefit that would have been
payable on the most recent Contract anniversary, increased for subsequent
payments, and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below and that
the Death Benefit Effective Annual Yield is equal to 5%. The table below
presents examples of the Death Benefit based on the Hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
E-1
<PAGE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield of 5% reduced proportionately to
reflect withdrawals. Death Benefit (c) is the death benefit that would have been
payable on the most recent Contract anniversary, increased for subsequent
payments, and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals. The table below presents examples of
the death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
E-2
<PAGE>
APPENDIX F
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period................... 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period......................... 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of
Period (in thousands).................... 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period................... 1.261 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 42,690 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period................... 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period......................... 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of
Period (in thousands).................... 58,454 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period................... 1.272 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 17,819 4,515 N/A N/A N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 1,235 N/A N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................... 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period......................... 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of
Period (in thousands).................... 55,136 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period................... 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period......................... 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of
Period (in thousands).................... 36,571 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period......................... 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of
Period (in thousands).................... 51,715 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period................... 0.880 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 6,662 4,545 N/A N/A N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period................... 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period......................... 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of
Period (in thousands).................... 81,359 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period................... 1.156 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.127 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 4,793 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period................... 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period......................... 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of
Period (in thousands).................... 70,679 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................... 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period......................... 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of
Period (in thousands).................... 28,066 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period................... 1.052 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 17,524 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period................... 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period......................... 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of
Period (in thousands).................... 32,501 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period................... 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period......................... 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 4,991 3,950 886 N/A N/A N/A N/A
</TABLE>
F-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period............................................... 2.078 1.608 1.351 1.006 1.000
End of Period..................................................... 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in thousands)........... 3,440 1,311 1,044 670 455
DEVON SERIES
Unit Value:
Beginning of Period............................................... 1.261 N/A N/A N/A N/A
End of Period..................................................... 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 1,558 106 N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period............................................... 1.646 1.453 1.287 1.008 1.000
End of Period..................................................... 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in thousands)........... 637 355 493 300 149
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period............................................... 1.272 N/A N/A N/A N/A
End of Period..................................................... 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 394 101 N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period............................................... N/A N/A N/A N/A N/A
End of Period..................................................... 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 0 N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period............................................... 1.938 1.478 1.223 1.002 1.000
End of Period..................................................... 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)........... 731 235 204 146 82
TREND SERIES
Unit Value:
Beginning of Period............................................... 1.839 1.536 1.404 1.022 1.000
End of Period..................................................... 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)........... 1,099 1,579 285 1,486 790
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............................................... 1.403 1.335 1.128 1.004 1.000
End of Period..................................................... 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)........... 652 554 2,244 358 193
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period............................................... 0.754 N/A N/A N/A N/A
End of Period..................................................... 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 184 1 N/A N/A N/A
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period............................................... 1.764 1.415 1.238 0.991 1.000
End of Period..................................................... 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)........... 1,070 420 405 304 173
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period............................................... 1.156 N/A N/A N/A N/A
End of Period..................................................... 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 375 84 N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period............................................... 1.391 1.240 1.116 0.980 1.000
End of Period..................................................... 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in thousands)........... 3,962 1,388 1,003 670 287
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period............................................... 1.214 1.144 1.115 0.991 1.000
End of Period..................................................... 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)........... 1,069 287 208 195 181
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period............................................... 1.052 N/A N/A N/A N/A
End of Period..................................................... 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 1,799 276 N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period............................................... 1.138 1.096 1.059 1.018 1.000
End of Period..................................................... 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)........... 1,603 401 125 126 302
GLOBAL BOND SERIES
Unit Value:
Beginning of Period............................................... 1.102 1.107 1.000 1.000 N/A
End of Period..................................................... 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in thousands)........... 31 7 N/A N/A N/A
</TABLE>
No information is shown above for the Sub-Accounts that commenced operations
after December 31, 1998.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus provides important information about
the Delaware Medallion II variable annuity policies
issued by Allmerica Financial Life Insurance and
PLEASE READ THIS Annuity Company and Delaware Medallion I variable
PROSPECTUS CAREFULLY annuity policies issued by Allmerica Financial Life
BEFORE INVESTING AND Insurance and Annuity Company and First Allmerica
KEEP IT FOR FUTURE Financial Life Insurance Company. The policy is a
REFERENCE. flexible payment tax-deferred combination variable
and fixed annuity offered on both a group and
individual basis. Neither of these policies is
currently being sold in any jurisdiction.
Information specific to Delaware Medallion I is set
forth in Appendix B. Owners of these policies should
review this Appendix first.
The Variable Account, known as Separate Account VA-K
is subdivided into Sub-Accounts. Each Sub-Account
offered under this policy invests exclusively in
shares of one of the following series of Delaware
Group Premium Fund, Inc.:
<TABLE>
<C> <S> <C> <C>
ANNUITIES INVOLVE Growth & Income Series Trend Series Delchester Series
RISKS INCLUDING Devon Series International Equity Series Capital Reserves Series
POSSIBLE LOSS OF DelCap Series Emerging Markets Series Strategic Income Series
PRINCIPAL. Aggressive Growth Series Delaware Balanced Series Cash Reserve Series
Social Awareness Series Convertible Securities Global Bond Series
REIT Series Series
Small Cap Value Series
</TABLE>
The Fixed Account is part of the Company's General
Account.
A Statement of Additional Information dated May 1,
1999 containing more information about this
annuity is on file with the Securities and
Exchange Commission and is incorporated by
THIS ANNUITY IS reference into this Prospectus. A copy may be
NOT: obtained free of charge by completing the attached
- A BANK DEPOSIT OR request card or by calling Annuity Client Services
OBLIGATION; at 1-800-533-2124. The Table of Contents of the
- FEDERALLY INSURED; Statement of Additional Information is listed on
- ENDORSED BY ANY page 4 of this Prospectus.
BANK OR This Prospectus and the Statement of Additional
GOVERNMENTAL Information can also be obtained from the
AGENCY. Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 4
SUMMARY OF FEES AND EXPENSES.......................................................... 6
SUMMARY OF POLICY FEATURES............................................................ 11
PERFORMANCE INFORMATION............................................................... 14
WHAT IS AN ANNUITY?................................................................... 20
RIGHT TO CANCEL OR SURRENDER.......................................................... 20
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND,
INC.................................................................................. 20
INVESTMENT OBJECTIVES AND POLICIES.................................................... 22
INVESTMENT ADVISORY SERVICES TO THE FUND.............................................. 23
CHARGES AND DEDUCTIONS................................................................ 24
A. Surrender Charge................................................................ 24
B. Premium Taxes................................................................... 27
C. Policy Fee...................................................................... 27
D. Annual Charges Against Separate Account Assets.................................. 27
E. Optional Minimum Guaranteed Annuity Payout Rider Charge......................... 28
THE VARIABLE ANNUITY POLICIES......................................................... 29
A. Purchase Payments............................................................... 29
B. Transfer Privilege.............................................................. 30
C. Surrender....................................................................... 31
D. Partial Redemption.............................................................. 31
E. Death Benefit................................................................... 32
F. The Spouse of the Owner as Beneficiary.......................................... 33
G. Assignment...................................................................... 33
H. Electing the Form of Annuity and the Annuity Date............................... 34
I. Description of Variable Annuity Options......................................... 34
J. Optional Minimum Guaranteed Annuity Payout Rider................................ 35
K. NORRIS Decision................................................................. 37
L. Computation of Policy Values and Annuity Benefit Payments....................... 38
Determination of the First Variable Annuity Benefit Payment................... 38
The Annuity Unit.............................................................. 38
Determination of the Number of Annuity Units.................................. 38
Dollar Amount of Subsequent Variable Annuity Benefit Payments................. 38
FEDERAL TAX CONSIDERATIONS............................................................ 39
A. Qualified and Non-Qualified Policies............................................ 40
B. Taxation of the Policies in General............................................. 40
Withdrawals Prior to Annuitization............................................ 40
Annuity Payouts After Annuitization........................................... 41
Penalty on Distribution....................................................... 41
Assignments or Transfers...................................................... 41
Nonnatural Owners............................................................. 41
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 41
C. Tax Withholding................................................................. 42
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....................................................... 43
Texas Optional Retirement Program............................................. 43
LOANS (QUALIFIED POLICIES ONLY)....................................................... 43
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
STATEMENTS AND REPORTS................................................................ 43
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 43
VOTING RIGHTS......................................................................... 44
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 45
LEGAL MATTERS......................................................................... 45
YEAR 2000 COMPLIANCE.................................................................. 45
FURTHER INFORMATION................................................................... 46
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.............................. A-1
APPENDIX B -- INFORMATION APPLICABLE ONLY TO DELAWARE MEDALLION I, POLICY Nos.
A3019-92 and A3019-94GRC (AND STATE VARIATIONS)..................................... B-1
APPENDIX C -- CONDENSED FINANCIAL INFORMATION......................................... 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....................................................................... 6
PERFORMANCE INFORMATION.............................................................. 8
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the General Account credited to the
Policy on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of a
Sub-Account before annuity benefit payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
ANNUITY DATE: the date on which annuity benefit payments begin. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity payments under the Policy.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for all
Delaware Medallion II policies (Form No. 3022-93) and for all Delaware Medallion
I policies (Form No. 3019-92) except for Delaware Medallion I policies issued in
New York on Form No. 301994 GRC on and after April 1, 1994. With regard to New
York policies issued on and after April 1, 1994, any reference to "Company"
refers exclusively to First Allmerica Financial Life Insurance Company.
FIXED ANNUITY PAYOUT: an annuity payout providing for payments which remain
fixed in amount throughout the annuity payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
OWNER (OR YOU): the Owner of a Policy who may exercise all rights under the
Policy, subject to the consent of any irrevocable beneficiary. After the Annuity
Date, the Annuitant will be the Owner.
SEPARATE ACCOUNT: Separate Account VA-K of the Company, consisting of assets
segregated from other assets of the Company. The investment performance of the
assets of the Separate Account is determined separately from the other assets of
the Company and are not chargeable with liabilities arising out of any other
business which the Company may conduct.
SUB-ACCOUNT: a subdivision of Separate Account VA-K investing exclusively in the
shares of a corresponding investment series of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee and
surrender charge applicable upon surrender.
UNDERLYING SERIES: the Growth & Income Series, Devon Series, DelCap Series,
Aggressive Growth Series, Social Awareness Series, REIT Series, Small Cap Value
Series, Trend Series, International Equity Series, Emerging Markets Series,
Delaware Balanced Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, Cash Reserve Series, and
Global Bond Series of Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Series is determined and unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during
4
<PAGE>
which no payment, partial withdrawal, or surrender of a Policy was received)
when there is a sufficient degree of trading in an Underlying Series portfolio
securities such that the current unit value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY PAYOUT: an annuity payout providing for payments varying in
amount in accordance with the investment experience of certain Underlying
Series.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Delaware
Medallion I and II Policies. The purpose of the following tables is to assist
you in understanding these fees and expenses. The tables show (1) charges under
the Policy, (2) annual expenses of the Sub-Accounts, and (3) annual 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 "B.
Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
1. POLICY CHARGES: DATE OF PAYMENT CHARGE
---------------- -----------
<S> <C> <C>
SURRENDER CHARGE:* 0-3 7.0%
This charge may be assessed upon surrender, 4 6.0%
withdrawal or annuitization under any 5 5.0%
commutable period certain option or a 6 4.0%
noncommutable period certain option of less 7 3.0%
than ten years. The charge is a percentage of More than 7 0%
payments applied to the amount surrendered (in
excess of any amount that is free of surrender
charge) within the indicated time period.
TRANSFER CHARGE: None
The Company currently makes no charge for
processing transfers and guarantees that the
first 12 transfers in a Policy year will not
be subject to a transfer charge. For each
subsequent transfer, the Company reserves the
right to assess a charge, guaranteed never to
exceed $25, to reimburse the Company for the
costs of processing the transfer.
ANNUAL POLICY FEE: $30
The fee is deducted annually and upon
surrender prior to the Annuity Date when
Accumulated Value is $50,000 or less. The fee
is waived for Policies issued to and
maintained by the trustee of a 401(k) plan.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly
basis at the end of each month.)
On an annual basis as a percentage of
Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity Payout 0.25%
Rider with a ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout 0.15%
Rider with a fifteen-year waiting period:
2. ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as percentage of average
daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----------
Total Asset Charges: 1.40%
</TABLE>
6
<PAGE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Policies when (1) Policies are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
3.__ANNUAL FUND EXPENSES: The following table shows the expenses of the
Underlying Series as a percentage of average net assets for the year ended
December 31, 1998 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1999). For more information concerning fees and
expenses, see the prospectus of the Underlying Series.
<TABLE>
<CAPTION>
MANAGEMENT TOTAL FUND
FEE (AFTER ANY OTHER EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ----------------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Growth & Income Series........................................... 0.64% 0.11% 0.75%(2)
Devon Series..................................................... 0.65% 0.06% 0.71%(2)
DelCap Series.................................................... 0.74% 0.11% 0.85%(1)(2)
Aggressive Growth Series(@)...................................... 0.68% 0.17% 0.85%(1)(2)
Social Awareness Series.......................................... 0.71% 0.14% 0.85%(1)(2)
REIT Series(@)................................................... 0.58% 0.27% 0.85%(1)(2)
Small Cap Value Series........................................... 0.75% 0.10% 0.85%(2)
Trend Series..................................................... 0.75% 0.10% 0.85%(2)
International Equity Series...................................... 0.82% 0.13% 0.95%(1)(2)
Emerging Markets Series.......................................... 1.08% 0.42% 1.50%(1)(2)
Delaware Balanced Series......................................... 0.65% 0.10% 0.75%(2)
Convertible Securities Series.................................... 0.75% 0.07% 0.82%(2)
Delchester Series................................................ 0.65% 0.10% 0.75%(2)
Capital Reserves Series.......................................... 0.50% 0.19% 0.69%(2)
Strategic Income Series.......................................... 0.64% 0.16% 0.80%(1)(2)
Cash Reserve Series.............................................. 0.45% 0.09% 0.54%(2)
Global Bond Series............................................... 0.68% 0.17% 0.85%(1)(2)
</TABLE>
(@) The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
(1) For the fiscal year ended December 31, 1998, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.86% for DelCap Series, 0.89% for Social
Awareness Series, 1.02% for REIT Series, 1.67% for Emerging Markets Series,
0.81% for Strategic Income Series, 0.92% for Global Bond Series, 0.98% for
International Equity Series and are anticipated to be 0.92% for Aggressive
Growth Series.
(2) The investment adviser for the Growth & Income Series (formerly known as
"Decatur Total Return Series"), Devon Series, DelCap Series, Aggressive Growth
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Balanced Series (formerly known as "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, 1999
through October 31, 1999, 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; 0.85% for
DelCap Series, Aggressive Growth 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,
7
<PAGE>
if necessary, to reflect the new voluntary limitations which took effect on May
1, 1999. The declaration of a voluntary expense limitation does not bind the
investment advisers to declare future expense limitations with respect to these
Funds. Pursuant to a vote of the Fund's shareholders on March 17, 1999, a new
management fee structure based on average daily net assets was approved. The
above ratios have been restated to reflect the new management fee structure
which took effect on May 1, 1999.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by the rules of the Securities and
Exchange Commission ("SEC"), the Policy fee has been reflected in the examples
by a method intended to show the "average" impact of the Policy fee on an
investment in the Separate Account. The total Policy fees collected under the
Policies by the Company are divided by the total average net assets attributable
to the Policies. The resulting percentage is 0.03%, and the amount of the Policy
fee is assumed to be $0.30 in the examples. The Policy fee is deducted only when
the Accumulated Value is $50,000 or less. Lower charges apply to Policies issued
and maintained as part of a 401(k) plan. Because the expenses of the Underlying
Series differ, separate examples are used to illustrate the expenses incurred by
an Owner on an investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF LESSER THAN THOSE SHOWN.
(1)(a) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under a commutable period certain option of less than ten years,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets and no Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 87 $ 136 $ 165 $ 248
Devon Series................................................................. $ 86 $ 135 $ 163 $ 244
DelCap Series................................................................ $ 88 $ 139 $ 170 $ 258
Aggressive Growth Series..................................................... $ 88 $ 139 $ 170 $ 258
Social Awareness Series...................................................... $ 88 $ 139 $ 170 $ 258
REIT Series.................................................................. $ 88 $ 139 $ 170 $ 258
Small Cap Value Series....................................................... $ 88 $ 139 $ 170 $ 258
Trend Series................................................................. $ 88 $ 139 $ 170 $ 258
International Equity Series.................................................. $ 88 $ 141 $ 175 $ 268
Emerging Markets Series...................................................... $ 94 $ 157 $ 203 $ 322
Delaware Balanced Series..................................................... $ 87 $ 136 $ 165 $ 248
Convertible Securities Series................................................ $ 87 $ 138 $ 169 $ 255
Delchester Series............................................................ $ 87 $ 136 $ 165 $ 248
Capital Reserves Series...................................................... $ 86 $ 134 $ 162 $ 242
Strategic Income Series...................................................... $ 87 $ 137 $ 168 $ 253
Cash Reserve Series.......................................................... $ 85 $ 130 $ 155 $ 226
Global Bond Series........................................................... $ 88 $ 139 $ 170 $ 258
</TABLE>
8
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under a commutable period certain option of less than ten years,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets and election of a Minimum Guaranteed Annuity Payout
Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 89 $ 143 $ 178 $ 273
Devon Series................................................................. $ 89 $ 142 $ 176 $ 269
DelCap Series................................................................ $ 90 $ 146 $ 183 $ 283
Aggressive Growth Series..................................................... $ 90 $ 146 $ 183 $ 283
Social Awareness Series...................................................... $ 90 $ 146 $ 183 $ 283
REIT Series.................................................................. $ 90 $ 146 $ 183 $ 283
Small Cap Value Series....................................................... $ 90 $ 146 $ 183 $ 283
Trend Series................................................................. $ 90 $ 146 $ 183 $ 283
International Equity Series.................................................. $ 91 $ 148 $ 188 $ 293
Emerging Markets Series...................................................... $ 96 $ 164 $ 214 $ 345
Delaware Balanced Series..................................................... $ 89 $ 143 $ 178 $ 273
Convertible Securities Series................................................ $ 90 $ 145 $ 181 $ 280
Delchester Series............................................................ $ 89 $ 143 $ 178 $ 273
Capital Reserves Series...................................................... $ 88 $ 141 $ 175 $ 267
Strategic Income Series...................................................... $ 89 $ 144 $ 180 $ 278
Cash Reserve Series.......................................................... $ 87 $ 137 $ 167 $ 252
Global Bond Series........................................................... $ 90 $ 146 $ 183 $ 283
</TABLE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Policy, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and no
Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 22 $ 67 $ 115 $ 248
Devon Series................................................................. $ 21 $ 66 $ 113 $ 244
DelCap Series................................................................ $ 23 $ 70 $ 120 $ 258
Aggressive Growth 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.................................................. $ 24 $ 73 $ 125 $ 268
Emerging Markets Series...................................................... $ 29 $ 90 $ 153 $ 322
Delaware Balanced Series..................................................... $ 22 $ 67 $ 115 $ 248
Convertible Securities Series................................................ $ 23 $ 69 $ 119 $ 255
Delchester Series............................................................ $ 22 $ 67 $ 115 $ 248
Capital Reserves Series...................................................... $ 21 $ 65 $ 112 $ 242
Strategic Income Series...................................................... $ 22 $ 69 $ 118 $ 253
Cash Reserve Series.......................................................... $ 20 $ 61 $ 105 $ 226
Global Bond Series........................................................... $ 23 $ 70 $ 120 $ 258
</TABLE>
9
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Policy, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and
election of a Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 24 $ 75 $ 128 $ 273
Devon Series................................................................. $ 24 $ 74 $ 126 $ 269
DelCap Series................................................................ $ 25 $ 78 $ 133 $ 283
Aggressive Growth Series..................................................... $ 25 $ 78 $ 133 $ 283
Social Awareness Series...................................................... $ 25 $ 78 $ 133 $ 283
REIT Series.................................................................. $ 25 $ 78 $ 133 $ 283
Small Cap Value Series....................................................... $ 25 $ 78 $ 133 $ 283
Trend Series................................................................. $ 25 $ 78 $ 133 $ 283
International Equity Series.................................................. $ 26 $ 81 $ 138 $ 293
Emerging Markets Series...................................................... $ 32 $ 97 $ 165 $ 345
Delaware Balanced Series..................................................... $ 24 $ 75 $ 128 $ 273
Convertible Securities Series................................................ $ 25 $ 77 $ 131 $ 280
Delchester Series............................................................ $ 24 $ 75 $ 128 $ 273
Capital Reserves Series...................................................... $ 24 $ 73 $ 125 $ 267
Strategic Income Series...................................................... $ 25 $ 76 $ 130 $ 278
Cash Reserve Series.......................................................... $ 22 $ 68 $ 117 $ 252
Global Bond Series........................................................... $ 25 $ 78 $ 133 $ 283
</TABLE>
* The Policy fee is not deducted after annuitization. No surrender charge is
assessed at the time of annuitization if you elect a life contingency option or
a noncommutable period certain option of ten years or more.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Policy.
10
<PAGE>
SUMMARY OF POLICY FEATURES
INVESTMENT OPTIONS. Purchase payments may be allocated among the variable
Sub-Accounts, which are subdivisions of Separate Account VA-K ("Separate
Account"), a separate account of the Company and, where available, a fixed
interest account ("General Account") of the Company (together "accounts"). The
Separate Account is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the "1940 Act"), but such registration does not
involve the supervision of the management or investment practices or policies of
the Separate Account by the SEC. For information about the Separate Account and
the Company, see "DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND DELAWARE
GROUP PREMIUM FUND, INC." For more information about the General Account see
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Each Sub-Account available under the Policies invests its assets without a sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. (the "Fund"). The Fund is an open-end, management investment company,
consisting of 17 different series: the Growth & Income Series (formerly Decatur
Total Return Series), Devon Series, DelCap Series, Aggressive Growth Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Balanced Series
(formerly Delaware Series), Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, Cash Reserve Series, and
Global Bond Series ("Underlying Series"). Each Underlying Series operates
pursuant to different investment objectives, discussed below.
INVESTMENT IN THE SUB-ACCOUNTS. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Series.
There can be no assurance that the investment objectives of the Underlying
Series can be achieved or that the value of a Policy will equal or exceed the
aggregate amount of the purchase payments made. For more information about the
investments of the Underlying Series, see "DESCRIPTION OF THE COMPANY, THE
SEPARATE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND, INC." The accompanying
prospectus of the Fund describes the investment objectives and risks of each of
the Underlying Series.
Dividends or capital gains distributions received from an Underlying Series are
reinvested in additional shares of that Underlying Series, which are retained as
assets of the Sub-Account.
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, amounts may be transferred
among the Sub-Accounts and, where available, between the General Account and the
Sub-Accounts, subject to certain limitations described under "B. Transfer
Privilege."
ANNUITY PAYMENTS. The Owner may select variable annuity payments based on
certain Sub-Accounts, fixed-amount annuity payments, or a combination of
fixed-amount and variable annuity payments. Fixed-amount annuity payments are
guaranteed by the Company.
In addition, an optional Minimum Guaranteed Annuity Payout Rider is available
during the accumulation phase in most jurisdictions for a separate monthly
charge. See "J. Optional Minimum Guaranteed Annuity Payout Rider" under "THE
VARIABLE ANNUITY POLICIES." If elected, the Rider guarantees the Annuitant a
minimum amount of fixed annuity lifetime income during the annuity payout phase,
subject to certain conditions. On each Policy anniversary a Minimum Guaranteed
Annuity Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout
Benefit Base (less any applicable premium taxes) is the value that will be
annuitized should the Rider be exercised. In order to exercise the Rider, a
fixed annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur
11
<PAGE>
at the guaranteed annuity purchase rates listed under the Annuity Option Tables
in the Policy. The Minimum Guaranteed Annuity Payout Benefit Base is equal to
the greatest of:
(a) the Accumulated Value, if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
See "THE VARIABLE ANNUITY POLICIES" for information about annuity payment
options, selecting the Annuity Date, and how annuity benefit payments are
calculated.
CANCELLATION RIGHTS. An individual purchasing a Policy ("IRA") may cancel it
within ten days of receipt. In certain states an Owner may have special
cancellation rights. For more information about cancellation rights, see "RIGHT
TO CANCEL OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Purchase payments are not limited as to
frequency and number, but no payments may be submitted within one month of the
Annuity Date. Generally, the initial purchase payment must be at least $600 and
subsequent payments must be at least $50. Under a monthly automatic payment
plan, or a payroll deduction plan, each purchase payment must be at least $50.
