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File Nos. 33-71054
811-8114
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Post-Effective Amendment No. 12
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27
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)
Mary Eldridge, Secretary
First Allmerica Financial Life Insurance 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, 2000 pursuant to Paragraph (b) of Rule 485
_____ 60 days after filing pursuant to Paragraph (a) (1) of Rule 485
_____ on (date) pursuant to Paragraph (a) (1) of Rule 485
_____ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant has registered 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,
1999 was filed on or before March 30, 2000.
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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 Contract Features; Summary
of Fees and Expenses
...........................Prospectus B: Summary of Policy Features; Summary of
Fees and Expenses
4..........................Condensed Financial Information; Performance
Information
5..........................Description of the Companies, the Variable Accounts,
and the Underlying Investment Companies
6..........................Charges and Deductions
7..........................Description of the Contract
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
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21.........................Performance Information
22.........................Annuity Benefit Payments
23.........................Financial Statements
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SEPARATE ACCOUNT VA-K
(DELAWARE MEDALLION I & II)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 2000
* * *
An Application for an Order of Exemption has been filed with the Securities
and Exchange Commission on behalf of Allmerica Financial Life Insurance and
Annuity Company, First Allmerica Financial Life Insurance Company, Separate
Account VA-K and Allmerica Investments, Inc. (collectively referred to
herein as the "Applicants"), to permit the Applicants to deduct a charge for
an optional benefit rider in the manner set out in "G. Optional Minimum
Guaranteed Annuity Payout Rider Charge," under the SUMMARY OF POLICY
FEATURES, and "E. Optional Minimum Guaranteed Annuity Payout Rider Charge"
under the CHARGES AND DEDUCTIONS sections of the prospectus.
While the Application for an Order of Exemption is pending, the first
paragraph of "G. Optional Minimum Guaranteed Annuity Payout Rider Charge,"
and the first two paragraphs of "C. Optional Minimum Guaranteed Annuity
Payout Rider Charge" are hereby