In cases where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, however, the Company may issue a Policy on the employee if the plan's
average annual contribution per eligible plan participant is at least $600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Policy. In addition, the Internal Revenue Code (the
"Code") imposes maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. SURRENDER CHARGES
No sales charge is deducted from purchase payments at the time the payments are
made. However, a surrender charge may be assessed on withdrawals of payments
that have not been invested for seven full years.
B. ANNUAL POLICY FEE
The Company will deduct a Policy fee equal to $30 from the Accumulated Value on
the Policy anniversary, and upon full surrender of the Policy if the Accumulated
Value on those dates is $50,000 or less. The Policy fee currently is waived for
policies issued to a trustee of a 401(k) plan.
C. PREMIUM TAXES
A deduction for state and local premium taxes, if any, may be made as described
under "B. Premium Taxes." Premium taxes may range from 0 to 3.5%.
12
<PAGE>
D. SEPARATE ACCOUNT ASSET CHARGES
The Company will deduct on a daily basis, an annual charge equal to 1.25% of the
average daily net assets of each Sub-Account. The charge is retained for the
mortality and expense risks the Company assumes. In addition, to cover
administrative expenses, the Company deducts on a daily basis, an annual charge
of 0.15% of the average daily net assets in the Sub-Accounts.
E. TRANSFER CHARGE
The Company currently makes no charge for transfers. The Company guarantees that
the first 12 transfers in a Policy year will be free of charge. For each
subsequent transfer, the Company reserves the right to assess a charge,
guaranteed never to exceed $25, to reimburse the Company for the costs of
processing the transfer.
F. CHARGES OF THE UNDERLYING SERIES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Series. These charges vary among the
Underlying Series, and ranged in 1998 from an annual rate of 0.64% to an annual
rate of 1.50% of average daily net assets.
G. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Owner may elect the following optional Rider.
A separate monthly charge is made for the Rider which is deducted from the
Accumulated Value at the end of each month within which the Rider has been in
effect. The applicable charge is assessed by multiplying the Accumulated Value
on the last day of each month and on the date the Rider is terminated by 1/12th
of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "E. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "J. Optional Minimum
Guaranteed Annuity Payout Rider" under "THE VARIABLE ANNUITY POLICIES."
SURRENDER OR PARTIAL REDEMPTIONS. At any time before the Annuity Date, the
Owner has the right either to surrender the Policy in full and receive its
current value, minus the Policy fee and any applicable surrender charge, or to
redeem a portion of the Policy's value subject to certain limits and any
applicable surrender charge. There may be tax consequences for surrender or
redemptions. For further information, see "C. Surrender" and "D. Partial
Redemption" under "THE VARIABLE ANNUITY POLICIES," "A. Surrender Charge" under
"CHARGES AND DEDUCTIONS," and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant or Owner dies before the Annuity Date, a death
benefit will be paid to the beneficiary. Upon the death of the Annuitant, the
death benefit is equal to the greatest of (1) the Accumulated Value under the
Policy, or (2) the sum of the gross payments made under the Policy reduced
proportionally to reflect all partial redemptions, or (3) the death benefit that
would have been payable on the most recent fifth year Policy anniversary,
increased for subsequent purchase payments and reduced proportionally to reflect
withdrawals after that date. Upon death of an Owner, who is not also the
Annuitant, the death benefit is equal to the Accumulated Value of the Policy.
(For differences under Delaware Medallion I, see APPENDIX B, #5.)
SALES OF POLICIES. The Policies were sold by agents of the Company who are
authorized by applicable law to sell variable annuity policies. These agents are
registered representatives of broker-dealers which are members of the National
Association of Securities Dealers, Inc. See "Sales Expense."
13
<PAGE>
PERFORMANCE INFORMATION
Allmerica Financial Life Insurance and Annuity Company first offered Delaware
Medallion II to the public in 1993 and Delaware Medallion I in 1992. The
Company, however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Series have been in
existence. Performance results in Tables 1A and 2A are calculated with all
charges assumed to be those applicable to the Policy, the Sub-Accounts and the
Underlying Series. Performance results also assume that the Policy is
surrendered at the end of the applicable period. Performance results in Tables
1B and 2B, do not include the Policy fee and assume that the Policy 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.
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 Sub-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 Series 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 Policy fee, the charges of the Underlying Series and the surrender charge
which would be assessed if the investment were completely withdrawn at the end
of the specified period. The calculation is not adjusted to reflect the
deduction of a Minimum Guaranteed Annuity Payout Rider Charge. 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 Policy fee and assumes that the Policy 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 Series 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 Series 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
Policy.
For more detailed information about these performance calculations, including
actual formulas, see the SAI. For performance of the Delaware Medallion I policy
issued by First Allmerica Financial Life Insurance Company, see Appendix B.
14
<PAGE>
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 SERIES IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain policy
features.
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
Series.
15
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY --
DELAWARE MEDALLION I & II
TABLE 1A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 4/27/92 2.28% 16.37% 15.16%
Devon Series............................................... 5/1/97 15.25% N/A 26.03%
DelCap Series.............................................. 4/9/92 9.77% 11.70% 11.39%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 6.81 % N/A 21.17 %
REIT Series................................................ 5/7/98 N/A N/A -15.59 %
Small Cap Value Series..................................... 1/2/94 -12.33 % N/A 11.70 %
Trend Series............................................... 12/30/93 7.16 % 14.28 % 14.54 %
International Equity Series................................ 10/29/92 1.58 % 7.91 % 8.91 %
Emerging Markets Series.................................... 5/1/97 -37.64 % N/A -30.23 %
Delaware Balanced Series................................... 4/30/92 9.64 % 14.56 % 13.20 %
Convertible Securities Series.............................. 5/1/97 -8.69 % N/A 3.36 %
Delchester Series.......................................... 4/27/92 -9.56 % 4.55 % 6.72 %
Capital Reserves Series.................................... 4/30/92 -1.42 % 3.40 % 4.58 %
Strategic Income Series.................................... 5/1/97 -5.19 % N/A -0.16 %
Cash Reserve Series........................................ 4/22/92 -2.94 % 2.45 % 2.41 %
Global Bond Series......................................... 5/1/96 -0.39 % N/A 3.66 %
</TABLE>
16
<PAGE>
TABLE 1B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 4/27/92 9.80% 17.42% 15.85%
Devon Series............................................... 5/1/97 22.33% N/A 29.68%
DelCap Series.............................................. 4/9/92 17.17% 12.74% 12.01%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 13.85 % N/A 24.86 %
REIT Series................................................ 5/7/98 N/A N/A -9.91 %
Small Cap Value Series..................................... 1/2/94 -6.11 % N/A 12.56 %
Trend Series............................................... 12/30/93 14.43 % 15.10 % 15.27 %
International Equity Series................................ 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................... 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................... 4/30/92 16.98 % 15.43 % 13.72 %
Convertible Securities Series.............................. 5/1/97 -2.54 % N/A 7.42 %
Delchester Series.......................................... 4/27/92 -3.19 % 5.65 % 7.28 %
Capital Reserves Series.................................... 4/30/92 5.29 % 4.36 % 5.02 %
Strategic Income Series.................................... 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series........................................ 4/22/92 3.63 % 3.40 % 2.85 %
Global Bond Series......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
17
<PAGE>
TABLE 2A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
UNDERLYING FUND ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS FUND
- --------------------------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 7/28/88 2.28% 16.37% 11.22%
Devon Series............................................. 5/1/97 15.25% N/A 26.03%
DelCap Series............................................ 7/12/91 9.77% 11.70% 10.79%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 6.81 % N/A 21.17 %
REIT Series.............................................. 5/1/98 N/A N/A -15.21 %
Small Cap Value Series................................... 12/27/93 -12.33 % 11.69 % 11.75 %
Trend Series............................................. 12/27/93 7.16 % 14.28 % 14.51 %
International Equity Series.............................. 10/29/92 1.58 % 7.91 % 8.91 %
Emerging Markets Series.................................. 5/1/97 -37.64 % N/A -30.23 %
Delaware Balanced Series................................. 7/28/88 9.64 % 14.56 % 12.95 %
Convertible Securities Series............................ 5/1/97 -8.69 % N/A 3.36 %
Delchester Series........................................ 7/28/88 -9.56 % 4.55 % 7.71 %
Capital Reserves Series.................................. 7/28/88 -1.42 % 3.40 % 5.38 %
Strategic Income Series.................................. 5/1/97 -5.19 % N/A -0.16 %
Cash Reserve Series...................................... 7/28/88 -2.94 % 2.45 % 3.65 %
Global Bond Series....................................... 5/1/96 -0.39 % N/A 3.66 %
</TABLE>
18
<PAGE>
TABLE 2B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
UNDERLYING FUND ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS FUND
- --------------------------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 7/28/88 9.80% 17.42% 11.72%
Devon Series............................................. 5/1/97 22.33% N/A 29.68%
DelCap Series............................................ 7/12/91 17.17% 12.74% 11.19%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 13.85 % N/A 24.86 %
REIT Series.............................................. 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................... 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series............................................. 12/27/93 14.43 % 15.10 % 15.24 %
International Equity Series.............................. 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................. 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series............................ 5/1/97 -2.54 % N/A 7.42 %
Delchester Series........................................ 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series.................................. 7/28/88 5.29 % 4.36 % 5.46 %
Strategic Income Series.................................. 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series...................................... 7/28/88 3.63 % 3.40 % 3.70 %
Global Bond Series....................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
19
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of periodic annuity payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
"annuity payments," and the individual receiving the payments is called the
"annuitant." Annuity payments may begin immediately after a lump sum purchase is
made or may begin after an investment period during which the amount necessary
to provide the desired amount of retirement income is accumulated.
Under an annuity policy, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the annuitant,
regardless of how long the annuitant lives or how long all annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the policy,
regardless of actual costs of operations.
The Owner's purchase payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity payments are paid to the
annuitant for life or for such other period chosen by the Owner. In the case of
a "fixed" annuity, the value of these annuity payments is guaranteed by the
insurance company, which assumes the risk of making the investments to enable it
to make the guaranteed payments. For more information about fixed annuities see
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
With a variable annuity, the value of the policy and the annuity payments are
not guaranteed but will vary depending on the investment performance of a
portfolio of securities. Any investment gains or losses are reflected in the
value of the policy and in the annuity payments. If the portfolio increases in
value, the value of the policy increases. If the portfolio decreases in value,
the value of the policy decreases.
RIGHT TO CANCEL OR SURRENDER
The Owner may cancel the Policy at any time between the date of the application
and the date ten days (or the number of days required by state law if more than
ten) after receipt of the Policy. Within seven days of receipt of the
cancellation request, the Company will return an amount equal to the sum of (1)
the difference between the gross payment(s) received and any amounts allocated
to the Sub-Accounts, and (2) the Accumulated Value of amounts allocated to the
Sub-Accounts as of the date the request is received. If the Policy was purchased
as an IRA or if required by state law, the Company will refund the greater of
the amount described above or the entire purchase payment. In order to cancel
the Policy, the Owner must mail or deliver the Policy (if it has already been
received) to the agent through whom the Policy was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any authorized
representative of the Company. Mailing or delivery must occur on or before ten
days after receipt of the Policy for revocation to be effective.
The liability of the Separate Accounts under this provision is limited to the
Owner's Accumulated Value in each Separate Account on the date of cancellation.
Any additional amounts refunded to the Owner will be paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Owner's bank.
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July 1974. Its principal office ("Principal Office") is located
at 440 Lincoln Street, Worcester, MA 01653, telephone 508-855-1000. The Company
is subject to the laws of the state of Delaware governing insurance companies
and to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is
20
<PAGE>
subject to the insurance laws and regulations of other states and jurisdictions
in which it is licensed to operate. As of December 31, 1998, the Company had
over $14 billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries (including the Company) had over $27 billion in combined assets and
over $48 billion in life insurance in force.
The Company is a charter 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 SEPARATE ACCOUNT. Separate Account VA-K (the "Separate Account") is a
separate investment account of the Company. The assets used to fund the variable
portions of the Policies are set aside in the Sub-Accounts of the Separate
Account, and are kept separate from the general assets of the Company. There are
17 Sub-Accounts available under the Policies. Each Sub-Account is administered
and accounted for as part of the general business of the Company, but the
income, capital gains, or capital losses of each Sub-Account are allocated to
such Sub-Account without regard to other income, capital gains, or capital
losses of the Company. Obligations under the Policies are obligations of the
Company. Under Delaware law, the assets of the Separate Account may not be
charged with any liabilities arising out of any other business of the Company.
The Board of Directors of the Company authorized the Separate Account on
November 1, 1990. The Separate Account meets the definition of a "separate
account" under federal securities laws, and is registered with the SEC as a unit
investment trust under the 1940 Act. Such registration does not involve the
supervision or management of investment practices or policies of the Separate
Account or the Company by the SEC. The Company reserves the right, subject to
compliance with applicable law, to change the names of the Separate Account and
the Sub-Accounts.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE SEPARATE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE SEPARATE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE POLICIES
DESCRIBED IN THIS PROSPECTUS.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. (the
"Fund") is an open-end, management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of the Fund or its separate investment
series. The Fund was established to serve as an investment medium for separate
accounts supporting variable insurance policies. The Fund currently has 17
investment portfolios ("Underlying Series"), each issuing a series of shares:
Growth & Income Series, Devon Series, DelCap Series, Aggressive Growth Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Balanced Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bond Series. The assets
of each Underlying Series are held separate from the assets of the other
Underlying Series. Each Underlying Series operates as a separate investment
vehicle, and the income or losses of one have no effect on the investment
performance of another Underlying Series. Shares of the Underlying Series are
not offered to the general public but solely to separate accounts of life
insurance companies.
21
<PAGE>
The investment adviser for the Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, Small Cap Value
Series, REIT Series, Trend Series, Delaware Balanced 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 Series is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING SERIES, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING SERIES MAY BE FOUND IN THE
PROSPECTUS OF THE FUND, WHICH ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The SAI of the Fund is available upon request.
GROWTH & INCOME SERIES -- seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Series formerly was known as
Decatur Total Return Series.
DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth.
AGGRESSIVE GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in small cap
common stocks whose market value appears low relative to their underlying value
or future earnings and growth potential. Emphasis also will be placed on
securities of companies that temporarily may be out of favor or whose value is
not yet recognized by the market.
TREND SERIES -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
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. It
seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The
22
<PAGE>
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 BALANCED SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series formerly was
known as Delaware Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, including privately placed
convertible securities.
DELCHESTER SERIES -- seeks as high a current income as possible by investing in
rated and unrated corporate bonds (including high-yield bonds commonly known as
"junk bonds"), U.S. government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in this
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. It seeks
to achieve its objective by using a multi-sector investment approach, investing
primarily in three sectors of the fixed-income securities market: high yield,
higher-risk securities; investment grade fixed-income securities; and foreign
government and other foreign fixed-income securities. The Series also may invest
in U.S. equity securities.
CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
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 Series
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Underlying Series in which it invests, you will be notified
of the change. If you have Policy value in that Sub-Account, the Company will
transfer it without charge on written request by you to another Sub-Account or
to the General Account, where available. The Company must receive your written
request within 60 days of the later of (1) the effective date of such change in
the investment policy, or (2) the receipt of the notice of your right to
transfer.
IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY OF
PARTICULAR SUB-ACCOUNTS.
INVESTMENT ADVISORY SERVICES TO THE FUND
Investment advisers are paid an annual fee based on the average daily net assets
of their respective Underlying Series for management services. The Cash Reserve
Series management fee rate is as follows: 0.45% on the first $500 million, 0.40%
on the next $500 million, 0.35% on the next $1,500 million and 0.30% on assets
in excess of $2,500 million; the Capital Reserves Series management fee rate is
as follows: 0.50% on the first $500 million, 0.475% on the next $500 million,
0.45% on the next $1,500 million and 0.425% on assets in excess of $2,500
million; the Growth & Income Series, Delchester Series, Delaware Balanced
Series, Devon Series and Strategic Income Series management fee rate is as
follows: 0.65% on the first $500 million, 0.60%
23
<PAGE>
on the next $500 million, 0.55% on the next $1,500 million and 0.50% on assets
in excess of $2,500 million; the DelCap Series, Aggressive Growth Series, Small
Cap Value Series, Trend Series, Social Awareness Series, REIT Series,
Convertible Securities Series and Global Bond Series management fee rate is as
follows: 0.75% on the first $500 million, 0.70% on the next $500 million, 0.65%
on the next $1,500 million and 0.60% on assets in excess of $2,500 million; the
International Equity Series management fee rate is as follows: 0.85% on the
first $500 million, 0.80% on the next $500 million, 0.75% on the next $1,500
million and 0.70% on assets in excess of $2,500 million; and the Emerging
Markets Series management fee rate is as follows: 1.25% on the first $500
million, 1.20% on the next $500 million, 1.15% on the next $1,500 million and
1.10% on assets in excess of $2,500 million.
CHARGES AND DEDUCTIONS
Deductions under the Policies and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Series are described in the Prospectus and SAI of the Fund.
A. SURRENDER CHARGE
No charge for sales expense is deducted from purchase payments at the time the
payments are made. A surrender charge is deducted from the Accumulated Value of
the Policy, however, in the case of surrender and/ or partial redemption of the
Policy or at the time annuity benefit payments begin, within certain time limits
described below.
For purposes of determining the surrender charge, the Policy Value is divided
into three categories: (1) New Payments -- purchase payments received by the
Company during the seven years preceding the date of the surrender; (2) Old
Payments -- purchase payments invested in the Policy for more than seven years;
and (3) the amount available under the Free Withdrawal provision. See "Free
Withdrawal Amounts" below. For purposes of determining the amount of any
surrender charge, surrenders will be deemed to be taken first from Free
Withdrawal Amounts and then Old Payments, and finally from New Payments. Free
Withdrawal Amounts and Old Payments may be withdrawn from the Policy at any time
without the imposition of a surrender charge. If a withdrawal is attributable
all or in part to New Payments, a surrender charge may apply.
Subject to state law, no surrender charge is imposed, and no commissions are
paid, on Policies issued after December 20, 1993 where the Owner and Annuitant
as of the date of application are both within the following class of
individuals: All employees and registered representatives of any broker-dealer
that has entered into a sales agreement with the Company to sell the Policies;
all officers, directors, trustees and bona fide full-time employees (including
former officers and directors and former employees who had been employed for at
least ten years) of Delaware Management, its affiliates and subsidiaries, and of
any Underlying Series; and any spouses of the above persons or any children or
other legal dependents of the above persons who are under the age of 21. Any
elimination of or reduction in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers. The Company will not make any
changes to the charge where prohibited by law.
CHARGES FOR SURRENDER AND PARTIAL REDEMPTION. If a Policy is surrendered, or if
New Payments are redeemed, while the Policy is in force and before the Annuity
Date, a surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments to which the withdrawal is
attributed have remained credited under the Policy. Any Free Withdrawal Amount
is deducted first as described below. Additional amounts withdrawn are then
deducted first from Old Payments. Thereafter, for the purpose of calculating
surrender charges for New Payments, all amounts withdrawn are assumed to be
deducted first from the oldest New Payment and then from the next oldest New
Payment and so on, until all New Payments have been exhausted pursuant to the
FIFO method of accounting. (See "FEDERAL TAX CONSIDERATIONS" for a discussion of
how withdrawals are treated for income tax purposes.)
24
<PAGE>
The Surrender Charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
0 - 3 7%
4 6%
5 5%
6 4%
7 3%
More than 7 0%
</TABLE>
The amount redeemed equals the amount requested by the Owner plus the charge, if
any, which is applied against the amount requested. For example, if the
applicable charge is 7% and the Owner has requested $200, the Owner will receive
$200 and the charge will be $14 (assuming no Free Withdrawal Amount, discussed
below) for a total withdrawal of $214. The charge is applied as a percentage of
the New Payments redeemed, but in no event will the total surrender charge
exceed a maximum limit of 8% of total gross New Payments. Such total charge
equals the aggregate of all applicable surrender charges for surrender, partial
redemptions, and annuitization.
In Maryland, a different surrender charge applies to monies in the General
Account. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
FREE WITHDRAWAL AMOUNTS. In each calendar year, the Company will waive the
surrender charge, if any, on an amount ("Free Withdrawal Amount") equal to the
greatest of (1), (2) or (3):
Where (1) is: The Accumulated Value as of the Valuation Date coincident
with or next following the date of receipt of the request for
withdrawal, reduced by total gross payments not previously
redeemed ("Cumulative Earnings");
Where (2) is: 10% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of the
request for withdrawal, reduced by the total amount of any
prior partial redemptions made in the same calendar year to
which no surrender charge was applied;
Where (3) is: The amount calculated under the Company's life expectancy
distribution (see "Life Expectancy Distributions," below),
whether or not the withdrawal was part of such distribution
(applies only if the Owner and Annuitant are the same
individual).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Free Withdrawal Amount will be deducted first from Cumulative Earnings. If
the Free Withdrawal Amount exceeds Cumulative Earnings, the excess amount will
be deemed withdrawn from payments not previously redeemed on a last-in-first-out
("LIFO") basis. If more than one partial withdrawal is made during the year, on
each subsequent withdrawal the Company will waive the surrender charge, if any,
until the entire Free Withdrawal Amount has been redeemed.
25
<PAGE>
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Policy according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. If an Owner elects
the Company's LED option, in each calendar year a fraction of the Accumulated
Value is withdrawn without a surrender charge based on the Owner's then life
expectancy (or the joint life expectancy of the Owner and a beneficiary.) 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. Under the Company's LED option, the amount withdrawn from the
Policy changes each year, because life expectancy changes each year that a
person lives. For example, actuarial tables indicate that a person age 70 has a
life expectancy of 16 years, but a person who attains age 86 has a life
expectancy of another 6.5 years. Where the Owner is a trust or other nonnatural
person, the Owner may elect the LED option based on the Annuitant's life
expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Policy and be subject to a 10% federal tax
penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Policies in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the amount of the Company's LED amount, a surrender charge may
apply to the amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Policy, net of the
applicable surrender charge on New Payments, the Policy fee, and any tax
withholding, if applicable. Subject to the same rules that are applicable to
partial redemptions, the Company will not assess a surrender charge on a Free
Withdrawal Amount. Because Old Payments count in the calculation of the Free
Withdrawal Amount, if Old Payments equal or exceed the Free Withdrawal Amount,
the Company may assess the full applicable surrender charge on New Payments.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Policy on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Policy to
other policies issued by the Company and owned by the trustee, with no deduction
for any otherwise applicable surrender charge. Any such reallocation will be at
the unit values for the Sub-Accounts as of the valuation date on which a
written, signed request is received at the Principal Office.
For further information on surrender and partial redemption, including minimum
limits on amount redeemed and amount remaining under the Policy in the case of
partial redemption, and important tax considerations, see "C. Surrender" and "D.
Partial Redemption" under "THE VARIABLE ANNUITY POLICIES," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses a
period certain option (Option V or the comparable fixed annuity option), a
surrender charge will be deducted from the Accumulated Value of the Policy if
the Annuity Date occurs at any time during the surrender charge period. Such
charge is the same as that which would apply had the policy been surrendered on
the Annuity Date.
26
<PAGE>
No surrender charge is imposed at the time of annuitization in any policy year
under an option involving a life contingency (Options I, II, III, IV-A, IV-B or
the comparable fixed annuity options) or involving a non-commutable period
certain of a duration of ten years or more.
SALES EXPENSE. The Company pays sales commissions, not to exceed 6.5% of
purchase payments, to entities which sell the Policies. To the extent permitted
by NASD rules, expense reimbursement allowances and additional payments for
other services not directly related to the sale of the Policies, including the
recruitment and training of personnel, production of promotional literature, and
similar services may also be made.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated surrender charges, described above, and the
investment earnings on amounts allocated to accumulate on a fixed basis in
excess of the interest credited on fixed accumulations by the Company which may
include amounts derived from mortality and expense risk charges. There is no
additional charge to Owners or to the Separate Account. Any surrender charges
assessed on a Policy will be retained by the Company. Alternative commission
schedules are available with lower initial commission amounts based on purchase
payments, plus ongoing annual compensation of up to 1% of policy value.
B. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
policies. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, to the extent permitted in the Policy the premium tax charge is
deducted on a pro-rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity benefit payments begin (the
Company reserves the right instead to deduct the premium tax charge for
these Policies at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
If no amount for premium tax was deducted at the time the purchase
payment was received, but subsequently tax is determined to be due prior
to the Annuity Date, the Company reserves the right to deduct the premium
tax from the Policy value at the time such determination is made.
C. POLICY FEE
The Company deducts a $30 Policy fee on the Policy anniversary date and upon
full surrender of the Policy if the Accumulated Value on any of these dates is
$50,000 or less. The Policy fee is not deducted after annuitization. The Policy
fee currently is waived for Policies issued to a trustee of a 401(k) plan.
Where Policy value has been allocated to more than one account (General Account
and/or one or more of the Sub-Accounts), a percentage of the total Policy fee
will be deducted from the Policy value in each account. The portion of the
charge deducted from each account will be equal to the percentage which the
Policy value in that account represents of the total Accumulated Value under the
Policy. The deduction of the Policy fee will result in cancellation of a number
of Accumulation Units equal in value to the percentage of the charge deducted
from that account.
D. ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation period and
the annuity period. The mortality risk arises from the Company's special death
benefit guarantee and its guarantee that it will make annuity benefit payments
in accordance with
27
<PAGE>
annuity rate provisions established at the time the Policy is issued for the
life of the Annuitant (or in accordance with the annuity option selected), no
matter how long the Annuitant (or other payee) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity phase on all Policies, including those that do not involve a life
contingency, even though the Company does not bear direct mortality risk with
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Policies and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's average daily net assets. This charge may not be
increased. Since mortality and expense risks involve future contingencies which
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge which is applicable to each. The
Company estimates that a reasonable allocation might be .80% for mortality risk
and .45% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account available
under the Policies with a daily charge at an annual rate of 0.15% of the average
daily net assets of the Sub-Account. The charge is imposed during both the
accumulation period and the annuity period. The daily administrative expense
charge is assessed to help defray administrative expenses actually incurred in
the administration of the Sub-Account, without profits. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Policy and the amount of expenses actually attributable to that Policy.
Deductions for the Policy fee (described under "C. Policy Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Separate Account and the Policies include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first 12 transfers in a Policy year will be free of
charge, but reserves the right to assess a charge, guaranteed never to exceed
$25, for the thirteenth and each subsequent transfer in a Policy year to
reimburse it for the expense of processing transfers. For more information, see
"B. Transfer Privilege" under "THE VARIABLE ANNUITY POLICIES."
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Fund, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Series. The prospectus and SAI of
the Fund contain additional information concerning expenses of the Underlying
Series.
E. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Policy at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts and the Fixed Interest Account (based on the relative
28
<PAGE>
value that the Accumulation Units of the Sub-Accounts and the dollar amounts in
the Fixed Interest Account bear to the Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<CAPTION>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
<S> <C>
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
For a description of the Rider, see "J. Optional Minimum Guaranteed Annuity
Payout Rider" under "THE VARIABLE ANNUITY POLICIES," below.
THE VARIABLE ANNUITY POLICIES
The Policies are designed for use in connection with several types of retirement
plans, as well as for individual use. Participants under such plans, as well as
Owners, and beneficiaries, are cautioned that the rights of any person to any
benefits under such Policies may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the Policies.
The Policies offered by this Prospectus may be purchased from representatives of
Allmerica Investments, Inc. and certain independent broker-dealers that are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. (NASD). The principal
underwriter of the Policies is Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA, 01653, an indirect wholly owned subsidiary of First Allmerica.
Owners may direct any inquiries to Client Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, MA 01653.
A. PURCHASE PAYMENTS
Purchase payments are 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 payment is credited to the Policy as of the date that the properly
completed application which accompanies the payment is received by the Company
at its Principal Office. If an application is not completed within five business
days of the Company's receipt of the initial payment, or does not specify how
payments are to be allocated among the Accounts, the initial purchase payment
will be returned immediately unless the Owner specifically consents to the
holding of it pending completion of the outstanding underwriting requirements.
After a policy is issued, Accumulation Units will be credited to the Policy at
the unit value computed as of the Valuation Date that a purchase payment is
received at the Principal Office on the basis of accumulation unit value next
determined after receipt.
Payments may be made to the Policy at any time prior to the Annuity Date,
subject to certain minimums. Generally, the initial payment must be at least
$600. Under a salary deduction or a monthly automatic payment plan, the minimum
initial payment is $50. In all cases, each subsequent payment must be at least
$50. Where the contribution on behalf of an employee under an employer-sponsored
retirement plan is less than $600 but more than $300 annually, the Company may
issue a Policy on the employee, if the plan's average annual contribution per
eligible plan participant is at least $600. Total payments may not exceed the
maximum limit specified in the Policy. If the payments are divided among two or
more accounts, a net amount of at least $10 of each payment must be allocated to
each account.
Generally, payments will be allocated among the Sub-Accounts according to the
Owner's instructions when the Policy is issued. The Owner may change allocation
instructions for new payments pursuant to written or telephone request. If
telephone requests are elected by the Owner, a properly completed authorization
form must be on file before telephone requests will be 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
29
<PAGE>
unauthorized or fraudulent instructions. The procedures the Company follows for
transactions initiated by telephone may 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 or PIN number. All transfer
instructions by telephone are tape-recorded.
B. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, subject to the Company's then current
rules, an Owner may have amounts transferred among the Sub-Accounts or between a
Sub-Account and the General Account, where available. As of the date of this
Prospectus, transfers may be made to and among all of the available Sub-
Accounts. However, should additional funds be added to the Policy, the Company
reserves the right to limit the number of Sub-Accounts which may be used during
the life of the Policy. Transfer values will be effected at the Accumulation
Value next computed after receipt of the transfer order. The Company will make
transfers pursuant to written request or, if a properly completed authorization
is on file, pursuant to a telephone request.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Policy year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Policy year, the Company reserves the right to assess a
charge, guaranteed not to exceed $25, to reimburse it for the expense of
processing these additional transfers.
Except for transfers made under the automatic transfer option (DOLLAR COST
AVERAGING) and for transfers made under policies issued to residents of Texas,
no transfers from the General Account are permitted except during the 30-day
period beginning on each policy anniversary. During this 30-day "window" period,
any amount (up to 100%) of the policy value may be transferred. In Texas,
transfers from the Fixed Account are also permitted if there has been at least a
ninety day period since the last transfer from the General Account and the
amount of the transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred, (2) the minimum
amount that may remain in a Sub-Account following a transfer from that
Sub-Account, (3) the minimum period of time between transfers involving the
General Account, and (4) the maximum amount that may be transferred each time
from the General Account.
The Owner may elect automatic transfers of a pre-determined dollar amount
(DOLLAR COST AVERAGING), not less than $100, on a periodic basis (monthly,
bi-monthly, quarterly, semi-annually or annually) from the Sub-Account investing
in the Capital Reserve Series, the Strategic Income Series, or the Cash Reserve
Series (the "source account") to one or more of the Sub-Accounts. Automatic
transfers may not be made into the General Account or, if applicable, the
Sub-Account being used as the source account. If an automatic transfer would
reduce the balance in the source account to less than $100, the entire balance
will be transferred proportionately to the chosen Sub-Accounts. Automatic
transfers will continue until the amount in the source account on a transfer
date is zero or the Owner's request to terminate the option is received by the
Company. If additional amounts are allocated to the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
The General Account may be used as the source account from which automatic
transfers can be made on a monthly, bi-monthly or quarterly basis provided that
(1) the amount of each monthly transfer cannot exceed 10% of the value in the
General Account as of the date of the first transfer; (2) the amount of each
bi-monthly transfer cannot exceed 20% of the value of the General Account as of
the date of the first transfer and (3) each quarterly transfer cannot exceed 25%
of the value in the General Account as of the date of the first transfer.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-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
30
<PAGE>
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate the option is received by the
Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Policy year under that
request count as one transfer towards the 12 transfers which are guaranteed to
be free of a transfer charge in each Policy year. Currently, automatic transfers
and automatic rebalancing may not be in effect simultaneously. Either option may
be elected at no additional charge when the Policy is purchased or at a later
date.
C. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Surrender Value. The Owner must return the Policy and a signed,
written request for surrender, satisfactory to the Company to the Principal
Office. The Surrender Value will be calculated based on the Accumulated Value of
the Policy as of the Valuation Date on which the request and the Policy are
received at the Principal Office.
Before the Annuity Date, a surrender charge may be deducted when a Policy is
surrendered if payments have been credited to the Policy during the last seven
full Policy years. See "CHARGES AND DEDUCTIONS." The Policy fee will be deducted
upon surrender of the Policy.
After the Annuity Date, only Policies annuitized under a commutable period
certain option (as in Annuity Option V) may be surrendered. The amount payable
is the commuted value of any unpaid installments, computed on the basis of the
assumed interest rate incorporated in such annuity benefit payments. No
surrender charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and partial redemptions of amounts in each Sub-Account during
any period which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each Separate Account is not reasonably
practicable.
The Company reserves the right to defer surrenders and partial redemptions of
amounts allocated to the Company's General Account for a period not to exceed
six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. PARTIAL REDEMPTION
At any time prior to the Annuity Date, an Owner may redeem a portion of the
Accumulated Value of his or her Policy, subject to the limits stated below. The
Owner must file a signed, written request for redemption, satisfactory to the
Company, at the Principal Office. The written request must indicate the dollar
amount the Owner wishes to receive and the account from which such amount is to
be redeemed. The amount redeemed equals the amount requested by the Owner plus
any applicable surrender charge, as described under "CHARGES AND DEDUCTIONS."
31
<PAGE>
Where allocations have been made to more than one account, a percentage of the
partial redemption may be allocated to each such account. A partial redemption
from a Sub-Account will result in cancellation of a number of units equivalent
in value to the amount redeemed, computed as of the Valuation Date that the
request is received at the Principal Office.
Each partial redemption must be in a minimum amount of $100. No partial
redemption will be permitted if the Accumulated Value remaining under the Policy
would be reduced to less than $1,000. Partial redemptions will be paid in
accordance with the time limitations described under "C. Surrender."
After the Annuity Date, only Policies under which a period certain option has
been elected may be partially redeemed. A partial redemption after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
E. DEATH BENEFIT
If the Annuitant dies (or an Owner predeceases the Annuitant) before the Annuity
Date while the Policy is in force, a death benefit will be paid to the
beneficiary, except where the Policy continues as provided below in "F. The
Spouse of the Owner as Beneficiary." Upon death of the Annuitant (including an
Owner who is also the Annuitant), the death benefit is equal to the greatest of
(1) the Accumulated Value under the Policy next determined following receipt of
due proof of death at the Principal Office, or (2) the total amount of gross
payments made under the Policy reduced proportionally to reflect the amount of
all prior partial withdrawals, or (3) the death benefit that would have been
payable on the most recent fifth year Policy anniversary, increased for
subsequent purchase payments and reduced proportionally to reflect withdrawals
after that date. A partial withdrawal will reduce the gross payments available
as a death benefit under (2) in the same proportion that the Accumulated Value
was reduced on the date of withdrawal. For each withdrawal, the reduction is
calculated by multiplying the total amount of gross payments by a fraction, the
numerator of which is the amount of the partial withdrawal and the denominator
of which is the Accumulated Value immediately prior to the withdrawal. For
example, if gross payments total $8,000 and a $3,000 withdrawal is made when the
Accumulated Value is $12,000, the proportional reduction of gross payments
available as a death benefit is calculated as follows: The Accumulated Value is
reduced by 1/4 (3,000 divided by 12,000); therefore, the gross amount available
as a death benefit under (2) also will be reduced by 1/4 (8,000 times 1/4 equals
$2,000), so that the $8,000 gross payments are reduced to $6,000. Payments made
after a withdrawal will increase the death benefit available under (2) by the
amount of the payment.
A partial withdrawal after the most recent fifth year Policy anniversary will
decrease the death benefit available under (3) in the same proportion that the
Accumulated Value was reduced on the date of the withdrawal. For example, if the
death benefit that would have been payable on the most recent fifth year Policy
anniversary is $12,000 and partial withdrawals totaling $5,000 are made
thereafter when the Accumulated Value is $15,000, the proportional reduction of
death benefit available under (3) is calculated as follows: The Accumulated
Value is reduced by 1/3 (5,000 divided by 15,000); therefore, the death benefit
that would have been payable on the most recent fifth year Policy anniversary
will also be reduced by 1/3 (12,000 times 1/3 or $4,000), so that the death
benefit available under (3) will be $8,000 ($12,000 minus $4,000). Payments made
after the most recent fifth year Policy anniversary will increase the death
benefit available under (3) by the amount of the payment.
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Upon death of an Owner who is not the Annuitant, the death benefit is equal to
the Accumulated Value of the Policy next determined following receipt of due
proof of death received at the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum. The
beneficiary may, however, by written request, elect one of the following
options:
(1) The payment of the one sum may be delayed for a period not to exceed
five years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin
within one year from the date of death, and are payable over a period
certain not extended beyond the life expectancy of the beneficiary.
(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from the
date of death and are payable over a period not extended beyond the life
expectancy of the beneficiary. Any annuity benefits will be provided in
accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy shall
be based on the unit values next computed after due proof of death has been
received at the Principal Office. If the beneficiary elects to receive the death
benefit in one sum, the death benefit will be paid within seven business days.
If the beneficiary (other than a spousal beneficiary under an IRA, See "F. The
Spouse of the Owner as Beneficiary," below) has not elected an annuity option
within one year from the date notice of death is received by the Company, the
Company will pay the death benefit in one sum. The death benefit will reflect
any earnings or losses experienced during the period and any withdrawals.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly annuity payments, any unpaid amounts or
installments will be paid to the beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death. If there is more than one beneficiary, the commuted
value of the payments, computed on the basis of the assumed interest rate
incorporated in the annuity option table on which such payments are based, shall
be paid to the beneficiaries in one sum.
F. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as sole beneficiary ("spousal beneficiary"), may by
written request continue the Policy in force rather than receive the death
benefit. The spousal beneficiary will become the new Owner (and, if the deceased
Owner was also the Annuitant, the new Annuitant). All other rights and benefits
provided in the Policy will continue, except that any subsequent spouse of such
new Owner will not be entitled to continue the Policy upon such new Owner's
death.
G. ASSIGNMENT
The Policy may be assigned by the Owner at any time prior to the Annuity Date
and while the Annuitant is alive. Policies sold in connection with IRA plans and
certain other qualified plans, however, are not assignable. For more information
about these plans, see "FEDERAL TAX CONSIDERATIONS."
The Company will not be deemed to have knowledge of an assignment unless it is
made in writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Policy is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Policy to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Owner in full settlement of all liability
under the Policy. The interest of the Owner and of any beneficiary will be
subject to any assignment.
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H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity 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 payments are determined
according to the annuity tables in the Policy, by the annuity option selected,
and by the investment performance of the Accounts selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the General Account of the Company, and the annuity payments will be fixed in
amount. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made each month. Since the value of an
Annuity Unit in a Sub-Account will reflect the investment performance of the
Sub-Account, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $50. If
a combination of fixed and variable payments is selected, the initial payment on
each basis must be at least $50. The Company reserves the right to increase
these minimum amounts. If the annuity option selected does not produce initial
payments which meet these minimums, the Company will pay the Accumulated Value
in one sum. Once the Company begins making annuity payments, the Annuitant
cannot make partial redemptions or surrender the annuity benefit, except in the
case where a commutable period certain option (Option V or a comparable fixed
option) has been chosen. Beneficiaries entitled to receive remaining payments
for a "period certain" may elect to instead receive a lump sum settlement.
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Annuitant's 85th
birthday, if the Annuitant's age at the date of issue of the Policy is 75 or
under, or (2) within ten years from the date of issue of the Policy and before
the Annuitant's 90th birthday, if the Annuitant's age at the date of issue is
between 76 and 90. The Owner may elect to change the Annuity Date by sending a
request to the Principal Office at least one month before the Annuity Date. The
new Annuity Date must be the first day of any month occurring before the
Annuitant's 90th birthday. The new Annuity Date must be within the life
expectancy of the Annuitant. The Company shall determine such life expectancy at
the time a change in Annuity Date is requested. In no event will the maximum
annuitization age exceed 90. The Code and the terms of qualified plans impose
limitations on the age at which annuity benefit payments may commence and the
type of annuity option selected. See "FEDERAL TAX CONSIDERATIONS" for further
information.
If the Owner does not elect otherwise, annuity benefit payments will be made in
accordance with Option I, a variable life annuity with 120 monthly payments
guaranteed. Changes in either the Annuity Date or annuity option can be made up
to one month prior to the Annuity Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Policy.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS
The Company currently provides the variable annuity options described below.
Variable annuity options may be funded through the Growth & Income Series, the
Capital Reserves Series and the Delaware Balanced Series.
The Company also provides fixed-amount annuity options which are comparable to
the variable annuity options. Regardless of how payments were allocated during
the accumulation period, any one of the variable annuity options or the
fixed-amount options may be selected, or any one of the variable annuity options
may
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be selected in combination with any one of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
OPTION I -- VARIABLE LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED. A
variable annuity payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before 120 monthly payments have been
paid, the monthly annuity benefit payments will continue to the beneficiary
until a total of 120 monthly payments have been paid.
OPTION II -- VARIABLE LIFE ANNUITY. A variable annuity payable during the
lifetime of the payee only. It would be possible under this option for the payee
to receive only one annuity benefit payment if the payee dies prior to the due
date of the second annuity payment, two annuity benefit payments if the payee
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the payee, no matter how
long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2), then monthly variable annuity payments will continue to the
beneficiary until the number of such payments equals the number determined in
(1).
Where:
(1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first monthly payment (which determines the greatest number
of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the payee.
OPTION IV-A -- JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. A variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Policy or the beneficiary. There is no
minimum number of payments under this option. See Option IV-B, below.
OPTION IV-B -- JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. A 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 in the
Policy or the beneficiary. There is no minimum number of payments under this
option. See Option IV-A, above.
OPTION V -- PERIOD CERTAIN VARIABLE ANNUITY. A variable annuity payable for a
stipulated number of years ranging from one to 30 years. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, if specifically requested at the time benefits begin.
It should be noted that Option V does not involve a life contingency. In the
computation of the payments under this option, the Company deducts a charge for
annuity rate guarantees, which includes a factor for mortality risks. Although
not contractually required to do so, the Company currently follows a practice of
permitting persons receiving payments under Option V to elect to convert to a
variable annuity involving a life contingency. The Company may discontinue or
change this practice at any time, but not with respect to Owners who have
elected Option V prior to the date of any change in this practice. See "FEDERAL
TAX CONSIDERATIONS" for a discussion of the possible adverse tax consequences of
selecting Option V.
J. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed
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annuity lifetime income during the annuity payout phase, subject to the
conditions described below. On each Policy anniversary a Minimum Guaranteed
Annuity Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout
Benefit Base (less any applicable premium taxes) is the value that will be
annuitized if the Rider is exercised. In order to exercise the Rider, a fixed
annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Policy. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value, if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Policy
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Policy issue or within thirty days after a Policy
anniversary date, the effective date of the Rider will be the following Policy
anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Policy anniversary following the expiration of a ten or
fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "I. Description of Variable Annuity
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Policy.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Policy anniversary after the effective date of the Rider unless
such termination occurs on or within thirty days after any Policy anniversary
or in conjunction with the repurchase of a Minimum Guaranteed Annuity Payout
Rider with a waiting period of equal or greater length at its then current
price, if available.
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- - After the seventh Policy anniversary from the effective date of the Rider the
Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Policy anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Policy or the date that a death
benefit is payable if the Policy is not continued under "F. The Spouse of the
Owner as Beneficiary" (See THE VARIABLE ANNUITY POLICIES").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Policy during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With 120 Monthly Payments Guaranteed. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under one Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
GUARANTEED
POLICY MINIMUM GUARANTEED
ANNIVERSARY BENEFIT MINIMUM ANNUAL
AT EXERCISE BASE INCOME(1)
- ---------------- -----------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With 120 Monthly Payments Guaranteed are available. See "I.
Description of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
Minimum Guaranteed Annuity Payout Benefit Base.
K. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a policy issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates, or (2) the
guaranteed male rates described in such Policy, regardless of whether the
Annuitant is male or female.
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Although the Company believes that the Supreme Court ruling does not affect
Policies funding IRA plans that are not employer-sponsored, the Company will
apply certain aspects of the ruling to annuity benefits under such Policies,
except in those states in which it is prohibited. Such benefits will be based on
(1) the greater of the guaranteed unisex annuity rates described in the
Policies, or (2) the Company's sex-distinct Non-Guaranteed Current Annuity
Option Rates.
L. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "K. NORRIS Decision" above) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Policy provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners both fixed and
variable annuity rates more favorable than those contained in the Policy. Any
such rates will be applied uniformly to all Owners of the same class.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- For life annuity options and noncommutable period certain options of ten
years or more (six or more years under New York Policies), the dollar
amount 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 years under New York Policies), the
dollar amount is determined by multiplying (1) the Surrender Value less
premium taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the
death benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
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 net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Policy.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected
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Sub-Account(s). The dollar amount of each subsequent variable annuity benefit
payment is determined by multiplying the fixed number of Annuity Units (derived
from the dollar amount of the first payment, as described above) with respect to
a Sub-Account by the value of an Annuity Unit of that Sub-Account on the
applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "J.
Optional Minimum Guaranteed Annuity Payout Rider" above.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
owner, annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Policy.
It should be recognized that the following discussion of federal income tax
aspects of amounts received under variable annuity policies is not exhaustive,
does not purport to cover all situations, and is not intended as tax advice. A
qualified tax adviser always should be consulted with regard to the application
of law to individual circumstances.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Policy, the Variable Account or the Sub-Accounts may have upon
its tax. The Variable Account presently is not subject to tax, but the Company
reserves the right to assess a charge for taxes should the Variable Account at
any time become subject to tax. Any charge for taxes will be assessed on a fair
and equitable basis in order to preserve equity among classes of Owners and with
respect to each separate account as though that separate account were a separate
taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than
39
<PAGE>
90% by any four investments. Under this section of the Code, if the investments
are not adequately diversified, the Contract will not be treated as an annuity
contract and therefore, the income on a policy, for any taxable year of an
owner, would be treated as ordinary income received or accrued by the owner. It
is anticipated that the Series of Delaware Group Premium Fund, Inc., in this
Contract will comply with the current diversification requirements. In the event
that future IRS regulations and/or rulings would require Policy modifications in
order to remain in compliance with the diversification standards, the Company
will make reasonable efforts to comply, and it reserves the right to make such
changes as it deems appropriate for that purpose.
In addition, traditionally in order for a variable annuity policy to qualify for
tax deferral, the Company, and not the variable policy owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity policy owners may now be considered the owners of these assets
for federal income tax purposes. Specifically, the IRS has stated in published
rulings that a variable annuity policy owner may be considered the owner of
segregated account assets if the policy owner possesses incidents of ownership
in those assets, such as the ability to exercise investment control over the
assets. The Treasury Department has also announced, in connection with the
issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
states that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
sub-accounts without being treated as owners of the underlying assets." As of
the date of this Prospectus, no such guidance has been issued. The Company
therefore additionally reserves the right to modify the Policy as necessary in
order to attempt to prevent a contract owner from being considered the owner of
a pro rata share of the assets of the segregated asset account underlying the
variable annuity policies.
A. QUALIFIED AND NON-QUALIFIED POLICIES
From a federal tax viewpoint there are two types of variable annuity policies:
"qualified" policies and "non-qualified" policies. A qualified policy is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
policy is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified policy or a
non-qualified policy. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE POLICIES IN GENERAL
The Company believes that the Policy described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
policy under Section 72 of the Code. Please note, however, if the Owner chooses
an Annuity Date beyond the Annuitant's 85th birthday, it is possible that the
Policy may not be considered an annuity for tax purposes and therefore, the
Owner may be taxed on the annual increase in Accumulated Value. The Owner should
consult tax and financial advisers for more information. This section governs
the taxation of annuities. The following discussion concerns annuities subject
to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Policy's Accumulated Value is not taxable to the Owner until it is withdrawn
from the Policy. If the Policy is surrendered or amounts are withdrawn prior to
the annuity date, any withdrawal of investment gain in value over the cost basis
of the Policy will be taxed as ordinary income. Under the current provisions of
the Code, amounts received under an annuity policy prior to annuitization
(including payments made upon the death of the annuitant or owner), generally
are first attributable to any investment gains credited to the policy over the
taxpayer's "investment in the policy." Such amounts will be treated as gross
income subject to federal income taxation. "Investment in the Policy" is the
total of all payments to the Policy which were not excluded from the Owner's
gross income less any amounts previously withdrawn which were not included in
income. Section 72(e)(11)(A)(ii) requires that all non-qualified deferred
annuity policies issued by the same insurance company to the same owner during a
single calendar year be treated as one policy in determining taxable
distributions.
40
<PAGE>
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Policy, generally a portion of each payment may be excluded
from gross income. The excludable portion generally is determined by a formula
that establishes the ratio that the cost basis of the Policy bears to the
expected return under the Policy. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all cost basis in the
Policy is recovered, the entire payment is taxable. If the annuitant dies before
the cost basis is recovered, a deduction for the difference is allowed on the
annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2. or if the
withdrawal follows the death of the Owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity policy were determined by amortizing the accumulated
value of the policy over the taxpayer's remaining life expectancy (such as under
the Policy's LED option), and the option could be changed or terminated at any
time, the distributions failed to qualify as part of a "series of substantially
equal payments" within the meaning of Section 72 of the Code. The distributions,
therefore, were subject to the 10% federal penalty tax. This Private Letter
Ruling may be applicable to an Owner who receives distributions under any
LED-type option prior to age 59 1/2. Subsequent Private Letter Rulings, however,
have treated LED-type withdrawal programs as effectively avoiding the 10%
penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Policy to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Policy to the Annuitant on the Annuity
Date, as required under the Policy, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NONNATURAL OWNERS. As a general rule, deferred annuity policies owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity policies
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity policies purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity policy under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity policies. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28,
41
<PAGE>
1986, however, a policy owned by a state or local government or a tax-exempt
organization will not be treated as an annuity under Section 72. In addition,
plan assets are treated as property of the employer, and are subject to the
claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified policies and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified policies. In addition, the Code requires reporting to the IRS of
the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Policies offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Policy made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity policy used to fund such benefits. As such,
the following is simply a general description of various types of qualified
plans that may use the Policy. Before purchasing any annuity policy for use in
funding a qualified plan, more specific information should be obtained.
A qualified Policy may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to a non-qualified Owner.
Individuals purchasing a qualified Policy should review carefully any such
changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Policies in
connection with such plans should seek competent advice as to the suitability of
the Policy to their specific needs and as to applicable Code limitations and tax
consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Policy will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Policy as described in this Prospectus. See "RIGHT TO CANCEL OR
SURRENDER."
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.
42
<PAGE>
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Policies purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA policies should
seek competent advice as to eligibility, limitations on permissible payments and
other tax consequences associated with the policies.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA policy after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA policy issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
LOANS (QUALIFIED POLICIES ONLY)
Loans will be permitted only for TSAs and Policies issued to a plan qualified
under Section 401(a) and 401(k) of the Code. Loans are made from the Policy's
value on a pro-rata basis from all accounts. The maximum loan amount is the
amount determined under the Company's maximum loan formula for qualified plans.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Policy. Loans are subject to applicable retirement legislation and their
taxation is determined under the federal income tax laws. The amount borrowed
will be transferred to a fixed, minimum guarantee loan assets account in the
Company's General Account, where it will accrue interest at a specified rate
below the then current loan interest rate. Generally, loans must be repaid
within five years and must be made at least quarterly in substantially equal
amounts. When repayments are received, they will be allocated pro-rata in
accordance with the Owner's most recent allocation instructions. The amount of
the death benefit, the amount payable on a full surrender and the amount applied
to provide an annuity on the Annuity Date will be reduced to reflect any
outstanding loan balance (plus accrued interest thereon). Partial withdrawals
may be restricted by the maximum loan limitation.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Series. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Policy, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting Policy Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Policy. The Company will assume that all transactions are accurately reported on
confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Series are no longer available for investment or if, in the Company's
judgment further
43
<PAGE>
investment in any Underlying Series should become inappropriate in view of the
purposes of the Separate Account or the affected Sub-Account, the Company may
redeem the shares of that Underlying Series and substitute shares of another
registered open-end management company. The Company will not substitute any
shares attributable to a Policy interest in a Sub-Account without notice to the
Owner and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by an Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Series or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Series are sold to separate accounts of unaffiliated
insurance companies ("shared funding") which issue variable annuity and variable
life policies ("mixed funding"). It is conceivable that in the future such
shared funding or mixed funding may be disadvantageous for variable life
insurance Owners or variable annuity Owners. Although the Company and the Fund
do not currently foresee any such disadvantages to either variable life
insurance owners or variable annuity owners, the Company and the Trustees of the
Fund intend to monitor events in order to identify any material conflicts and to
determine what action, if any, should be taken in response thereto.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Policy to reflect the substitution or change
and will notify Owners of all such changes. If the Company deems it to be in the
best interest of Owners, and subject to any approvals that may be required under
applicable law, the Separate Account or any Sub-Accounts may be operated as a
management company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from Separate Account VA-K or any Sub-Account to another of
the Company's separate accounts or sub-accounts having assets of the same class,
(2) to operate the Separate Account or any Sub-Account as a management
investment company under the 1940 Act or in any other form permitted by law, (3)
to deregister the Separate Account under the 1940 Act in accordance with the
requirements of the 1940 Act, and (4) to substitute the shares of any other
registered investment company for the Underlying Series shares held by a
Sub-Account, in the event that Underlying Series shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Series shares is inappropriate in view of the purpose of the Sub-
Account. In no event will the changes described above be made without notice to
Owners in accordance with the 1940 Act. The Company reserves the right, subject
to compliance with applicable law, to change the names of the Separate Account
or of the Sub-Accounts.
VOTING RIGHTS
The Company will vote Underlying Series shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying Series, together with a form
with which to give voting instructions to the Company. Shares for which no
timely instructions are received will be voted in proportion to the instructions
which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to the Policies in the same proportion. If
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change and, as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Policies, the Company reserves the
right to do so.
44
<PAGE>
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Series.
During the accumulation period, the number of Underlying Series shares
attributable to each Owner will be determined by dividing the dollar value of
the Accumulation Units of the Sub-Account credited to the Policy by the net
asset value of one Underlying Series share.
During the annuity period, the number of Underlying Series shares attributable
to each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Series share. Ordinarily, the Annuitant's voting interest in the
Underlying Series will decrease as the reserve for the variable annuity is
depleted.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Policies as presently offered and to make any change to provisions of the
Policies to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation. Including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a party
or to which the assets of the Separate Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Separate
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year
45
<PAGE>
2000 issue for the products it has sold. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted from this Prospectus pursuant to the
rules and regulations of the SEC. The omitted information may be obtained from
the SEC's principal office in Washington, DC, upon payment of the SEC's
prescribed fees.
46
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation under
the provisions of the Securities Act of 1933 or the Investment Company Act of
1940. Disclosures regarding the fixed portion of the annuity Policy and the
General Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the SEC.
ALLOCATIONS TO AND TRANSFERS TO AND FROM THE GENERAL ACCOUNT OF THE COMPANY ARE
NOT PERMITTED IN CERTAIN STATES.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations to
the General Account, where available, become part of the assets of the Company
and are used to support insurance and annuity obligations.
A portion or all of net purchase payments may be allocated to accumulate at a
fixed rate of interest in the General Account, where available. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Policies, the minimum interest which may be credited on amounts
allocated to the General Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If the Policy is surrendered, or if an Excess Amount is redeemed, while the
Policy is in force and before the Annuity Date, a surrender charge is imposed if
such event occurs before the payments attributable to the surrender or
withdrawal have been credited to the Policy less than seven full Policy years.
If the Policy was issued in Maryland on Form No. A3022-93 (Delaware Medallion
II), the following surrender charge table applies to monies in the General
Account, rather than the surrender charge table shown in "CHARGES AND
DEDUCTION," "A. Surrender Charge" (which applies to monies in the Separate
Account):
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -----------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More Than 9 No Charge
</TABLE>
A-1
<PAGE>
APPENDIX B
INFORMATION APPLICABLE ONLY TO OWNERS OF
DELAWARE MEDALLION I
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(POLICY FORM A3019-92)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (POLICY FORM A3019-94GRC)
Delaware Medallion I policies issued on Form No. A3019-92 were issued solely by
Allmerica Financial Life Insurance and Annuity Company (Allmerica Financial)
until March 31, 1994. On and after April 1, 1994, all Delaware Medallion I
policies sold in New York were issued on Form No. A3019-94GRC by First Allmerica
Financial Life Insurance Company ("First Allmerica"). Delaware Medallion I
policies are no longer available for sale in any jurisdiction.
The Delaware Medallion I policies are substantially similar to the Policies
described in the body of this Prospectus except for the addition/substitution of
the following:
1. (For Owners of A3019-94GRC the following is added to "THE DESCRIPTION OF THE
COMPANY"). The issuer of the policy is First Allmerica rather than Allmerica
Financial. First Allmerica, organized under the laws of Massachusetts in 1844,
is among the five oldest life insurance companies in America. As of December 31,
1998, First Allmerica and its subsidiaries had over $27 billion in combined
assets and over $48 billion of life insurance in force. Effective October 16,
1995, First Allmerica converted from a mutual life insurance company known as
State Mutual Life Assurance Company of America to a stock life insurance company
and adopted its present name. First Allmerica is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). First Allmerica's principal office
("Principal Office") is located at 440 Lincoln Street, Worcester MA 01653,
Telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
First Allmerica is a charter 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.
2. (Substitute the following provision under "Free Withdrawal Amounts") Under
all Delaware Medallion I policies, the Free Withdrawal Amount is the greater of
(1) 10% of the Accumulated Value as of December 31 of the previous calendar year
or (2) the Company's life expectancy distribution, if applicable. The Free
Withdrawal Amount is deducted from Old Payments first, then from the earliest
New Payments and so on until all New Payments have been exhausted pursuant to
the first-in-first out ("FIFO") method of Accounting (LIFO or last-in-last-out
method in New Jersey.)
3. Add "and New York" after the word "Texas" in the second and fourth line of
the third paragraph under "B. Transfer Privilege."
4. Add the following sentence as the second sentence in the second paragraph
under "Life Expectancy Distributions": For policies issued in New York, the LED
option will terminate automatically on the maximum Annuity Date permitted under
the policy, at which time an Annuity Option must be selected.
5. The guaranteed death benefit under Delaware Medallion II policies is reduced
proportionately to reflect a withdrawal (in the same proportion that the
Accumulated Value was reduced by the withdrawal). Under all Delaware Medallion I
policies, the guaranteed death benefit is simply reduced by subsequent
withdrawals by
B-1
<PAGE>
subtracting the amount of the withdrawal from the guaranteed death benefit.
Additionally, the stepped-up death benefit applies to the most recent fifth year
policy anniversary under Delaware Medallion II and applies to the most recent
seventh year policy anniversary under Delaware Medallion I. As such, the
description of the death benefit is revised as follows:
Upon death of the Annuitant (including an Owner who is also the
Annuitant), the death benefit is equal to the greatest of (1) the
Accumulated Value under the Policy next determined following receipt of
due proof of death at the Principal Office; or (2) the total amount of
gross payments made under the Policy less the amount of all prior
partial withdrawals; or (3) the death benefit that would have been
payable on the most recent seventh year Policy anniversary.
6. For Owners of First Allmerica Delaware Medallion I Form A3019-94GRC the
minimum interest rate credited to amounts allocated to the General Account is 3%
compounded annually. For Owners of Allmerica Financial Delaware Medallion I Form
A3019-92 the minimum interest rate credited to amounts allocated to the General
Account is 5% for the first five policy years, and 3.5% thereafter.
7. If you surrender the Policy or annuitize under a period certain option at the
end of one, three, five or ten years, the expenses you would pay on a $1,000
investment, assuming 5% annual return on assets are the same in years one and
ten as shown in the expense example (1)(a) and if you surrender the Policy or
annuitize under a period certain option at the end of one, three, five or ten
years, the expenses you would pay on a $1,000 investment, assuming 5% annual
return on assets and election of a Minimum Guaranteed Annuity Payout Rider(1)
are the same in years one and ten as shown in the expense example (1)(b) under
"ANNUAL AND TRANSACTION EXPENSE" but Delaware I may be one to two dollars higher
in years three and five under examples (1)(a) and (1)(b) than Delaware Medallion
II due to differences in the Free Withdrawal calculation. The expense numbers
for years three and five under Delaware Medallion I are as follows:
(1)(a)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
----------- -----------
<S> <C> <C>
Growth and Income Series........................................................................ $ 130 $ 160
Devon Series.................................................................................... $ 129 $ 158
DelCap Series................................................................................... $ 133 $ 165
Aggressive Growth Series........................................................................ $ 133 $ 165
Social Awareness Series......................................................................... $ 133 $ 165
REIT Series..................................................................................... $ 133 $ 165
Small Cap Value Series.......................................................................... $ 133 $ 165
Trend Series.................................................................................... $ 133 $ 165
International Equity Series..................................................................... $ 136 $ 170
Emerging Markets Series......................................................................... $ 152 $ 197
Delaware Balanced Series........................................................................ $ 130 $ 160
Convertible Securities Series................................................................... $ 132 $ 163
Delchester Series............................................................................... $ 130 $ 160
Capital Reserves Series......................................................................... $ 128 $ 157
Strategic Income Series......................................................................... $ 131 $ 162
Cash Reserve Series............................................................................. $ 123 $ 149
Global Bond Series.............................................................................. $ 133 $ 165
</TABLE>
B-2
<PAGE>
(1)(b)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
----------- -----------
<S> <C> <C>
Growth and Income Series........................................................................ $ 137 $ 172
Devon Series.................................................................................... $ 136 $ 170
DelCap Series................................................................................... $ 140 $ 177
Aggressive Growth Series........................................................................ $ 140 $ 177
Social Awareness Series......................................................................... $ 140 $ 177
REIT Series..................................................................................... $ 140 $ 177
Small Cap Value Series.......................................................................... $ 140 $ 177
Trend Series.................................................................................... $ 140 $ 177
International Equity Series..................................................................... $ 143 $ 182
Emerging Markets Series......................................................................... $ 160 $ 210
Delaware Balanced Series........................................................................ $ 137 $ 172
Convertible Securities Series................................................................... $ 140 $ 176
Delchester Series............................................................................... $ 137 $ 172
Capital Reserves Series......................................................................... $ 136 $ 169
Strategic Income Series......................................................................... $ 139 $ 175
Cash Reserve Series............................................................................. $ 131 $ 162
Global Bond Series.............................................................................. $ 140 $ 177
</TABLE>
Expense examples (2)(a) and (2)(b) on pages 9 and 10 are the same for both
Delaware Medallion I and Delaware Medallion II.
B-3
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY --
DELAWARE MEDALLION I
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED INCEPTION OF
UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series....................................... 5/1/94 2.32% N/A 18.31%
Devon Series................................................. 5/1/97 15.21% N/A 25.97%
DelCap Series................................................ 4/20/94 9.90% N/A 14.06%
Aggressive Growth Series..................................... N/A N/A N/A N/A
Social Awareness Series...................................... 5/1/97 6.80 % N/A 21.14 %
REIT Series.................................................. N/A N/A N/A N/A
Small Cap Value Series....................................... 5/11/94 -12.28 % N/A 12.87 %
Trend Series................................................. 5/11/94 7.14 % N/A 16.48 %
International Equity Series.................................. 4/20/94 1.64 % N/A 8.19 %
Emerging Markets Series...................................... 5/1/97 -37.62 % N/A -36.40 %
Delaware Balanced Series..................................... 4/20/94 9.69 % N/A 15.80 %
Convertible Securities Series................................ 5/1/97 -8.71 % N/A 3.33 %
Delchester Series............................................ 5/23/94 -9.67 % N/A 5.41 %
Capital Reserves Series...................................... 6/23/94 -1.42 % N/A 4.57 %
Strategic Income Series...................................... 5/1/97 -5.29 % N/A -0.27 %
Cash Reserve Series.......................................... 4/7/94 -2.97 % N/A 2.56 %
Global Bond Series........................................... 5/1/96 -0.37 % N/A 3.68 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
NAME OF UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- --------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 5/1/94 9.81% N/A 19.33%
Devon Series............................................... 5/1/97 22.34% N/A 29.66%
DelCap Series.............................................. 4/20/94 17.17% N/A 15.01%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 13.86 % N/A 24.86 %
REIT Series................................................ N/A N/A N/A N/A
Small Cap Value Series..................................... 5/11/94 -6.11 % N/A 13.77 %
Trend Series............................................... 5/11/94 14.45 % N/A 17.39 %
International Equity Series................................ 4/20/94 8.80 % N/A 9.43 %
Emerging Markets Series.................................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series................................... 4/20/94 16.98 % N/A 16.67 %
Convertible Securities Series.............................. 5/1/97 -2.54 % N/A 7.41 %
Delchester Series.......................................... 5/23/94 -3.19 % N/A 6.66 %
Capital Reserves Series.................................... 6/23/94 5.29 % N/A 5.57 %
Strategic Income Series.................................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series........................................ 4/7/94 3.62 % N/A 3.54 %
Global Bond Series......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-4
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
SUB-ACCOUNT FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN INCEPTION ENDED UNDERLYING
UNDERLYING FUND DATE 12/31/98 5 YEARS FUND
- ------------------------------------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series...................................... 7/28/88 2.32% 16.37% 11.22%
Devon Series................................................ 5/1/97 15.21% N/A 25.97%
DelCap Series............................................... 7/12/91 9.90% 11.81% 10.88%
Aggressive Growth Series.................................... N/A N/A N/A N/A
Social Awareness Series..................................... 5/1/97 6.80 % N/A 21.14 %
REIT Series................................................. 5/1/98 N/A N/A -15.21 %
Small Cap Value Series...................................... 12/27/93 -12.28 % 11.69 % 11.75 %
Trend Series................................................ 12/27/93 7.14 % 14.28 % 14.51 %
International Equity Series................................. 10/29/92 1.64 % 7.91 % 8.91 %
Emerging Markets Series..................................... 5/1/97 -37.62 % N/A -36.40 %
Delaware Balanced Series.................................... 7/28/88 9.69 % 14.56 % 12.95 %
Convertible Securities Series............................... 5/1/97 -8.71 % N/A 3.33 %
Delchester Series........................................... 7/28/88 -9.67 % 4.55 % 7.71 %
Capital Reserves Series..................................... 7/28/88 -1.42 % 3.40 % 5.38 %
Strategic Income Series..................................... 5/1/97 -5.29 % N/A -0.27 %
Cash Reserve Series......................................... 7/28/88 -2.97 % 2.50 % 3.69 %
Global Bond Series.......................................... 5/1/96 -0.37 % N/A 3.68 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
NAME OF UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 9.81% 17.42% 11.72%
Devon Series.......................................... 5/1/97 22.34% N/A 29.66%
DelCap Series......................................... 7/12/91 17.17% 12.76% 11.20%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 13.86 % N/A 24.86 %
REIT Series........................................... 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................ 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series.......................................... 12/27/93 14.45 % 15.13 % 15.24 %
International Equity Series........................... 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.............................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series......................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series..................................... 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................... 7/28/88 5.29 % 4.35 % 5.52 %
Strategic Income Series............................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series................................... 7/28/88 3.62 % 3.42 % 3.71 %
Global Bond Series.................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-5
<PAGE>
APPENDIX C
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period.................... 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period.......................... 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of
Period (in thousands)..................... 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period.................... 1.261 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 42,690 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period.................... 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period.......................... 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of
Period (in thousands)..................... 58,454 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period.................... 1.272 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 17,819 4,515 N/A N/A N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period.................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period.......................... 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 1,235 N/A N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.................... 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period.......................... 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 55,136 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period.................... 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period.......................... 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 36,571 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period.................... 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period.......................... 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of
Period (in thousands)..................... 51,715 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period.................... 0.880 N/A N/A N/A N/A N/A N/A
End of Period.......................... 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 6,662 4,545 N/A N/A N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period.................... 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period.......................... 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of
Period (in thousands)..................... 81,359 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period.................... 1.156 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.127 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 4,793 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period.................... 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period.......................... 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of
Period (in thousands)..................... 70,679 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.................... 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period.......................... 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of
Period (in thousands)..................... 28,066 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period.................... 1.052 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 17,524 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period.................... 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period.......................... 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of
Period (in thousands)..................... 32,501 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period.................... 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period.......................... 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 4,991 3,950 886 0 N/A N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period................................................ 2.078 1.608 1.351 1.006 1.000
End of Period...................................................... 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in thousands)............ 3,440 1,311 1,044 670 455
DEVON SERIES
Unit Value:
Beginning of Period................................................ 1.261 N/A N/A N/A N/A
End of Period...................................................... 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 1,558 106 N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period................................................ 1.646 1.453 1.287 1.008 1.000
End of Period...................................................... 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in thousands)............ 637 355 493 300 149
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period................................................ 1.272 N/A N/A N/A N/A
End of Period...................................................... 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 394 101 N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period................................................ N/A N/A N/A N/A N/A
End of Period...................................................... 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 0 N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................................................ 1.938 1.478 1.223 1.002 1.000
End of Period...................................................... 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)............ 731 235 204 146 82
TREND SERIES
Unit Value:
Beginning of Period................................................ 1.839 1.536 1.404 1.022 1.000
End of Period...................................................... 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)............ 1,099 1,579 285 1,486 790
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................................................ 1.403 1.335 1.128 1.004 1.000
End of Period...................................................... 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)............ 652 554 2,244 358 193
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period................................................ 0.754 N/A N/A N/A N/A
End of Period...................................................... 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 184 1 N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period................................................ 1.764 1.415 1.238 0.991 1.000
End of Period...................................................... 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)............ 1,070 420 405 304 173
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period................................................ 1.156 N/A N/A N/A N/A
End of Period...................................................... 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 375 84 N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period................................................ 1.391 1.240 1.116 0.980 1.000
End of Period...................................................... 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in thousands)............ 3,962 1,388 1,003 670 287
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................................................ 1.214 1.144 1.115 0.991 1.000
End of Period...................................................... 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)............ 1,069 287 208 195 181
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period................................................ 1.052 N/A N/A N/A N/A
End of Period...................................................... 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 1,799 276 N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period................................................ 1.138 1.096 1.059 1.018 1.000
End of Period...................................................... 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)............ 1,603 401 125 126 302
GLOBAL BOND SERIES
Unit Value:
Beginning of Period................................................ 1.102 1.107 1.000 1.000 N/A
End of Period...................................................... 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in thousands)............ 31 7 N/A N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
9. First Allmerica Financial Life Insurance Company first offered the Delaware
Medallion I policy to the public in 1994.
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF SEPARATE ACCOUNT VA-K (DELAWARE
MEDALLION) DATED MAY 1, 1999 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
TELEPHONE 1-800-533-2124.
DATED MAY 1, 1999
FAFLIC Delaware Medallion
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<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>
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "Variable Account") is a separate investment account
of First Allmerica Financial Life Insurance Company (the "Company") established
by vote of its Board of Directors on August 20, 1991. The Company, organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, the Company and its subsidiaries
had over $27 billion in combined assets and over $48 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 (the "Principal Office") is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, telephone (508) 855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
in Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other state and jurisdictions in which it is licensed to operate.
Currently, 16 Sub-Accounts of the Variable Account are available under the
Delaware Medallion III contract (the "Contract") and Delaware Medallion I
contract (Form A3019-94-GRC), a predecessor contract no longer being sold.
Delaware I and III are referred to collectively as "the contracts." Each
Sub-Account invests in a corresponding investment portfolio of Delaware Group
Premium Fund, Inc. (the "Fund"). The series are managed by Delaware Management
Company, Inc. (except for the International Equity Series, Emerging Markets
Series and Global Bond Series which are managed by Delaware International
Advisers Ltd.).
The Fund is an open-end, diversified management investment company. Seventeen
different investment series of the Fund are available under the Contract: the
Growth & Income Series (formerly Decatur Total Return Series), Delchester Series
(formerly High Yield Series), Capital Reserve Series, Cash Reserve Series
(formerly Money Market Series), DelCap Series (formerly Growth Series),
Aggressive Growth Series, Delaware Balanced Series (formerly Delaware Series),
Small Cap Value Series (formerly Value Series), Trend Series (formerly Emerging
Growth Series), Global Bond Series, International Equity Series, Strategic
Income Series, Devon Series, Emerging Markets Series, Convertible Securities
Series, REIT Series, and Social Awareness
2
<PAGE>
Series (formerly Quantum Series) (the "Underlying Series"). Each Underlying
Series has its own investment objectives and certain attendant risks.
3
<PAGE>
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
contracts, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Series shares owned by the Sub-Account are held on
an open account basis. A Sub-Account's ownership of Underlying Series shares is
reflected on the records of the Underlying Series and is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31,
1998, and the financial statements of Separate Account VA-K--Delaware
Medallion of the Company as of December 31, 1998 and for the periods
indicated, included in this Statement of Additional Information constituting
part of this Registration Statement, have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653 was
organized in 1969 as a wholly owned subsidiary of the Company, and presently is
indirectly wholly owned by the Company.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
4
<PAGE>
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 6.5% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% is paid to Delaware Distributors, Inc. for
administrative and support services with respect to the distribution of the
Contract; however, Delaware Distributors, Inc. may direct the Company to pay a
portion of said allowance to broker-dealers who provide support services
directly.
No commissions were paid to Allmerica Investments, Inc. during 1996, 1997 and
1998. Sales of these contracts began in April 1994.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account, in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period .............................. $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period .................................. $ 5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses ..................... $ 1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2) ........ 0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum) ............................. 0.000039
(6) Net Investment Rate (4) - (5) ..................................................... 0.000296
(7) Net Investment Factor 1.000000 + (6) .............................................. 1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7) ............................... $ 1.135336
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
5
<PAGE>
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent Annuity Benefit
Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in a Variable Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or surrender
charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit Values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
benefit payment is 1.000190. Multiplying this factor by .999906 (the one-day
adjustment factor for the assumed interest rate of 3.5% per annum) produces a
factor of 1.000096. This then is multiplied by the Annuity Unit value on the
immediately preceding Valuation Date (assumed here to be $1.105000). The result
is an Annuity Unit value of $1.105106 for the current monthly payment. The
current monthly payment then is determined by multiplying the number of Annuity
Units by the current Annuity Unit value, or 267.5818 times $1.105106, which
produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the Commuted Value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts issued by
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), described
below, to exchange their contracts at net asset value for the variable annuity
contracts described in the Prospectus, which is issued on Form No. A3025-96 or a
state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued by AFLIAC on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers
6
<PAGE>
with a "JQ" or "JN" prefix), and Single Payment Variable Annuity contracts
issued on Forms A3014-79 and A3015-79 ("Single Payment Exchanged Contract," all
such contracts having numbers with a "KQ" or "KN" prefix). These contracts are
referred to collectively as the "Exchanged Contract." To effect an exchange, the
Company should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender charge under the new Contract will be computed as if the payments that
had been made to the Exchanged Contract were made to the new Contract, as of the
date of issue of the Exchanged Contract. Any additional payments to the new
Contract after the exchange will be subject to the surrender charge computation
outlined in the new Contract and the Prospectus, i.e., the charge will be
computed based on the number of years that the additional payment (or portion of
that payment) that is being withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The new
Contract and the Exchanged Contract differ substantially as summarized below.
There may be additional differences important to a person considering an
exchange and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
SURRENDER CHARGE. The surrender charge under the new Contract, as described in
the Prospectus, imposes higher charge percentages against the excess amount
redeemed than the Single Payment Exchanged Contract. In addition, if an
Elective Payment Exchanged Contract was issued more than nine years before the
date of an exchange under this offer, additional payments to the Exchanged
Contract would not be subject to a surrender charge. New payments to the new
Contract may be subject to a charge if withdrawn prior to the surrender charge
period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Variable Exchanged Contract
if the Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any Contract year.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of
the Exchanged Contract becomes the "payment" for the new Contract. Therefore,
the prior purchase payments made under the Exchanged Contract (if higher than
the Exchanged Contract's Accumulated Value) is no longer a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
7
<PAGE>
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by the
Company's subsidiary, Allmerica Financial Life Insurance and Annuity Company. A
fixed annuity contract to which this exchange offer applies may be exchanged at
net asset value for the Contract described in this Prospectus, subject to the
same provisions for effecting the exchange and for applying the new Contract's
surrender charge as described above for variable annuity contracts. This
Prospectus should be read carefully before making such exchange. Unlike a fixed
annuity, the new Contract's value is not guaranteed and will vary depending on
the investment performance of the Underlying Series to which it is allocated.
The new Contract has a different charge structure than a fixed annuity contract,
which includes not only a surrender charge that may vary from that of the class
of contracts to which the exchanged fixed contract belongs, but also Contract
fees, mortality and expense risk charges (for the Company's assumption of
certain mortality and expense risks), administrative expense charges, transfer
charges (for transfers permitted among Sub-Accounts and the Fixed Account), and
expenses incurred by the Underlying Series. Additionally, the interest rates
offered under the Fixed Account of the new Contract and the Annuity Tables for
determining minimum annuity benefit payments may be different from those offered
under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract
for the new Contract and subsequently cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right
to Cancel Individual Retirement Annuity" and "Right to Cancel All Other
Contracts," will have their exchanged contract automatically reinstated as of
the date of cancellation. The refunded amount will be applied as the new
current Accumulated Value under the reinstated contract, which may be more or
less than it would have been had no exchange and reinstatement occurred. The
refunded amount will be allocated initially among the Fixed Account and
Sub-Accounts of the reinstated contract in the same proportion that the value
in the Fixed Account and the value in each Sub-Account bore to the
transferred Accumulated Value on the date of the exchange of the contract for
the new Contract. For purposes of calculating any surrender charge under the
reinstated contract, the reinstated contract will be deemed to have been
issued and to have received past purchase payments as if there had been no
exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Series and an
underlying Sub-Account have been in existence, even if longer than the period of
time that the Contract has been offered. The results for any period prior to a
Contract
8
<PAGE>
being offered will be calculated as if the Contract had been offered during that
period of time, with all charges assumed to be those applicable to the Contract.
9
<PAGE>
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge and any applicable surrender charge which
would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC") The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment
at the end of the specified period
The calculation of Total Return includes the annual charges against the assets
of the Sub-Account. This charge is 1.40% on an annual basis. The calculation
of ending redeemable value assumes (1) the Contract was issued at the beginning
of the period, and (2) a complete surrender of the Contract at the end of the
period. The deduction of the surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
<TABLE>
<CAPTION>
CONTRACT FORM A3019-GRC-94 (DELAWARE MEDALLION I)
----------------------------------------------------------------------------
(NO GUARANTEE PERIOD ACCOUNT OPTIONS)
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF WITHDRAWAL NEW PURCHASE PAYMENTS WITHDRAWN*
----------------------------- -------------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
Thereafter 0%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CONTRACT FORM A3025-GRC-96 (DELAWARE MEDALLION III)
-----------------------------------------------------------------------------
(WITH GUARANTEE PERIOD ACCOUNT OPTIONS)
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF WITHDRAWAL NEW PURCHASE PAYMENTS WITHDRAWN*
----------------------------- -------------------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return include the deduction of the $30 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges. It
is assumed, however, that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified period that would equate
the initial amount invested to the ending values, according to the following
formula:
P(1 + T) (n) = EV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Account. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $30 annual
Contract fee.
11
<PAGE>
YIELD AND EFFECTIVE YIELD - THE CASH RESERVE SUB-ACCOUNT
Set forth below is yield and effective yield information for the Cash Reserve
Sub-Account investing in the Cash Reserve Series for the seven-day period ended
December 31, 1998:
<TABLE>
<S> <C>
Yield 3.49%
Effective Yield 3.55%
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same
period to obtain the base period return, and then multiplying the return for
a seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Cash Reserve Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1)(365/7) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account VA-K.
12
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 18 and Note 20,
which are as of March 19, 1999 and April 1, 1999, respectively
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,303.9 $2,311.0 $2,236.3
Universal life and investment product
policy fees.............................. 296.6 237.3 197.2
Net investment income...................... 613.7 641.8 670.8
Net realized investment gains.............. 62.6 76.5 66.8
Other income............................... 142.6 117.6 108.4
-------- -------- --------
Total revenues......................... 3,419.4 3,384.2 3,279.5
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 2,050.2 2,004.6 1,957.0
Policy acquisition expenses................ 452.8 425.1 470.1
Sales practice litigation.................. 31.0 -- --
Loss from exiting reinsurance pools........ 25.3 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Restructuring costs........................ 13.0 -- --
Other operating expenses................... 559.0 523.7 503.2
-------- -------- --------
Total benefits, losses and expenses.... 3,131.3 3,007.3 2,930.3
-------- -------- --------
Income before federal income taxes............. 288.1 376.9 349.2
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 67.6 83.3 96.8
Deferred................................... (15.4) 14.2 (15.7)
-------- -------- --------
Total federal income tax expense....... 52.2 97.5 81.1
-------- -------- --------
Income before minority interest................ 235.9 279.4 268.1
Minority interest.......................... (55.0) (79.4) (74.6)
-------- -------- --------
Net income..................................... $ 180.9 $ 200.0 $ 193.5
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$7,520.8 and $6,992.8)............................. $ 7,683.9 $ 7,253.5
Equity securities at fair value (cost of $253.1 and
$341.1)............................................ 397.1 479.0
Mortgage loans...................................... 562.3 567.5
Real estate......................................... 20.4 50.3
Policy loans........................................ 154.3 141.9
Other long-term investments......................... 142.7 148.3
--------- ---------
Total investments............................... 8,960.7 8,640.5
--------- ---------
Cash and cash equivalents............................. 504.0 213.9
Accrued investment income............................. 141.0 141.8
Deferred policy acquisition costs..................... 1,161.2 965.5
--------- ---------
Reinsurance receivables:
Future policy benefits.............................. 322.6 307.1
Outstanding claims, losses and loss adjustment
expenses........................................... 652.2 626.7
Other............................................... 161.6 106.4
--------- ---------
Total reinsurance receivables................... 1,136.4 1,040.2
--------- ---------
Deferred federal income taxes......................... 19.4 --
Premiums, accounts and notes receivable............... 510.5 554.4
Other assets.......................................... 530.6 373.0
Closed Block assets................................... 803.1 806.7
Separate account assets............................... 13,697.7 9,755.4
--------- ---------
Total assets.................................... $27,464.6 $22,491.4
--------- ---------
--------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,802.2 $ 2,598.5
Outstanding claims, losses and loss adjustment
expenses........................................... 2,815.9 2,825.0
Unearned premiums................................... 843.2 846.8
Contractholder deposit funds and other policy
liabilities........................................ 2,637.0 1,852.7
--------- ---------
Total policy liabilities and accruals........... 9,098.3 8,123.0
--------- ---------
Expenses and taxes payable............................ 681.9 662.6
Reinsurance premiums payable.......................... 50.2 37.7
Short-term debt....................................... 221.3 33.0
Deferred federal income taxes......................... -- 12.9
Long-term debt........................................ -- 2.6
Closed Block liabilities.............................. 872.0 885.6
Separate account liabilities.......................... 13,691.5 9,749.7
--------- ---------
Total liabilities............................... 24,615.2 19,507.1
--------- ---------
Minority interest..................................... 532.9 748.9
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 444.0 453.7
Accumulated other comprehensive income................ 169.2 209.3
Retained earnings..................................... 1,698.3 1,567.4
--------- ---------
Total shareholder's equity...................... 2,316.5 2,235.4
--------- ---------
Total liabilities and shareholder's equity...... $27,464.6 $22,491.4
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 453.7 392.4 392.4
Contributed from parent.................... -- 61.3 --
Loss on change of interest -- Allmerica
P&C...................................... (9.7) -- --
-------- -------- --------
Balance at end of period................... 444.0 453.7 392.4
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 209.3 131.4 153.0
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities............ (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal
income taxes............................. 28.9 (59.8) 11.8
Minority interest.......................... 13.4 (33.2) 1.7
-------- -------- --------
(40.1) 77.9 (21.6)
-------- -------- --------
Balance at end of period................... 169.2 209.3 131.4
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,567.4 1,367.4 1,173.9
Net income................................. 180.9 200.0 193.5
Dividend to shareholder.................... (50.0) -- --
-------- -------- --------
Balance at end of period................... 1,698.3 1,567.4 1,367.4
-------- -------- --------
Total shareholder's equity............. $2,316.5 $2,235.4 $1,896.2
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $180.9 $200.0 $193.5
------ ------ ------
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities........... (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal
income taxes............................ 28.9 (59.8) 11.8
Minority interest......................... 13.4 (33.2) 1.7
------ ------ ------
Other comprehensive income.............. (40.1) 77.9 (21.6)
------ ------ ------
Comprehensive income...................... $140.8 $277.9 $171.9
------ ------ ------
------ ------ ------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 180.9 $ 200.0 $ 193.5
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 55.0 79.4 74.6
Net realized gains.................. (62.7) (77.8) (66.8)
Net amortization and depreciation... 20.7 31.6 44.7
Deferred federal income taxes....... (15.4) 14.2 (15.7)
Loss from exiting reinsurance
pools............................... 25.3 -- --
Sales practice litigation expense... 31.0 -- --
Payment related to exiting
reinsurance pools................... (30.3) -- --
Loss from cession of disability
income business..................... -- 53.9 --
Payment related to cession of
disability income business.......... -- (207.0) --
Change in deferred acquisition
costs............................... (185.8) (189.7) (73.9)
Change in premiums and notes
receivable, net of reinsurance
payable............................. 56.7 (15.1) (16.8)
Change in accrued investment
income.............................. 0.8 7.1 16.7
Change in policy liabilities and
accruals, net....................... 168.1 (134.9) (184.3)
Change in reinsurance receivable.... (115.4) 27.2 123.8
Change in expenses and taxes
payable............................. (3.3) 49.4 26.0
Separate account activity, net...... (48.5) -- 5.2
Other, net.......................... (63.8) 20.4 38.5
-------- -------- --------
Net cash provided by (used in)
operating activities................ 13.3 (141.3) 165.5
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 1,929.1 2,892.9 3,985.8
Proceeds from disposals of equity
securities............................. 285.3 162.7 228.7
Proceeds from disposals of other
investments............................ 120.8 116.3 99.3
Proceeds from mortgages matured or
collected.............................. 171.2 204.7 176.9
Purchase of available-for-sale fixed
maturities............................. (2,588.4) (2,596.0) (3,771.1)
Purchase of equity securities........... (119.9) (67.0) (90.9)
Purchase of other investments........... (274.4) (175.0) (168.0)
Capital expenditures.................... (0.7) (15.3) (12.8)
Purchase of minority interest in
Citizens Corporation................... (195.9) -- --
Other investing activities, net......... 5.1 1.3 4.3
-------- -------- --------
Net cash (used in) provided by
investing activities................ (667.8) 524.6 452.2
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 1,419.2 457.6 268.7
Withdrawals from contractholder deposit
funds.................................. (625.0) (647.1) (905.0)
Change in short-term debt............... 188.3 (5.4) 10.4
Change in long-term debt................ (2.6) (0.1) (0.1)
Dividend paid to parent................. (50.0) -- --
Dividends paid to minority
shareholders........................... -- (9.4) (3.9)
Additional paid-in capital.............. -- 0.1 --
Subsidiary treasury stock purchased, at
cost................................... (1.0) (140.0) (42.0)
-------- -------- --------
Net cash provided by (used in)
financing activities................ 928.9 (344.3) (671.9)
-------- -------- --------
Net change in cash and cash equivalents..... 274.4 39.0 (54.2)
Net change in cash held in the Closed
Block...................................... 15.7 (1.0) (6.5)
Cash and cash equivalents, beginning of
period..................................... 213.9 175.9 236.6
-------- -------- --------
Cash and cash equivalents, end of period.... $ 504.0 $ 213.9 $ 175.9
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................... $ 7.3 $ 3.6 $ 18.6
Income taxes paid........................... $ 133.5 $ 66.3 $ 72.0
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its wholly
owned life insurance subsidiary Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), its non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property and Casualty
Companies, Inc. ("Allmerica P&C") (a 70.06%-owned non-insurance holding
company). The Closed Block (Note 1B) assets and liabilities at December 31, 1998
and 1997, and its results of operations subsequent to demutualization are
presented in the consolidated financial statements as single line items. Unless
specifically stated, all disclosures contained herein supporting the
consolidated financial statements at December 31, 1998 and 1997, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
On December 3, 1998, the Company acquired all of the outstanding common stock of
Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary of
Hanover, a wholly owned subsidiary of Allmerica P&C) that it did not already own
in exchange for cash of $195.9 million (Note 3). The acquisition has been
recognized as a purchase. The minority interest acquired totaled $158.5 million.
A total of $40.8 million representing the excess of the purchase price over the
fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
Allmerica P&C and a wholly owned subsidiary of AFC merged on July 16, 1997.
Through the merger, AFC acquired all of the outstanding common stock of
Allmerica P&C that it did not already own in exchange for cash and stock. The
merger has been accounted for as a purchase. A total of $90.6 million,
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period. Additional information pertaining to the
merger agreement is included in Note 2, significant transactions.
Minority interest relates to the Company's investment in Allmerica P&C and its
only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's wholly owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block (the "Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies, individual deferred
annuity contracts and supplementary contracts not involving life contingencies
which were in force as of FAFLIC's demutualization on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts. Unless the Commissioner consents to an earlier
termination, the Closed Block will continue to be in effect until the date none
of the Closed Block policies are in force. FAFLIC allocated to the Closed Block
assets in an amount that is expected to produce cash flows which, together with
future revenues from the Closed Block Business, are reasonably sufficient to
support the Closed Block Business, including provision for payment of policy
benefits, certain future expenses and taxes and for
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuation of policyholder dividend scales payable in 1994 so long as the
experience underlying such dividend scales continues. The Company expects that
the factors underlying such experience will fluctuate in the future and
policyholder dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company adopted a plan to dispose of all real estate assets by
the end of 1998. As of December 31, 1998, there were 7 properties remaining in
the Company's real estate portfolio, all of which are being actively marketed.
As a result of the plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less costs of disposal.
Depreciation is not recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Default swap contracts entered into
for investment purposes are accounted for using the fair value method, with
changes in fair value, if any, reported in realized investment gains and losses
in earnings. Premium paid to the Company on default swap contracts is reported
in net investment income in earnings. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings. Any
ineffective swaps or futures hedges are recognized currently in realized
investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products are deferred and amortized, generally in proportion to the
ratio of annual revenue to the estimated total revenues over the contract
periods based upon the same assumptions used in estimating the liability for
future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 7 1/4%
for life insurance and 2 1/2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include investment
related products such as guaranteed investment contracts, deposit administration
funds and immediate participation guarantee funds and consist of deposits
received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income. Prior to the merger on July 16,
1997, Allmerica P&C and its subsidiaries filed a separate United States federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement
No. 109"). These differences result primarily from loss and LAE reserves, policy
reserves, policy acquisition expenses, and unrealized appreciation or
depreciation on investments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the results of operations or financial position for
the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed and determinable. In addition, it provides criteria for when
an asset may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations. (Note 12)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No.
130 which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement No. 130 for the first quarter of 1998, which resulted primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revenue................................................................................... $ 3,405.1 $ 3,366.3
---------- ----------
---------- ----------
Net realized capital gains included in revenue............................................ $ 59.8 $ 71.8
---------- ----------
---------- ----------
Income before taxes and minority interest................................................. 272.9 358.0
Income taxes.............................................................................. (47.2) (91.3)
Minority Interest:
Equity in earnings.................................................................... (42.6) (64.1)
---------- ----------
Net income................................................................................ $ 183.1 $ 202.6
---------- ----------
---------- ----------
</TABLE>
On October 29, 1998, the Company announced that had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the Company, in its Corporate Risk Management Services segment, has exited its
accident and health assumed reinsurance pool business, as well as its
administrative services only business. Additionally, it has commenced the
closing of nearly half of its nationwide Corporate Risk Management Services'
sales offices, eliminated certain staff and discontinued certain automation
initiatives. In addition to the aforementioned initiatives in the Corporate Risk
Management Services segment, the Property and Casualty segment is consolidating
its field support activities from fourteen regional branches into three hub
locations. As a result of the Company's restructuring initiative, it recognized
a pretax loss of $13.0 million, in the fourth quarter of 1998. Approximately
$5.5 million of this loss relates to severance and other employee related costs
resulting from the elimination of 339 positions, of which 129 employees had
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been terminated as of December 31, 1998. In addition, contract terminations and
lease cancellations resulted in losses of approximately $4.1 million and $3.4
million, respectively. During 1998, the Company made payments of approximately
$1.6 million related to this restructuring initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, of which $19.7 million relating to the Company's accident and health
assumed reinsurance pool business has been utilized as of December 31, 1998.
These pools consist primarily of the Corporate Risk Management Services
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on its results of operations or financial position.
In 1998 and 1997, Allmerica P&C redeemed 3,289.5 and 5,735.3 shares,
respectively, of its issued and outstanding common stock owned by AFC for $125.0
million and $195.0 million, respectively, thereby increasing FAFLIC's ownership
of Allmerica P&C by 4.3% and 6.3%, respectively. The 1998 transaction consisted
of $124.0 million of securities and $1.0 million of cash. The 1997 transaction
consisted of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly.
The merger has been accounted for as a purchase. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million funded a portion of the acquisition of
the 24.2 million publicly-held shares of Allmerica P&C pursuant to the merger on
July 16, 1997.
The Company's consolidated results of operations include minority interest in
Allmerica P&C prior to July 16, 1997. The unaudited pro forma information below
presents consolidated results of operations as if the merger and issuance of
Capital Securities had occurred at the beginning of 1996 and reflects
adjustments which include interest expense related to the assumed financing of a
portion of the cash consideration paid and amortization of goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the merger
and issuance of Capital Securities occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revenue................................................................................... $ 3,362.7 $ 3,246.4
---------- ----------
---------- ----------
Net realized capital gains included in revenue............................................ $ 63.0 $ 46.7
---------- ----------
---------- ----------
Income before taxes and minority interest................................................. 353.0 311.6
Income taxes.............................................................................. (89.6) (68.7)
Minority Interest:
Equity in earnings.................................................................... (75.5) (67.3)
---------- ----------
Net income................................................................................ $ 187.9 $ 175.6
---------- ----------
---------- ----------
</TABLE>
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ---------- ---------- --------
Total fixed maturities.................. $7,520.8 $ 282.0 $ 118.9 $7,683.9
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Equity securities....................... $ 253.1 $ 151.1 $ 7.1 $ 397.1
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- -------- ---------- ---------- --------
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
<S> <C> <C> <C> <C>
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
-------- ---------- ---------- --------
Total fixed maturities.................. $6,992.8 $ 281.1 $ 20.4 $7,253.5
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Equity securities....................... $ 341.1 $ 141.9 $ 4.0 $ 479.0
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1998, the amortized cost and market value of assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.4 million and $105.1 million were on
deposit with various state and governmental authorities at December 31, 1998 and
1997, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 384.7 $ 391.5
Due after one year through five years....................... 2,309.4 2,341.2
Due after five years through ten years...................... 2,173.3 2,199.6
Due after ten years......................................... 2,653.4 2,751.6
--------- --------
Total....................................................... $ 7,520.8 $7,683.9
--------- --------
--------- --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ------ ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 993.3 $ 18.2 $ 11.9
Equity securities........................................... $ 276.4 $ 76.3 $ 9.6
1997
Fixed maturities............................................ $1,894.8 $ 27.6 $ 16.2
Equity securities........................................... $ 145.5 $ 55.8 $ 1.3
1996
Fixed maturities............................................ $2,432.8 $ 19.3 $ 30.5
Equity securities........................................... $ 228.1 $ 56.1 $ 1.3
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $122.6 $ 86.7 $209.3
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
---------- ------ ------
(43.6) 3.5 (40.1)
---------- ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
---------- ------ ------
---------- ------ ------
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $131.4
---------- ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C.............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................... (65.9) (27.1) (93.0)
---------- ------ ------
51.3 26.6 77.9
---------- ------ ------
Net appreciation, end of year............................... $122.6 $ 86.7 $209.3
---------- ------ ------
---------- ------ ------
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
1996
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $108.7 $ 44.3 $153.0
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................... 33.6 (20.1) 13.5
---------- ------ ------
(37.4) 15.8 (21.6)
---------- ------ ------
Net appreciation, end of year............................... $ 71.3 $ 60.1 $131.4
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $0.8 million, $1.8
million, and $0.6 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Mortgage loans.............................................. $562.3 $567.5
Real estate held for sale................................... 20.4 50.3
------ ------
Total mortgage loans and real estate........................ $582.7 $617.8
------ ------
------ ------
</TABLE>
Reserves for mortgage loans were $11.5 million and $20.7 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there were 7 properties
remaining in the Company's portfolio, which are being actively marketed. As a
result of the plan, during 1997 real estate assets with a carrying amount of
$54.7 million were written down to the estimated fair value less cost of
disposal of $50.3 million, and a net realized investment loss of $4.4 million
was recognized. Depreciation is not recorded on these assets while they are held
for disposal. There were no non-cash investing activities, including real estate
acquired through foreclosure of mortgage loans, in 1998 and 1997. During 1996,
non-cash investing activities included real estate acquired through foreclosure
of mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- ------
<S> <C> <C>
Property type:
Office building........................................... $304.4 $265.1
Residential............................................... 52.8 66.6
Retail.................................................... 108.5 132.8
Industrial/warehouse...................................... 110.0 107.2
Other..................................................... 18.5 66.8
Valuation allowances...................................... (11.5) (20.7)
-------- ------
Total....................................................... $582.7 $617.8
-------- ------
-------- ------
Geographic region:
South Atlantic............................................ $136.1 $173.4
Pacific................................................... 155.1 152.8
East North Central........................................ 80.5 102.0
Middle Atlantic........................................... 61.2 73.8
West South Central........................................ 54.7 34.9
New England............................................... 60.7 46.9
Other..................................................... 45.9 54.7
Valuation allowances...................................... (11.5) (20.7)
-------- ------
Total....................................................... $582.7 $617.8
-------- ------
-------- ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $84.7 million; 2000 -- $131.6 million; 2001 -- $33.9 million; 2002 -- $28.4
million; 2003 -- $42.5 million; and $241.2 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
----- ----- ----- -----
----- ----- ----- -----
1997
Mortgage loans.............................................. $19.6 $ 2.5 $ 1.4 $20.7
Real estate................................................. 14.9 6.0 20.9 --
----- ----- ----- -----
Total................................................... $34.5 $ 8.5 $22.3 $20.7
----- ----- ----- -----
----- ----- ----- -----
1996
Mortgage loans.............................................. $33.8 $ 5.5 $19.7 $19.6
Real estate................................................. 19.6 -- 4.7 14.9
----- ----- ----- -----
Total................................................... $53.4 $ 5.5 $24.4 $34.5
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $20.9 million to the investment valuation allowance related to
real estate in 1997 primarily reflect write downs to the estimated fair value
less costs to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $22.0 million and $30.5 million, with
related reserves of $6.0 million and $13.8 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $26.1 million, $30.8 million
and $50.4 million, with related interest income while such loans were impaired
of $3.2 million, $3.2 million and $5.8 million as of December 31, 1998, 1997 and
1996, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. Futures contract
activity increased significantly in 1998 due to the increase in sale of GICs.
The Company's exposure to credit risk under futures contracts is limited to the
margin deposited with the broker. The Company only trades futures contracts with
nationally recognized brokers, which the Company believes have adequate capital
to ensure that there is minimal danger of default. The Company does not require
collateral or other securities to support financial instruments with credit
risk.
The notional amount of futures contracts outstanding at December 31, 1998 was
$92.7 million. There were no futures contracts outstanding at December 31, 1997.
The notional amounts of the contracts represent the extent of the Company's
investment but not the future cash requirements, as the Company generally
settles open positions prior to maturity. The maturity of all futures contracts
outstanding is less than one year. The fair value of futures contracts
outstanding was $92.5 million at December 31, 1998.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging gains (losses) were $(1.8) million in 1998. There were no deferred
hedging gains or losses in 1997. Gains and losses on hedge contracts that are
deemed ineffective by the Company are realized immediately. There were $0.1
million of gains realized on ineffective hedges in 1998. There was no gain or
loss in 1997 or 1996.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- --------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year......................................... $ -- $ (33.0) $ 74.7
New contracts.................................................................... 1,117.5 (0.2) (1.1)
Contracts terminated............................................................. (1,024.8) 33.2 (106.6)
----------- --------- ---------
Contracts outstanding, end of year............................................... $ 92.7 $ -- $ (33.0)
----------- --------- ---------
----------- --------- ---------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed income securities payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S dollars translated at a specific currency exchange rate. The primary risk
associated with these transactions is
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange, as indicated by the fair value of the contract. The fair values
of the foreign currency swap contracts outstanding were $1.2 million and $1.3
million at December 31, 1998 and 1997, respectively. Changes in the fair value
of contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. The Company does not require collateral or other
security to support financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1998, 1997 and 1996. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1998 or 1997.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.............................................. $ 42.6 $ 47.6 $ 69.4
New contracts......................................................................... -- 5.0 --
Contracts expired..................................................................... -- (10.0) (21.8)
--------- --------- ---------
Contracts outstanding, end of year.................................................... $ 42.6 $ 42.6 $ 47.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at December
31, 1998 are $24.0 million in 1999, $8.3 million in 2000 and $10.3 million
thereafter. There are no expected maturities of such foreign currency swap
contracts in 2001, 2002 and 2003.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. The use of interest rate swap contracts increased during 1998
due to the increase in floating rate GIC liabilities. As with foreign currency
swap contracts, the primary risk associated with these transactions is the
inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. Because the underlying principal of swap contracts
is not exchanged, the Company's maximum exposure to counterparty credit risk is
the difference in payments exchanged, which at December 31, 1998 was a net
payable of $3.9 million. The Company does not require collateral or other
security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(2.8)
million, $(0.4) million and $0.6 million for the years ended December 31, 1998,
1997, and 1996, respectively. The fair value of interest rate swap contracts
outstanding were $(28.3) million and $(2.3) million at December 31, 1998 and
1997, respectively. Changes in the fair value of contracts are reported as an
unrealized gain or loss, consistent with the underlying hedged security. Any
gain or loss on the termination of interest rate swap contracts accounted for as
hedges are deferred and recognized with the gain or loss on the
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transaction. The Company had no deferred gain or loss on interest rate
swap contracts in 1998 or 1997. A reconciliation of the notional amount of
interest rate swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.......................................... $ 244.1 $ 5.0 $ 17.5
New contracts..................................................................... 873.5 244.7 5.0
Contracts expired................................................................. (5.0) (5.6) (17.5)
---------- --------- ---------
Contracts outstanding, end of year................................................ $ 1,112.6 $ 244.1 $ 5.0
---------- --------- ---------
---------- --------- ---------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1998 is $44.0 million in 2000, $234.5 million in 2002, $810.5 million in 2003
and $23.6 million thereafter. There are no expected maturities of interest rate
contracts in 1999 or 2001.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked and insurance portfolio-linked
swap contracts for investment purposes. Under the security return-linked
contracts, the Company agrees to exchange cash flows according to the
performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1998, was not material to the Company.
The Company does not require collateral or other security to support financial
instruments with credit risk.
In 1998, the Company also entered into credit default swap agreements. Under the
terms of these agreements, the Company assumes the default risk of a specific
high credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-determined
security of the issuer. The primary risk associated with these transactions is
the default risk of the underlying companies. The Company regularly assesses the
financial strength of the underlying companies and generally enters into default
swap agreements for companies rated "A" or better by nationally recognized
rating agencies.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.1) million at
December 31, 1998 and 1997. The net amount receivable or payable under
security-returned-linked and insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net increase (decrease)
in realized investment gains related to these contracts was $1.1 million in 1998
and $(1.6) million in 1997. There were no realized investment gains or losses on
other swap contracts recognized in 1996.
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.2 million in 1998. There was no
investment income recognized in 1997 and 1996.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year............................................ $ 15.0 $ 58.6 $ --
New contracts....................................................................... 266.3 192.1 58.6
Contracts expired................................................................... (26.3) (211.6) --
Contracts terminated................................................................ -- (24.1) --
--------- --------- ---------
Contracts outstanding, end of year.................................................. $ 255.0 $ 15.0 $ 58.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1998 are
as follows: $115.0 million in 1999, $115.0 million in 2000 and $25.0 million in
2001. There are no expected maturities of such other swap contracts in 2002 or
2003.
H. OTHER
At December 31, 1998, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity. At December 31, 1997, FAFLIC had
no concentration of investments in a single investee exceeding 10% of
shareholder's equity, except for investments with the U.S. Treasury with a
carrying value of $262.4 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $530.8 $541.9 $553.8
Mortgage loans.............................................. 58.3 57.5 69.5
Equity securities........................................... 7.4 10.6 11.1
Policy loans................................................ 11.9 10.9 10.3
Real estate................................................. 7.2 20.1 40.8
Other long-term investments................................. (0.5) 12.4 19.9
Short-term investments...................................... 14.3 12.8 10.6
------ ------ ------
Gross investment income..................................... 629.4 666.2 716.0
Less investment expenses.................................... (15.7) (24.4) (45.2)
------ ------ ------
Net investment income....................................... $613.7 $641.8 $670.8
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1998, there was one mortgage loan on non-accrual status which
had an outstanding principal balance of $4.3 million. This loan was restructured
and fully impaired. There were no fixed maturities which were on non-accrual
status at December 31, 1998. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investments, had no impact in 1998 and 1997, and reduced net income by $0.5
million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $28.7 million, $40.3 million and $51.3 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.3 million, $3.9 million and $7.7 million in 1998, 1997
and 1996, respectively. Actual interest income on
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these loans included in net investment income aggregated $3.3 million, $4.2
million and $4.5 million in 1998, 1997 and 1996, respectively.
There were no fixed maturities which were non-income producing for the year
ended December 31, 1998. There was one mortgage loan which was non-income
producing for the year ended December 31, 1998, which had an outstanding
principal balance of $4.3 million and was fully impaired.
Included in other long-term investments is a loss from limited partnerships of
$7.5 million in 1998, and income of $7.8 million and $13.7 million in 1997 and
1996, respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Fixed maturities............................................ $ (11.8) $ 14.7 $ (9.7)
Mortgage loans.............................................. 8.8 (1.2) (2.4)
Equity securities........................................... 66.6 53.6 54.8
Real estate................................................. 13.7 12.8 21.1
Other....................................................... (14.7) (3.4) 3.0
--------- --------- ---------
Net realized investment gains............................... $ 62.6 $ 76.5 $ 66.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period, (net of
taxes and minority interest of $(20.8) million, $123.7
million and $10.7 million in 1998, 1997 and 1996,
respectively).............................................. $ (6.8) $ 115.5 $ (0.7)
Less: reclassification adjustment for gains included in net
income (net of taxes and minority interest of $21.5
million, $30.7 million and $24.2 million in 1998, 1997 and
1996, respectively)........................................ 33.3 37.6 20.9
--------- --------- ---------
Other comprehensive income.................................. $ (40.1) $ 77.9 $ (21.6)
--------- --------- ---------
--------- --------- ---------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $(27.1) million at December 31,
1998. Fair values of interest rate futures were not material at December 31,
1997.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 504.0 $ 504.0 $ 213.9 $ 213.9
Fixed maturities.......................................... 7,683.9 7,683.9 7,253.5 7,253.5
Equity securities......................................... 397.1 397.1 479.0 479.0
Mortgage loans............................................ 562.3 587.1 567.5 597.0
Policy loans.............................................. 154.3 154.3 141.9 141.9
-------- -------- -------- --------
$9,301.6 $9,326.4 $8,655.8 $8,685.3
-------- -------- -------- --------
-------- -------- -------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,791.8 $1,830.8 $ 985.2 $1,004.7
Supplemental contracts without life contingencies......... 37.3 37.3 22.4 22.4
Dividend accumulations.................................... 88.4 88.4 87.8 87.8
Other individual contract deposit funds................... 61.6 61.1 57.9 55.7
Other group contract deposit funds........................ 700.4 704.0 714.8 715.5
Individual annuity contracts.............................. 1,110.6 1,073.6 907.4 882.2
Short-term debt........................................... 221.3 221.3 33.0 33.0
Long-term debt............................................ -- -- 2.6 2.6
-------- -------- -------- --------
$4,011.4 $4,016.5 $2,811.1 $2,803.9
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1998, 1997
and 1996 is a net pre-tax contribution from the Closed Block of $10.4 million,
$9.1 million and $8.6 million, respectively. Summarized financial information of
the Closed Block as of December 31, 1998 and 1997 and for the period ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $399.1
and $400.1, respectively)............................... $414.2 $412.9
Mortgage loans............................................ 136.0 112.0
Policy loans.............................................. 210.9 218.8
Cash and cash equivalents................................. 9.4 25.1
Accrued investment income................................. 14.1 14.1
Deferred policy acquisition costs......................... 15.6 18.2
Other assets.............................................. 2.9 5.6
------ ------
Total assets................................................ $803.1 $806.7
------ ------
------ ------
Liabilities
Policy liabilities and accruals........................... $862.9 $875.1
Other liabilities......................................... 9.1 10.4
------ ------
Total liabilities........................................... $872.0 $885.5
------ ------
------ ------
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums................................................ $ 55.4 $ 58.3 $ 61.7
Net investment income................................... 53.3 53.4 52.6
Realized investment loss................................ 0.1 1.3 (0.7)
-------- -------- --------
Total revenues.............................................. 108.8 113.0 113.6
Benefits and expenses
Policy benefits......................................... 95.0 100.5 101.2
Policy acquisition expenses............................. 2.7 3.0 3.2
Other operating expenses................................ 0.7 0.4 0.6
-------- -------- --------
Total benefits and expenses................................. 98.4 103.9 105.0
-------- -------- --------
Contribution from the Closed Block.......................... $ 10.4 $ 9.1 $ 8.6
-------- -------- --------
-------- -------- --------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block...................... $ 10.4 $ 9.1 $ 8.6
Change in deferred policy acquisition costs, net........ 2.6 2.9 3.4
Change in premiums and other receivables................ 0.3 -- 0.2
Change in policy liabilities and accruals............... (13.5) (11.6) (13.9)
Change in accrued investment income..................... -- 0.2 2.3
Deferred Taxes.......................................... 0.1 (5.1) 1.0
Change in other assets.................................. 2.4 (2.9) (1.6)
Change in expenses and taxes payable.................... (2.9) (2.0) 1.7
Other, net.............................................. (0.1) (1.2) 1.4
-------- -------- --------
Net cash (used in) provided by operating activities....... (0.7) (10.6) 3.1
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 83.6 161.6 188.1
Purchases of investments................................ (106.5) (161.4) (196.9)
Other, net.............................................. 7.9 11.4 12.2
-------- -------- --------
Net cash provided by (used in) investing activities....... (15.0) 11.6 3.4
-------- -------- --------
Net increase in cash and cash equivalents................... (15.7) 1.0 6.5
Cash and cash equivalents, beginning of year................ 25.1 24.1 17.6
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 9.4 $ 25.1 $ 24.1
-------- -------- --------
-------- -------- --------
</TABLE>
There are no valuation allowances on mortgage loans in the Closed Block at
December 31, 1998, 1997 or 1996, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Short and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ -----
<S> <C> <C>
Short-Term
Commercial paper........................................ $ 41.3 $32.6
Borrowings under bank credit facility................... 150.0 --
Repurchase agreements................................... 30.0 --
Other................................................... -- 0.4
------ -----
Total short-term debt....................................... $ 221.3 $33.0
------ -----
------ -----
Long-term debt.............................................. $ -- $ 2.6
------ -----
------ -----
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1998, the weighted average
interest rate for outstanding commercial paper was approximately 5.34%.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at December
31, 1998 were $150.0 million.
During 1998 and 1996, the Company utilized repurchase agreements to finance
certain investments. The 1996 repurchase agreements were settled by the end of
1996.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY. Interest expense was $7.3 million, $3.6 million and $16.8 million in 1998,
1997 and 1996, respectively. Interest paid on the credit agreement was
approximately $0.7 million in 1998 and $2.8 million in 1997. Interest expense
during 1996 also included $11.0 million related to interest payments on
repurchase agreements. All interest expense is recorded in other operating
expenses.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ----- -------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................. $ 67.6 $83.3 $ 96.8
Deferred................................................ (15.4) 14.2 (15.7)
------- ----- -------
Total....................................................... $ 52.2 $97.5 $ 81.1
------- ----- -------
------- ----- -------
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Expected federal income tax expense......................... $100.9 $131.8 $122.3
Tax-exempt interest..................................... (38.9) (37.9) (35.3)
Differential earnings amount............................ -- -- (10.2)
Dividend received deduction............................. (5.1) (3.2) (1.6)
Changes in tax reserve estimates........................ 2.3 7.8 4.7
Tax credits............................................. (8.5) (2.7)
Other, net.............................................. 1.5 1.7 1.2
------ ------ ------
Federal income tax expense.................................. $ 52.2 $ 97.5 $ 81.1
------ ------ ------
------ ------ ------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards....................................... $ (16.8) $ (15.6)
Loss reserve discounting................................ (406.6) (391.6)
Deferred acquisition costs.............................. 345.8 291.8
Employee benefit plans.................................. (45.3) (48.0)
Investments, net........................................ 121.7 175.4
Bad debt reserve........................................ (1.8) (14.3)
Litigation reserve...................................... (10.9) --
Other, net.............................................. (5.5) 15.2
-------- --------
Deferred tax (asset) liability, net......................... $ (19.4) $ 12.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax assets totaled $486.9 million and $469.5 million at
December 31, 1998 and 1997, respectively. Gross deferred income tax liabilities
totaled $467.5 million and $482.4 million at December 31, 1998 and 1997,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1998, there are available alternative
minimum tax credit carryforwards of $16.8 million.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1994. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1992,1993 and 1994 for the
FAFLIC/AFLIAC consolidated group. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/ AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1998, 1997 and 1996 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.0 $ 19.9 $ 19.0
Interest cost............................................... 25.5 23.5 21.9
Expected return on plan assets.............................. (34.9) (31.2) (28.3)
Recognized net actuarial loss (gain)........................ 0.4 0.1 (0.4)
Amortization of transition asset............................ (1.8) (1.9) (1.9)
Amortization of prior service cost.......................... (1.7) (2.0) (2.3)
------- ------- -------
Net periodic pension cost................................... $ 6.5 $ 8.4 $ 8.0
------- ------- -------
------- ------- -------
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the pension plan. At December 31,
1998 and 1997 the plan's assets exceeded its projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year....... $370.4 $344.2
Service cost -- benefits earned during the year......... 19.0 19.9
Interest cost........................................... 25.5 23.5
Actuarial losses........................................ 20.4 0.3
Benefits paid........................................... (21.1) (17.5)
------ ------
Projected benefit obligation at end of year............. $414.2 $370.4
------ ------
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year.......... $395.5 $347.8
Actual return on plan assets............................ 67.2 65.2
Benefits paid........................................... (21.1) (17.5)
------ ------
Fair value of plan assets at end of year................ 441.6 395.5
------ ------
Funded status of the plan............................... 27.4 25.1
Unrecognized transition obligation...................... (23.9) (26.2)
Unamortized prior service cost.......................... (11.0) (13.9)
Unrecognized net actuarial gains........................ (54.9) (44.9)
------ ------
Net pension liability............................... $(62.4) $(59.9)
------ ------
------ ------
</TABLE>
As a result of AFC's merger with APY, certain pension liabilities were reduced
by $11.7 million in 1997, to reflect their fair value as of the purchase date.
These pension liabilities were reduced by $10.3 million in 1998, which reflects
fair value, net of applicable amortization. Determination of the projected
benefit obligations was based on a weighted average discount rate of 6.5% and
7.0% in 1998 and 1997, respectively, and the assumed long-term rate of return on
plan assets was 9.0% in both 1998 and 1997. The actuarial present value of the
projected benefit obligations was determined using assumed rates of increase in
future compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. Plan
assets also include 973,262 shares of AFC Common Stock at both December 31, 1998
and 1997, with a market value of $56.3 million and $48.6 million at December 31,
1998 and 1997, respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1998, 1997 and
1996, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expenses related to this plan was $5.6 million, $3.3
million and $5.5 million, in 1998, 1997 and 1996, respectively. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The Plan expense in 1998, 1997 and 1996 was $3.0 million, $2.8
million and $2.0 million, respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $5.9 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC. Generally, employees become
eligible at age 55 with at least 15 years of service. Spousal coverage is
generally provided for up to two years after death of the retiree. Benefits
include hospital, major medical, and a payment at death equal to retirees' final
compensation up to certain limits. Effective January 1, 1996, the Company
revised these benefits so as to establish limits on future benefit payments and
to restrict eligibility to current employees. The medical plans have varying
copayments and deductibles, depending on the plan. These plans are unfunded.
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year..................................... $ 71.8 $ 72.3
Service cost............................................ 3.1 3.0
Interest cost........................................... 5.1 4.6
Actuarial losses........................................ 7.6 (4.7)
Benefits paid........................................... (3.6) (3.4)
------ ------
Accumulated postretirement benefit obligation at end of
year.................................................. 84.0 71.8
Fair value of plan assets at end of year................ -- --
------ ------
Funded status of the plan............................... (84.0) (71.8)
Unamortized prior service cost.......................... (12.9) (15.3)
Unrecognized net actuarial losses....................... 7.5 0.8
------ ------
Accumulated postretirement benefit costs................ $(89.4) $(86.3)
------ ------
------ ------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Service cost................................................ $ 3.1 $ 3.0 $ 3.2
Interest cost............................................... 5.1 4.6 4.6
Recognized net actuarial loss (gain)........................ 0.1 (0.1) 0.2
Amortization of prior service cost.......................... (2.4) (2.7) (3.0)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.9 $ 4.8 $ 5.0
------ ------ ------
------ ------ ------
</TABLE>
As a result of AFC's merger with APY in 1997, certain postretirement liabilities
were reduced by $6.1 million to reflect their fair value as of the purchase
date. These postretirement liabilities were reduced by $5.4 million in 1998,
which reflects fair value, net of applicable amortization.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1998, health care costs were assumed to increase 7.0% in 1999,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1998
by $5.7 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1998 by $0.7 million.
Conversely, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 1998 by $5.2 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1998 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.0% at December 31, 1998 and
1997. In addition, the actuarial present value of the accumulated postretirement
benefit obligation was determined using an assumed rate of increase in future
compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the aforementioned postretirement
medical and death benefits plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $3.8 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
11. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Dividends from FAFLIC and Allmerica P&C (Hanover) are the primary source of cash
flow for AFC.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1998, FAFLIC paid dividends of
$50.0 million to AFC. No dividends were declared by FAFLIC to AFC during 1997 or
1996 During 1999, FAFLIC could pay dividends of $116.4 million to AFC without
prior approval of the Commissioner.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were declared by AFLIAC to FAFLIC during
1998, 1997 or 1996. During 1999, AFLIAC could pay dividends of $26.1 million to
FAFLIC without prior approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling, $125.0 million, $120.0
million and $105.0 million during 1998, 1997 and 1996, respectively. During
1999, the maximum dividend and other distributions that could be paid to
Allmerica P&C by Hanover, without prior approval of the Insurance Commissioner,
is approximately $1.6 million, which considers an extraordinary dividend of
$125.0 million declared on March 12, 1998. The allowable dividend without prior
approval will increase to $126.6 million on March 12, 1999.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $200.0 million and $6.3 million during 1998 and 1996, respectively. A
$180.0 million extraordinary dividend was approved by the Commissioner in 1998.
No dividends were declared by Citizens Insurance during 1997. During 1999,
Citizens Insurance can declare no dividends to Citizens Corporation without
prior approval of the Michigan Insurance Commissioner as a result of the $180.0
million extraordinary dividend declared on December 21, 1998.
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in four operating segments.
Effective January 1, 1998, the Company adopted Statement No. 131. Upon adoption,
the separate financial information of each segment was re-defined consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. A
summary of the significant changes in reportable segments is included below.
The Risk Management group includes two segments: Property and Casualty and
Corporate Risk Management Services. The Property and Casualty segment includes
property and casualty insurance products, such as automobile insurance,
homeowners insurance, commercial multiple peril insurance, and workers'
compensation insurance. These products are offered by Allmerica P&C through its
operating subsidiaries, Hanover and Citizens. Substantially all of the Property
and Casualty segment's earnings are generated in Michigan and the Northeast
(Connecticut, Massachusetts, New York, New Jersey, New Hampshire, Rhode Island,
Vermont and Maine). The Corporate Risk Management Services segment includes
group life and health insurance products and services which assist employers in
administering employee benefit programs and in managing the related risks.
The Retirement and Asset Accumulation group includes two segments: Allmerica
Financial Services and Allmerica Asset Management. The Allmerica Financial
Services segment includes variable annuities, variable universal life and
traditional life insurance products distributed via retail channels as well as
group retirement products, such as defined benefit and 401(k) plans and
tax-sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing in
three types of GICs; the traditional GIC, the synthetic GIC and the floating
rate GIC. This segment is also a Registered Investment Advisor providing
investment advisory services, primarily to affiliates, and to other
institutions, such as insurance companies and pension plans. In addition to the
four operating segments, the Company has a Corporate segment, which consists
primarily of cash, investments, corporate debt, Capital Securities and corporate
overhead expenses. Corporate overhead expenses reflect costs not attributable to
a
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
particular segment, such as those generated by certain officers and directors,
Corporate Technology, Corporate Finance, Human Resources and the legal
department.
Significant changes to the Company's segmentation include a reclassification of
corporate overhead expenses from each operating segment into the Corporate
segment. Additionally, certain products (group retirement products, such as
401(k) plans and tax-sheltered annuities, group variable universal life) and
certain other non-insurance operations (telemarketing and trust services)
previously reported in the Allmerica Financial Institutional Services segment
were combined with the Allmerica Financial Services segment. Also, the Company
reclassified the GIC product line previously reported in the Allmerica Financial
Institutional Services segment into the Allmerica Asset Management segment.
Management evaluates the results of the aforementioned segments based on pre-tax
segment income. Pre-tax segment income is determined by adjusting net income for
net realized investment gains and losses, net gains and losses on disposals of
businesses, extraordinary items, the cumulative effect of accounting changes and
certain other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of pre-tax segment income enhances its
understanding of the Company's results of operations by highlighting net income
attributable to the normal, recurring operations of the business. However,
pre-tax segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management
Property and Casualty................................... $2,204.8 $2,211.0 $2,145.8
Corporate Risk Management Services...................... 412.9 405.4 370.7
-------- -------- --------
Subtotal............................................ 2,617.7 2,616.4 2,516.5
-------- -------- --------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 721.2 709.7 700.0
Allmerica Asset Management.............................. 121.7 91.1 110.5
-------- -------- --------
Subtotal............................................ 842.9 800.8 810.5
-------- -------- --------
Corporate................................................. 2.3 5.5 5.2
Intersegment revenues..................................... (7.6) (11.6) (13.8)
-------- -------- --------
Total segment revenues including Closed Block........... 3,455.2 3,411.1 3,318.4
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block............................. (98.4) (102.6) (105.7)
Net realized gains...................................... 62.6 75.6 66.8
-------- -------- --------
Total revenues...................................... $3,419.4 $3,384.2 $3,279.5
-------- -------- --------
-------- -------- --------
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Segment income (loss) before income taxes and minority
interest:
Risk Management
Property and Casualty................................... $151.4 $172.9 $170.7
Corporate Risk Management Services...................... 7.8 27.0 28.3
------ ------ ------
Subtotal............................................ 159.2 199.9 199.0
------ ------ ------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 166.6 134.6 106.8
Allmerica Asset Management.............................. 23.7 18.4 11.5
------ ------ ------
Subtotal............................................ 190.3 153.0 118.3
------ ------ ------
Corporate................................................. (45.3) (44.6) (36.6)
------ ------ ------
Segment income before income taxes and minority
interest.............................................. 304.2 308.3 280.7
------ ------ ------
Adjustments to segment income:
Net realized investment gains, net of amortization...... 53.9 78.7 69.6
Sales practice litigation expense....................... (31.0) -- --
Loss on exiting reinsurance pools....................... (25.3)
Gain from change in mortality assumptions............... -- 47.0 --
Loss on cession of disability income business........... -- (53.9) --
Restructuring costs..................................... (13.0) -- --
Other items............................................. (.7) (3.2) (1.1)
------ ------ ------
Income before taxes and minority interest................. $288.1 $376.9 $349.2
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997 1998 1997
- ------------------------------------------------------------ --------- --------- -------- ------
DEFERRED
ACQUISITION
IDENTIFIABLE ASSETS COSTS
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty................................... $ 5,649.0 $ 5,650.4 $ 164.9 $167.2
Corporate Risk Management Services...................... 567.8 619.8 2.6 2.9
--------- --------- -------- ------
Subtotal............................................ 6,216.8 6,270.2 167.5 170.1
Retirement and Asset Accumulation
Allmerica Financial Services............................ 19,407.3 15,159.2 993.1 794.5
Allmerica Asset Management.............................. 1,810.9 1,035.1 0.6 0.9
--------- --------- -------- ------
Subtotal............................................ 21,218.2 16,194.3 993.7 795.4
Corporate............................................... 29.6 26.9 -- --
--------- --------- -------- ------
Total............................................... $27,464.6 $22,491.4 $1,161.2 $965.5
--------- --------- -------- ------
--------- --------- -------- ------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $34.9 million, $33.6 million and $34.9 million in 1998, 1997 and
1996, respectively. At December 31, 1998, future minimum rental payments under
non-cancelable operating leases were approximately $73.5 million, payable as
follows: 1999 -- $28.6 million; 2000 -- $21.0 million; 2001 -- $13.8 million;
2002 -- $6.9 million; and $3.2 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1999.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short Duration and Long Duration Contracts".
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1998, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1998, 1997 and 1996 were
$34.3 million and $38.1 million, $32.3 million and $28.2 million, and $38.0
million and $21.8 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1998, 1997 and 1996 of $3.7
million and $18.0 million, $9.8 million and $(0.8) million, and $50.5 million
and $(52.9) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................. $ 416.6 $ 417.4 $ 389.1
Assumed................................................. 111.9 110.7 87.8
Ceded................................................... (189.8) (170.1) (138.9)
---------- -------- --------
Net premiums................................................ $ 338.7 $ 358.0 $ 338.0
---------- -------- --------
---------- -------- --------
Property and casualty premiums written:
Direct.................................................. $1,969.3 $2,068.5 $2,039.7
Assumed................................................. 58.8 103.1 108.7
Ceded................................................... (74.1) (179.8) (234.0)
---------- -------- --------
Net premiums................................................ $1,954.0 $1,991.8 $1,914.4
---------- -------- --------
---------- -------- --------
Property and casualty premiums earned:
Direct.................................................. $1,966.8 $2,046.2 $2,018.5
Assumed................................................. 64.5 102.0 112.4
Ceded................................................... (66.1) (195.1) (232.6)
---------- -------- --------
Net premiums................................................ $1,965.2 $1,953.1 $1,898.3
---------- -------- --------
---------- -------- --------
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................. $ 653.6 $ 656.4 $ 606.5
Assumed................................................. 67.9 61.6 44.9
Ceded................................................... (164.0) (158.8) (77.8)
---------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 557.5 $ 559.2 $ 573.6
---------- -------- --------
---------- -------- --------
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................. $1,588.3 $1,464.9 $1,299.8
Assumed................................................. 62.7 101.2 85.8
Ceded................................................... (158.2) (120.6) (2.2)
---------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses................................................... $1,492.8 $1,445.5 $1,383.4
---------- -------- --------
---------- -------- --------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 965.5 $ 822.7 $ 735.7
Acquisition expenses deferred........................... 641.2 617.7 547.4
Amortized to expense during the year.................... (452.8) (476.0) (470.1)
Adjustment to equity during the year.................... 7.3 (11.1) 9.7
Adjustment for cession of disability income insurance... -- (38.6) --
Adjustment for revision of universal and variable
universal life insurance mortality assumptions........ -- 50.8 --
-------- -------- --------
Balance at end of year...................................... $1,161.2 $ 965.5 $ 822.7
-------- -------- --------
-------- -------- --------
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND
LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$568.0 million, $533.6 million and $471.7 million at December 31, 1998, 1997 and
1996, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were increased by $14.6 million in 1998, and decreased by
$0.2 million and $0.6 million in 1997 and 1996, respectively. The increase in
1998 resulted from the Company's reserve strengthening primarily in the assumed
reinsurance and stop loss only business.
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,615.4 $2,744.1 $2,896.0
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year........ 1,609.0 1,564.1 1,513.3
Decrease in provision for insured events of prior
years................................................. (127.2) (127.9) (141.4)
-------- -------- --------
Total incurred losses and LAE............................... 1,481.8 1,436.2 1,371.9
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................. 871.9 775.1 759.6
Losses and LAE attributable to insured events of prior
years................................................. 643.0 732.1 627.6
-------- -------- --------
Total payments.............................................. 1,514.9 1,507.2 1,387.2
-------- -------- --------
Change in reinsurance recoverable on unpaid losses.......... 15.0 (50.2) (136.6)
-------- -------- --------
Other (1)................................................... -- (7.5) --
-------- -------- --------
Reserve for losses and LAE, end of year..................... $2,597.3 $2,615.4 $2,744.1
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.2 million,
$127.9 million and $141.1 million in 1998, 1997, and 1996, respectively.
The decrease in favorable development on prior years' reserves of $0.7 million
in 1998 results from a $20.7 million decrease in favorable development at
Citizens, significantly offset by a $20.0 million increase in favorable
development at Hanover. The decrease in favorable development on prior year
reserves at Citizens in 1998, reflects a $13.8 million decrease in favorable
development, to $21.9 million, in the workers' compensation line. In addition,
favorable development in the commercial multiple peril line decreased $4.0
million, to
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million. These declines in favorable development are partially offset by
continued favorable development on prior year reserves in the personal
automobile line due to tort reform in Michigan, which became effective July 26,
1996. The new legislation requires judges rather than juries to determine if the
minimum threshold to allow pain and suffering damage settlements has been met.
The increase in favorable development at Hanover during 1998 reflects a $20.6
million increase in favorable development on prior year reserves, to $38.0
million, in the personal automobile line, as well as a $14.9 million increase to
$12.1 million in the commercial multiple peril line. These increases are
primarily attributable to the initiatives taken by the Company over the past two
years which are expected to reduce ultimate settlement costs. These increases
are partially offset by less favorable development in the workers' compensation
line where favorable development on prior year reserves decreased $19.2 million,
to $9.6 million.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million, in the personal automobile line
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million, in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997, reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million, and in the commercial multiple peril line where favorable
development increased $7.0 million, to $4.3 million. These increases are
partially offset by less favorable development in the personal automobile line,
where favorable development decreased $10.5 million, to $22.5 million in 1997.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $49.9
million, $53.1 million and $50.8 million, net of reinsurance of $14.2 million,
$15.7 million and $20.2 million in 1998, 1997 and 1996, respectively. The
Regional Property and Casualty subsidiaries do not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Regional Property and
Casualty subsidiaries may be required to defend such claims. The Company
estimated its ultimate liability for these claims based upon currently known
facts, reasonable assumptions where the facts are not known, current law and
methodologies currently available. Although these claims are not material, their
existence gives rise to uncertainty and is discussed because of the possibility,
however remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims are adequate. In addition, the
Company is not aware of any litigation or pending claims that may result in
additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 70.0%,
65.8% and 59.5% of the outstanding shares of common stock at December 31, 1998,
1997 and 1996, respectively. Earnings and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholder's equity attributable to minority shareholders are included in
minority interest in the consolidated financial statements.
18. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement, to which the court granted preliminary
approval on December 4, 1998. A hearing was held on March 19, 1999 to consider
final approval of the settlement agreement. A decision by the court is expected
to be rendered in the near future. Accordingly, FAFLIC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation. Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on the amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles primarily because policy acquisition costs are expensed
when incurred, investment reserves are based on different assumptions,
postretirement benefit costs are based on different assumptions and reflect a
different method of adoption, life insurance reserves are based on different
assumptions and income tax expense reflects only taxes paid or currently
payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies......................... $ 180.7 $ 190.3 $ 155.5
Life and Health Companies............................... 86.4 191.2 133.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies......................... $1,269.3 $1,279.6 $1,201.6
Life and Health Companies............................... 1,164.1 1,221.3 1,120.1
</TABLE>
20. SUBSEQUENT EVENT
On April 1, 1999, Allmerica P&C redeemed an additional 3,246.8 shares of its
issued and outstanding common stock owned by AFC for $125.0 million, thereby
increasing FAFLIC's ownership of Allmerica P&C by 4.8%. The 1999 transaction
consisted of $75.4 million of securities and $49.6 million of cash.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of Separate Account VA-K -- Delaware Medallion of First
Allmerica Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account VA-K -- Delaware Medallion of First Allmerica
Financial Life Insurance Company at December 31, 1998, the results of each of
their operations and the changes in each of their net assets for each of the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of First Allmerica Financial
Life Insurance Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with DGPF, provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DECATUR CAPITAL CASH
TOTAL RETURN DELCHESTER RESERVES RESERVE
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group
Premium Fund, Inc.......................... $7,849,631 $5,321,130 $1,363,677 $1,888,099
Investment income receivable................ -- 13,202 1,847 2,413
------------ ---------- ---------- ----------
Total assets.............................. 7,849,631 5,334,332 1,365,524 1,890,512
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- 13 -- --
------------ ---------- ---------- ----------
Net assets................................ $7,849,631 $5,334,319 $1,365,524 $1,890,512
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $3,012,687 $ 902,251 $ 176,681 $ 157,745
Non-qualified variable annuity
contracts............................... 4,836,944 4,432,068 1,188,843 1,732,767
------------ ---------- ---------- ----------
$7,849,631 $5,334,319 $1,365,524 $1,890,512
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
Qualified units outstanding, December 31,
1998....................................... 1,320,376 670,217 138,261 133,795
Net asset value per qualified unit, December
31, 1998................................... $ 2.281689 $ 1.346208 $ 1.277883 $ 1.179007
Non-qualified units outstanding, December
31, 1998................................... 2,119,896 3,292,271 930,322 1,469,683
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.281689 $ 1.346208 $ 1.277883 $ 1.179007
<CAPTION>
INTERNATIONAL SMALL CAP
DELCAP DELAWARE EQUITY VALUE*
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group
Premium Fund, Inc.......................... $1,228,174 $2,208,497 $ 996,284 $1,329,902
Investment income receivable................ -- -- -- --
---------- ---------- ------------- ----------
Total assets.............................. 1,228,174 2,208,497 996,284 1,329,902
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- -- --
---------- ---------- ------------- ----------
Net assets................................ $1,228,174 $2,208,497 $ 996,284 $1,329,902
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 220,500 $ 673,836 $ 239,297 $ 279,207
Non-qualified variable annuity
contracts............................... 1,007,674 1,534,661 756,987 1,050,695
---------- ---------- ------------- ----------
$1,228,174 $2,208,497 $ 996,284 $1,329,902
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Qualified units outstanding, December 31,
1998....................................... 114,312 326,582 156,708 153,427
Net asset value per qualified unit, December
31, 1998................................... $ 1.928927 $ 2.063298 $1.527027 $1.819802
Non-qualified units outstanding, December
31, 1998................................... 522,401 743,790 495,726 577,368
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.928927 $ 2.063298 $1.527027 $1.819802
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
STRATEGIC
TREND GLOBAL BOND INCOME DEVON
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group
Premium Fund, Inc.......................... $2,313,244 $ 36,658 $1,915,949 $2,403,288
Investment income receivable................ -- -- -- --
---------- ----------- ---------- ----------
Total assets.............................. 2,313,244 36,658 1,915,949 2,403,288
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- -- --
---------- ----------- ---------- ----------
Net assets................................ $2,313,244 $ 36,658 $1,915,949 $2,403,288
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 231,150 $ -- $ 365,182 $ 604,394
Non-qualified variable annuity
contracts............................... 2,082,094 36,658 1,550,767 1,798,894
---------- ----------- ---------- ----------
$2,313,244 $ 36,658 $1,915,949 $2,403,288
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Qualified units outstanding, December 31,
1998....................................... 109,836 -- 342,902 391,821
Net asset value per qualified unit, December
31, 1998................................... $ 2.104498 $1.171357 $ 1.064975 $ 1.542526
Non-qualified units outstanding, December
31, 1998................................... 989,354 31,295 1,456,153 1,166,200
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.104498 $1.171357 $ 1.064975 $ 1.542526
<CAPTION>
EMERGING CONVERTIBLE SOCIAL
MARKETS SECURITIES AWARENESS* REIT (a)
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group
Premium Fund, Inc.......................... $ 92,356 $ 422,568 $ 571,202 $ --
Investment income receivable................ -- -- -- --
--------- ----------- ---------- ---------
Total assets.............................. 92,356 422,568 571,202 --
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- -- --
--------- ----------- ---------- ---------
Net assets................................ $ 92,356 $ 422,568 $ 571,202 $ --
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 11,177 $ 46,750 $ 16,260 $ --
Non-qualified variable annuity
contracts............................... 81,179 375,818 554,942 --
--------- ----------- ---------- ---------
$ 92,356 $ 422,568 $ 571,202 $ --
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Qualified units outstanding, December 31,
1998....................................... 22,274 41,491 11,227 --
Net asset value per qualified unit, December
31, 1998................................... $0.501777 $1.126758 $1.448322 $1.000000
Non-qualified units outstanding, December
31, 1998................................... 161,783 333,539 383,162 --
Net asset value per non-qualified unit,
December 31, 1998.......................... $0.501777 $1.126758 $1.448322 $1.000000
</TABLE>
* Name changed. See Note 1.
(a) For the period ended 12/31/98, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DECATUR TOTAL RETURN DELCHESTER
------------------------- -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 97,912 $ 41,452 $ 457,287 $ 132,135
Mortality and expense risk fees............ (67,683) (24,356) (57,961) (17,988)
Administrative expense fees................ (8,122) (2,923) (6,955) (2,159)
----------- ----------- ----------- -----------
Net investment income (loss)............. 22,107 14,173 392,371 111,988
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 147,580 140,597 740 --
Net realized gain (loss) from sales of
investments.............................. 67,232 66,828 (36,816) 5,608
----------- ----------- ----------- -----------
Net realized gain (loss)................... 214,812 207,425 (36,076) 5,608
Net unrealized gain (loss)................. 129,300 261,162 (579,052) 43,881
----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 344,112 468,587 (615,128) 49,489
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 366,219 482,760 (222,757) 161,477
----------- ----------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 4,963,746 528,447 2,864,937 486,161
Withdrawals................................ (453,179) (128,614) (419,388) (84,340)
Contract benefits.......................... (253) -- (81,886) --
Contract charges........................... (914) (715) (647) (386)
Transfers between sub-accounts (including
fixed account), net...................... (33,344) 167,482 590,551 119,666
Other transfers from (to) the General
Account.................................. 282,747 (3,551) 673,045 3,357
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 4,758,803 563,049 3,626,612 524,458
----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 5,125,022 1,045,809 3,403,855 685,935
NET ASSETS:
Beginning of year.......................... 2,724,609 1,678,800 1,930,464 1,244,529
----------- ----------- ----------- -----------
End of year................................ $ 7,849,631 $ 2,724,609 $ 5,334,319 $ 1,930,464
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
CAPITAL RESERVES CASH RESERVE
----------------------- -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 39,262 $ 19,667 $ 65,433 $ 10,639
Mortality and expense risk fees............ (8,804) (3,872) (16,521) (2,640)
Administrative expense fees................ (1,057) (464) (1,982) (317)
----------- --------- ----------- -----------
Net investment income (loss)............. 29,401 15,331 46,930 7,682
----------- --------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 2,126 516 -- --
----------- --------- ----------- -----------
Net realized gain (loss)................... 2,126 516 -- --
Net unrealized gain (loss)................. 708 3,075 -- --
----------- --------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 2,834 3,591 -- --
----------- --------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 32,235 18,922 46,930 7,682
----------- --------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 933,977 77,896 1,396,824 1,129,235
Withdrawals................................ (234,236) (47,692) (70,449) (1,600)
Contract benefits.......................... (55,937) (25,637) -- (25,473)
Contract charges........................... (113) (28) (63) (3)
Transfers between sub-accounts (including
fixed account), net...................... 262,343 85,468 251,741 (790,105)
Other transfers from (to) the General
Account.................................. 79,048 1,599 (190,998) 60
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- --------- ----------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 985,082 91,606 1,387,055 312,114
----------- --------- ----------- -----------
Net increase (decrease) in net assets...... 1,017,317 110,528 1,433,985 319,796
NET ASSETS:
Beginning of year.......................... 348,207 237,679 456,527 136,731
----------- --------- ----------- -----------
End of year................................ $ 1,365,524 $ 348,207 $ 1,890,512 $ 456,527
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DELCAP DELAWARE
------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 23,023 $ 18,796
Mortality and expense risk fees............ (9,922) (7,272) (19,336) (7,800)
Administrative expense fees................ (1,190) (872) (2,321) (936)
----------- ---------- ----------- ----------
Net investment income (loss)............. (11,112) (8,144) 1,366 10,060
----------- ---------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 52,926 38,811 80,465 36,846
Net realized gain (loss) from sales of
investments.............................. 14,247 19,337 19,561 38,170
----------- ---------- ----------- ----------
Net realized gain (loss)................... 67,173 58,148 100,026 75,016
Net unrealized gain (loss)................. 100,062 13,639 150,586 60,698
----------- ---------- ----------- ----------
Net realized and unrealized gain
(loss).................................. 167,235 71,787 250,612 135,714
----------- ---------- ----------- ----------
Net increase (decrease) in net assets from
operations............................... 156,123 63,643 251,978 145,774
----------- ---------- ----------- ----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 484,559 13,349 1,218,323 69,725
Withdrawals................................ (51,098) (163,729) (69,415) (112,463)
Contract benefits.......................... -- -- (81,219) --
Contract charges........................... (471) (430) (459) (370)
Transfers between sub-accounts (including
fixed account), net...................... (39,520) (43,277) 25,961 283,421
Other transfers from (to) the General
Account.................................. 93,969 (1,078) 122,254 (218,658)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
----------- ---------- ----------- ----------
Net increase (decrease) in net assets from
contract transactions.................... 487,439 (195,165) 1,215,445 21,655
----------- ---------- ----------- ----------
Net increase (decrease) in net assets...... 643,562 (131,522) 1,467,423 167,429
NET ASSETS:
Beginning of year.......................... 584,612 716,134 741,074 573,645
----------- ---------- ----------- ----------
End of year................................ $ 1,228,174 $ 584,612 $ 2,208,497 $ 741,074
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
<CAPTION>
INTERNATIONAL EQUITY SMALL CAP VALUE*
------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
--------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 28,926 $ 108,398 $ 3,737 $ 2,303
Mortality and expense risk fees............ (10,702) (30,889) (9,803) (3,743)
Administrative expense fees................ (1,284) (3,707) (1,177) (449)
--------- ------------ ----------- ----------
Net investment income (loss)............. 16,940 73,802 (7,243) (1,889)
--------- ------------ ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- 13,702 19,469
Net realized gain (loss) from sales of
investments.............................. 25,772 435,037 3,001 22,939
--------- ------------ ----------- ----------
Net realized gain (loss)................... 25,772 435,037 16,703 42,408
Net unrealized gain (loss)................. 28,658 (229,879) (29,729) 36,464
--------- ------------ ----------- ----------
Net realized and unrealized gain
(loss).................................. 54,430 205,158 (13,026) 78,872
--------- ------------ ----------- ----------
Net increase (decrease) in net assets from
operations............................... 71,370 278,960 (20,269) 76,983
--------- ------------ ----------- ----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 264,912 44,861 750,092 115,492
Withdrawals................................ (93,238) (163,344) (39,961) (116,917)
Contract benefits.......................... (118) -- -- --
Contract charges........................... (404) (601) (243) (186)
Transfers between sub-accounts (including
fixed account), net...................... (50,184) (2,382,228) 142,052 78,906
Other transfers from (to) the General
Account.................................. 26,857 3,371 42,652 (178)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
--------- ------------ ----------- ----------
Net increase (decrease) in net assets from
contract transactions.................... 147,825 (2,497,941) 894,592 77,117
--------- ------------ ----------- ----------
Net increase (decrease) in net assets...... 219,195 (2,218,981) 874,323 154,100
NET ASSETS:
Beginning of year.......................... 777,089 2,996,070 455,579 301,479
--------- ------------ ----------- ----------
End of year................................ $ 996,284 $ 777,089 $ 1,329,902 $ 455,579
--------- ------------ ----------- ----------
--------- ------------ ----------- ----------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
TREND GLOBAL BOND
-------------------------- ------------------
YEAR ENDED DECEMBER 31, YEAR ENDED
DECEMBER 31,
1998 1997 1998 1997
------------ ----------- -------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 857 $ 1,498 $ 651 $ 90
Mortality and expense risk fees............ (18,562) (14,184) (181) (31)
Administrative expense fees................ (2,227) (1,702) (22) (4)
------------ ----------- -------- -------
Net investment income (loss)............. (19,932) (14,388) 448 55
------------ ----------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 14,652 5,393 7 2
Net realized gain (loss) from sales of
investments.............................. (73,636) 13,826 299 6
------------ ----------- -------- -------
Net realized gain (loss)................... (58,984) 19,219 306 8
Net unrealized gain (loss)................. 126,288 81,484 (36) 15
------------ ----------- -------- -------
Net realized and unrealized gain
(loss)................................. 67,304 100,703 270 23
------------ ----------- -------- -------
Net increase (decrease) in net assets from
operations............................... 47,372 86,315 718 78
------------ ----------- -------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 525,702 58,532 24,922 7,130
Withdrawals................................ (115,013) (38,535) -- --
Contract benefits.......................... -- -- -- --
Contract charges........................... (433) (409) (8) --
Transfers between sub-accounts (including
fixed account), net...................... (1,172,031) 2,357,226 1,236 --
Other transfers from (to) the General
Account.................................. 123,852 2,482 2,584 --
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- (223)
------------ ----------- -------- -------
Net increase (decrease) in net assets from
contract transactions.................... (637,923) 2,379,296 28,734 6,907
------------ ----------- -------- -------
Net increase (decrease) in net assets...... (590,551) 2,465,611 29,452 6,985
NET ASSETS:
Beginning of year.......................... 2,903,795 438,184 7,206 221
------------ ----------- -------- -------
End of year................................ $ 2,313,244 $ 2,903,795 $ 36,658 $ 7,206
------------ ----------- -------- -------
------------ ----------- -------- -------
<CAPTION>
STRATEGIC INCOME DEVON
---------------------------------- ----------------------------------
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/98 5/1/97** TO 12/31/97 12/31/98 5/1/97** TO 12/31/97
----------- -------------------- ----------- --------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 11,398 $ -- $ 947 $ --
Mortality and expense risk fees............ (14,228) (506) (16,751) (181)
Administrative expense fees................ (1,708) (61) (2,010) (21)
----------- -------- ----------- --------
Net investment income (loss)............. (4,538) (567) (17,814) (202)
----------- -------- ----------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,055 -- 2,427 --
Net realized gain (loss) from sales of
investments.............................. (456) 4 4,842 3
----------- -------- ----------- --------
Net realized gain (loss)................... 599 4 7,269 3
Net unrealized gain (loss)................. 8,674 1,292 266,494 4,015
----------- -------- ----------- --------
Net realized and unrealized gain
(loss)................................. 9,273 1,296 273,763 4,018
----------- -------- ----------- --------
Net increase (decrease) in net assets from
operations............................... 4,735 729 255,949 3,816
----------- -------- ----------- --------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,569,678 269,043 1,964,135 79,238
Withdrawals................................ (37,334) -- (39,202) --
Contract benefits.......................... (46,400) -- (249) --
Contract charges........................... (82) -- (14) --
Transfers between sub-accounts (including
fixed account), net...................... 44,987 20,937 37,266 50,000
Other transfers from (to) the General
Account.................................. 89,625 32 52,354 --
Net increase (decrease) in investment by
Sponsor.................................. -- (1) (25) 20
----------- -------- ----------- --------
Net increase (decrease) in net assets from
contract transactions.................... 1,620,474 290,011 2,014,265 129,258
----------- -------- ----------- --------
Net increase (decrease) in net assets...... 1,625,209 290,740 2,270,214 133,074
NET ASSETS:
Beginning of year.......................... 290,740 -- 133,074 --
----------- -------- ----------- --------
End of year................................ $1,915,949 $290,740 $2,403,288 $133,074
----------- -------- ----------- --------
----------- -------- ----------- --------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K -- DELAWARE MEDALLION
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EMERGING MARKETS CONVERTIBLE SECURITIES
--------------------------------- ---------------------------------
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/98 5/1/97** TO 12/31/97 12/31/98 5/1/97** TO 12/31/97
---------- -------------------- ---------- --------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 4 $ -- $ 3,589 $ --
Mortality and expense risk fees............ (720) (106) (3,477) (221)
Administrative expense fees................ (86) (13) (417) (26)
---------- ------- ---------- -------
Net investment income (loss)............. (802) (119) (305) (247)
---------- ------- ---------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 26 -- 824 --
Net realized gain (loss) from sales of
investments.............................. (12,830) (3,522) (1,458) 6
---------- ------- ---------- -------
Net realized gain (loss)................... (12,804) (3,522) (634) 6
Net unrealized gain (loss)................. (33,828) (166) (2,428) 1,545
---------- ------- ---------- -------
Net realized and unrealized gain
(loss)................................. (46,632) (3,688) (3,062) 1,551
---------- ------- ---------- -------
Net increase (decrease) in net assets from
operations............................... (47,434) (3,807) (3,367) 1,304
---------- ------- ---------- -------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 157,103 1,000 352,459 95,927
Withdrawals................................ (4,005) -- (17,837) --
Contract benefits.......................... -- -- (42,033) --
Contract charges........................... (3) -- (35) --
Transfers between sub-accounts (including
fixed account), net...................... (16,144) 3,637 (2,286) --
Other transfers from (to) the General
Account.................................. 1,998 -- 38,440 --
Net increase (decrease) in investment by
Sponsor.................................. (9) 20 -- (4)
---------- ------- ---------- -------
Net increase (decrease) in net assets from
contract transactions.................... 138,940 4,657 328,708 95,923
---------- ------- ---------- -------
Net increase (decrease) in net assets...... 91,506 850 325,341 97,227
NET ASSETS:
Beginning of year.......................... 850 -- 97,227 --
---------- ------- ---------- -------
End of year................................ $ 92,356 $ 850 $422,568 $97,227
---------- ------- ---------- -------
---------- ------- ---------- -------
<CAPTION>
SOCIAL AWARENESS*
---------------------------------
YEAR ENDED PERIOD FROM
12/31/98 5/1/97** TO 12/31/97
---------- --------------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 479 $ --
Mortality and expense risk fees............ (4,794) (262)
Administrative expense fees................ (575) (32)
---------- --------
Net investment income (loss)............. (4,890) (294)
---------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,770 --
Net realized gain (loss) from sales of
investments.............................. (11,166) 1,124
---------- --------
Net realized gain (loss)................... (9,396) 1,124
Net unrealized gain (loss)................. 35,743 2,176
---------- --------
Net realized and unrealized gain
(loss)................................. 26,347 3,300
---------- --------
Net increase (decrease) in net assets from
operations............................... 21,457 3,006
---------- --------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 457,590 77,052
Withdrawals................................ (4,912) --
Contract benefits.......................... -- --
Contract charges........................... (22) --
Transfers between sub-accounts (including
fixed account), net...................... (42,629) 48,877
Other transfers from (to) the General
Account.................................. 10,787 --
Net increase (decrease) in investment by
Sponsor.................................. (24) 20
---------- --------
Net increase (decrease) in net assets from
contract transactions.................... 420,790 125,949
---------- --------
Net increase (decrease) in net assets...... 442,247 128,955
NET ASSETS:
Beginning of year.......................... 128,955 --
---------- --------
End of year................................ $571,202 $128,955
---------- --------
---------- --------
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account VA-K, which funds the Delaware Medallion variable annuity
contracts (the Delaware contracts) in addition to other contracts (the Allmerica
Advantage and ExecAnnuity Plus variable annuity contracts), is a separate
investment account of First Allmerica Financial Life Insurance Company (the
Company), established on April 1, 1994 for the purpose of separating from the
general assets of the Company those assets used to fund certain variable annuity
contracts issued by the Company. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of Separate Account VA-K are clearly identified and
distinguished from the other assets and liabilities of the Company. Separate
Account VA-K cannot be charged with liabilities arising out of any other
business of the Company.
Separate Account VA-K is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account VA-K
currently offers sixteen Sub-Accounts under the Delaware contracts. Each
Sub-Account invests exclusively in a corresponding investment portfolio of the
Delaware Group Premium Fund, Inc. (DGPF), managed by Delaware Management
Company, or Delaware International Advisers Ltd. DGPF is an open-end,
diversified management investment company registered under the 1940 Act.
Separate Account VA-K funds 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 Section 401, 403, or 408 of the Internal Revenue Code (the
Code), while a non-qualified contract is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
withdrawals or surrenders will vary according to whether they are made from a
qualified contract or a non-qualified contract.
Effective May 1, 1998, the sub-accounts formerly know as Quantum and Value
changed their names to Social Awareness and Small Cap Value, respectively.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of DGPF. Net realized gains and losses on
securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of DGPF
at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of Separate Account VA-K. Therefore, no provision
for income taxes has been charged against Separate Account VA-K.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in DGPF at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Decatur Total Return.................... 404,203 $7,177,718 $19.420
Delchester.............................. 628,975 5,819,936 8.460
Capital Reserves........................ 138,024 1,358,958 9.880
Cash Reserve............................ 188,810 1,888,099 10.000
DelCap.................................. 66,209 1,039,105 18.550
Delaware................................ 110,204 1,903,039 20.040
International Equity.................... 60,454 878,156 16.480
Small Cap Value*........................ 80,845 1,254,341 16.450
Trend................................... 117,126 2,063,420 19.750
Global Bond............................. 3,432 36,659 10.680
Strategic Income........................ 180,750 1,905,983 10.600
Devon................................... 155,653 2,132,779 15.440
Emerging Markets........................ 15,896 126,350 5.810
Convertible Securities.................. 37,864 423,451 11.160
Social Awareness*....................... 39,258 533,283 14.550
REIT.................................... -- -- 9.100
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is $50,000 or less on
contracts issued on Form A3019-94 (Delaware Medallion I) and less than $50,000
on contracts issued on Form A3025-96 (Delaware Medallion III). The fee is
currently waived for the above contracts issued to and maintained by the trustee
of a 401(k) plan.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account VA-K, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale. For the
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
years ended December 31, 1998 and December 31, 1997, the Company received
$11,636 and $35,112, respectively, for contingent deferred sales charges
applicable to Separate Account VA-K.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------- --------------------------
UNITS AMOUNT UNITS AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Decatur Total Return
Issuance of Units.......................... 2,680,164 $ 5,914,222 500,746 $ 976,895
Redemption of Units........................ (551,136) (1,155,419) (233,587) (413,846)
----------- ------------ ----------- ------------
Net increase (decrease).................. 2,129,028 $ 4,758,803 267,159 $ 563,049
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Delchester
Issuance of Units.......................... 5,043,925 $ 7,108,606 506,081 $ 681,334
Redemption of Units........................ (2,469,663) (3,481,994) (120,874) (156,876)
----------- ------------ ----------- ------------
Net increase (decrease).................. 2,574,262 $ 3,626,612 385,207 $ 524,458
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Capital Reserves
Issuance of Units.......................... 1,215,646 $ 1,542,507 226,513 $ 264,440
Redemption of Units........................ (433,955) (557,425) (147,420) (172,834)
----------- ------------ ----------- ------------
Net increase (decrease).................. 781,691 $ 985,082 79,093 $ 91,606
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Cash Reserve
Issuance of Units.......................... 4,450,736 $ 5,109,401 1,326,202 $ 1,479,573
Redemption of Units........................ (3,248,497) (3,722,346) (1,049,663) (1,167,459)
----------- ------------ ----------- ------------
Net increase (decrease).................. 1,202,239 $ 1,387,055 276,539 $ 312,114
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
DelCap
Issuance of Units.......................... 384,486 $ 656,282 71,181 $ 110,048
Redemption of Units........................ (102,901) (168,843) (208,990) (305,213)
----------- ------------ ----------- ------------
Net increase (decrease).................. 281,585 $ 487,439 (137,809) $ (195,165)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Delaware
Issuance of Units.......................... 763,840 $ 1,453,838 279,831 $ 360,738
Redemption of Units........................ (113,638) (238,393) (265,151) (339,083)
----------- ------------ ----------- ------------
Net increase (decrease).................. 650,202 $ 1,215,445 14,680 $ 21,655
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
International Equity
Issuance of Units.......................... 268,156 $ 394,673 195,354 $ 274,015
Redemption of Units........................ (169,418) (246,848) (1,885,903) (2,771,956)
----------- ------------ ----------- ------------
Net increase (decrease).................. 98,738 $ 147,825 (1,690,549) $ (2,497,941)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
* Name changed. See Note 1.
</TABLE>
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------- --------------------------
UNITS AMOUNT UNITS AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Small Cap Value*
Issuance of Units.......................... 540,420 $ 988,214 110,902 $ 200,491
Redemption of Units........................ (44,677) (93,622) (79,768) (123,374)
----------- ------------ ----------- ------------
Net increase (decrease).................. 495,743 $ 894,592 31,134 $ 77,117
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Trend
Issuance of Units.......................... 1,421,182 $ 2,626,819 1,378,734 $ 2,517,123
Redemption of Units........................ (1,901,174) (3,264,742) (84,798) (137,827)
----------- ------------ ----------- ------------
Net increase (decrease).................. (479,992) $ (637,923) 1,293,936 $ 2,379,296
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Global Bond
Issuance of Units.......................... 46,094 $ 53,839 6,541 $ 7,130
Redemption of Units........................ (21,340) (25,105) (200) (223)
----------- ------------ ----------- ------------
Net increase (decrease).................. 24,754 $ 28,734 6,341 $ 6,907
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Strategic Income
Issuance of Units.......................... 1,762,649 $ 1,875,968 276,642 $ 290,343
Redemption of Units........................ (239,893) (255,494) (343) (332)
----------- ------------ ----------- ------------
Net increase (decrease).................. 1,522,756 $ 1,620,474 276,299 $ 290,011
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Devon
Issuance of Units.......................... 1,598,494 $ 2,221,232 105,540 $ 129,258
Redemption of Units........................ (146,013) (206,967) -- --
----------- ------------ ----------- ------------
Net increase (decrease).................. 1,452,481 $ 2,014,265 105,540 $ 129,258
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Emerging Markets
Issuance of Units.......................... 215,600 $ 162,428 73,212 $ 81,084
Redemption of Units........................ (32,671) (23,488) (72,084) (76,427)
----------- ------------ ----------- ------------
Net increase (decrease).................. 182,929 $ 138,940 1,128 $ 4,657
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Convertible Securities
Issuance of Units.......................... 364,829 $ 415,406 84,102 $ 95,927
Redemption of Units........................ (73,901) (86,698) (1) (4)
----------- ------------ ----------- ------------
Net increase (decrease).................. 290,928 $ 328,708 84,101 $ 95,923
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Social Awareness*
Issuance of Units.......................... 402,874 $ 557,588 132,408 $ 165,974
Redemption of Units........................ (109,864) (136,798) (31,029) (40,025)
----------- ------------ ----------- ------------
Net increase (decrease).................. 293,010 $ 420,790 101,379 $ 125,949
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
REIT
Issuance of Units.......................... -- $ -- -- $ --
Redemption of Units........................ -- -- -- --
----------- ------------ ----------- ------------
Net increase (decrease).................. -- $ -- -- $ --
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
* Name changed. See Note 1.
</TABLE>
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account VA-K satisfies the current
requirements of the regulations, and it intends that Separate Account VA-K will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of DGPF by Separate
Account VA-K during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ----------- -----------
<S> <C> <C>
Decatur Total Return................................... $ 5,685,996 $ 757,506
Delchester............................................. 7,048,429 3,041,888
Capital Reserves....................................... 1,526,970 514,334
Cash Reserve........................................... 4,971,386 3,539,823
DelCap................................................. 700,492 171,239
Delaware............................................... 1,525,259 227,983
International Equity................................... 401,081 236,316
Small Cap Value*....................................... 982,021 80,970
Trend.................................................. 2,634,092 3,277,295
Global Bond............................................ 54,472 25,283
Strategic Income....................................... 1,763,562 146,571
Devon.................................................. 2,167,055 168,177
Emerging Markets....................................... 161,729 23,565
Convertible Securities................................. 426,357 97,130
Social Awareness*...................................... 558,226 140,556
REIT................................................... -- --
----------- -----------
Totals............................................... $30,607,127 $12,448,636
----------- -----------
----------- -----------
</TABLE>
* Name changed. See Note 1.
SA-11
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account VA-K of First Allmerica Financial
Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of Registrant
dated August 20, 1991 was previously filed in Post-Effective
Amendment No. 9 on April 24, 1998, and is incorporated by reference
herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company may
hold the assets of the registrant NOT pursuant to a trust indenture
or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement was
previously filed in Post-Effective Amendment No. 9 on April
24, 1998, and is incorporated by reference herein.
(b) Sales Agreements with Commission Schedule were previously
filed in Post-Effective Amendment No. 9 on April 24, 1998,
and are incorporated by reference herein.
(c) General Agent's Agreement was previously filed in Post-
Effective Amendment No. 9 on April 24, 1998, and is
incorporated by reference herein.
(d) Career Agent Agreement was previously filed in Post-
Effective Amendment No. 9 on April 24, 1998, and is
incorporated by reference herein.
(e) Registered Representative's Agreement was previously filed
in Post-Effective Amendment No. 9 on April 24, 1998, and is
incorporated by reference herein.
EXHIBIT 4 Policy Form A was previously filed in Post-Effective Amendment No. 9
on April 24, 1998, and is incorporated by reference herein. Policy
Form B was previously filed on March 1, 1996 in Post-Effective
Amendment No. 5, and is incorporated by reference herein.
EXHIBIT 5 Application Form was previously filed in Post-Effective Amendment
No. 9 on April 24, 1998, and is incorporated by reference herein.
Application Form B was previously filed on March 1, 1996 in Post-
Effective Amendment No. 5, and is incorporated by reference herein.
<PAGE>
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws, as amended
to reflect its name change, were previously filed on October 12,
1995 in Post-Effective Amendment No. 4, and are incorporated by
reference herein. Revised Bylaws were previously filed on May 1,
1996 in Post-Effective Amendment No. 6, and are incorporated by
reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Service Agreement was previously filed on April 29,
1996 in Post-Effective Amendment No. 6, and is incorporated
by reference herein.
(b) An Amendment to the Fidelity Service Agreement, effective as
of January 1, 1997, was previously filed on May 1, 1997 in
Post-Effective Amendment No. 8, and is incorporated by
reference herein.
(c) Fidelity Service Contract was previously filed on May 1,
1997 in Post-Effective Amendment No. 8, and is incorporated
by reference herein.
(d) BFDS Agreements for lockbox and mailroom services were
previously filed in Post-Effective Amendment No. 9 on April
24, 1998, and are incorporated by reference herein.
(e) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 Form of Participation Agreement with Delaware Group Premium Fund,
Inc. and Amendment were previously filed in Post-Effective Amendment
No. 9 on April 24, 1998, and are incorporated by reference herein.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
Bruce C. Anderson Director (since 1996), Vice President (since
Director, Vice President and 1984) and Assistant Secretary (since 1992) of
Assistant Secretary First Allmerica
<PAGE>
Abigail M. Armstrong Secretary (since 1996) and Counsel (since
Secretary and Counsel 1991) of First Allmerica; Secretary (since
1988) and Counsel (since 1994) of Allmerica
Investments, Inc.; and Secretary (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate
Vice President and Controller (since 1998) of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since
Director, Vice President and 1997) and Vice President (since 1995) of First
Chief Information Officer Allmerica; and Corporate Manager (1979 to
1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since
Director, Vice President and 1996) and Vice President (since 1991) of First
Chief Investment Officer Allmerica; and Vice President (since 1998) of
Allmerica Financial Investment Management
Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President
Director, Senior Vice (since 1986), General Counsel (since 1981) and
President, General Counsel Assistant Secretary (since 1991) of First
and Assistant Secretary Allmerica; Director (since 1985) of Allmerica
Investments, Inc.; and Director (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica;
Director Director and President (since 1996) of The
Hanover Insurance Company; and Vice President
(1993 to 1996) of the Hanover Insurance
Company
James R. McAuliffe Director (since 1996) of First Allmerica;
Director Director (since 1992), President (since 1994)
and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive
Director, President and Chief Officer (since 1989) of First Allmerica;
Executive Officer Director (since 1989) of Allmerica
Investments, Inc.; and Director and Chairman
of the Board (since 1990) of Allmerica
Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since
Director, Vice President, 1996) and Vice President and Treasurer (since
Chief Financial Officer and 1993) of First Allmerica; Treasurer (since
Treasurer 1993) of Allmerica Investments, Inc.; and
Treasurer (since 1993) of Allmerica Financial
Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President
Director and Vice President (since 1990) of First Allmerica; Director
(since 1990) of Allmerica Investments, Inc.;
and Director and President (since 1998) of
Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of
Director and Vice President First Allmerica; Chief Executive Officer (1996
to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna
Life & Casualty Company
<PAGE>
Eric A. Simonsen Director (since 1996) and Vice President
Director and Vice President (since 1990) of First Allmerica; Director
(since 1991) of Allmerica Investments, Inc.;
and Director (since 1991) of Allmerica
Financial Investment Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President
Director and Vice President (since 1987) of First Allmerica
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _________________ _____________
| |
100% 100%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | -------------- Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
-------------- Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of The Hanover
Insurance Company
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
<S><C>
NAME ADDRESS TYPE OF BUSINESS
- ---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, 440 Lincoln Street Insurance Broker
Inc. Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known Worcester MA 01653 health insurance, annuities,variable
as SMA Life Assurance Company) annuities and variable
life insurance
<PAGE>
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
<PAGE>
Citizens Insurance Company of the 3950 Priority Way South Multi-line property and casualty
Midwest Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity, accident
Insurance Company (formerly State Worcester MA 01653 and health insurance company
Mutual Life Assurance Company of
America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover
Company, Inc. Richardson TX 75081 Llyod's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 28, 1999, there were 131 Contract holders of qualified
Contracts and 422 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder
for monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however,
that this provision shall not eliminate or limit the liability of a
director:
1. for and breach of the director's duty of loyalty to the Company or its
policyholders;
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance companies
pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c.156B Section 62;
4. for any transactions from which the director derived an improper personal
benefit.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H,
VA-K, VA-P, Allmerica Select Separate Account II, Group VEL Account,
Separate Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account, and Allmerica Select Separate
Account of Allmerica Financial Life Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate Account
II, Group VEL Account, Separate Account KG, Separate Account KGC,
Fulcrum Separate Account, and Allmerica Select Separate Account of
First Allmerica Financial Life Insurance Company
- Allmerica Investment Trust
<PAGE>
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance
Officer
Richard F. Betzler, Jr. Vice President
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive
Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
<PAGE>
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission ("SEC") such supplementary and
periodic information, documents, and reports as may be prescribed by any
rule or regulation of the SEC heretofore or hereafter duly adopted pursuant
to authority conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional
Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant
under any registration statement, underwriting agreement or otherwise,
Registrant has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, Officer or Controlling
Person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
(e) The Company hereby represents that the aggregate fees and charges under the
Policies are reasonable in relation to the services rendered, expenses
expected to be incurred, and risks assumed by the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940 Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of
Life Insurance, in applying the withdrawal restrictions of Internal Revenue
Code Section 403(b)(11). Registrant has taken the following steps in
reliance on the letter:
1. Appropriate disclosures regarding the redemption/withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have
been included in the prospectus of each registration statement used in
connection with the offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption/withdrawal restrictions imposed by the Program and by
Section 403(b)(11) to the attention of potential participants.
<PAGE>
4. A signed statement acknowledging the participant's understanding of
(i) the restrictions on redemption/withdrawal imposed by the Program
and by Section 403(b)(11) and (ii) the investment alternatives
available under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 2nd day of April,
1999.
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Abigail M. Armstrong
-------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate April 2, 1999
------------------------ Controller
Warren E. Barnes
/s/ Edward J. Parry Director, Vice President, Chief
------------------------ Financial Officer and Treasurer April 2, 1999
Edward J. Parry III
/s/ Richard M. Reilly Director and Vice President
------------------------ April 2, 1999
Richard M. Reilly
John F. O'Brien* Director, President and Chief April 2, 1999
------------------------ Executive Officer
Bruce C. Anderson* Director and Vice President April 2, 1999
------------------------
Robert E. Bruce* Director, Vice President and April 2, 1999
------------------------ Chief Information Officer
John P. Kavanaugh* Director, Vice President and April 2, 1999
------------------------ Chief Investment Officer
John F. Kelly* Director, Senior Vice President April 2, 1999
------------------------ and General Counsel
J. Barry May* Director April 2, 1999
------------------------
James R. McAuliffe* Director April 2, 1999
------------------------
Robert P. Restrepo, Jr.* Director and Vice President April 2, 1999
------------------------
Eric A. Simonsen* Director and Vice President April 2, 1999
------------------------
Phillip E. Soule* Director and Vice President April 2, 1999
------------------------
* Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-71054)
<PAGE>
EXHIBIT TABLE
Exhibit 8(e) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form N-4 of Separate Account VA-K, Separate Account VA-P,
Allmerica Select Separate Account, Separate Account KG, Separate Account KGC and
Fulcrum Separate Account of First Allmerica Financial Life Insurance Company,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director, President and Chief Executive 4/1/99
- ------------------------------ Officer ------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and 4/1/99
- ------------------------------ Chief Information Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/1/99
- ------------------------------ ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen
- ------------------------------ Director and Vice President 4/1/99
Eric A. Simonsen ------
/s/ Phillip E. Soule Director and Vice President 4/1/99
- ------------------------------ ------
Phillip E. Soule
<PAGE>
April 1, 1999
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION) OF FIRST
ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-71054 AND 811-8814
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
Separate Account VA-K on Form N-4 under the Securities Act of 1933 and the
Investment Company Act of 1940, with respect to the Company's qualified and
non-qualified variable annuity contracts.
I am of the following opinion:
1. Separate Account VA-K is a separate account of the Company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement for Separate Account VA-K
on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 10 to the Registration
Statement of Separate Account VA-K--Delaware Medallion of First Allmerica
Financial Life Insurance Company on Form N-4 of our report dated February 2,
1999, except for paragraph 2 of Note 18 and Note 20, which are as of March 19,
1999 and April 1, 1999, respectively, relating to the financial statements of
First Allmerica Financial Life Insurance Company, and our report dated
March 26, 1999, relating to the financial statements of Separate
Account VA-K--Delaware Medallion of First Allmerica Financial Life Insurance
Company, both of which appear in such Statement of Additional Information. We
also consent to the reference to us under the heading "Experts" in such
Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
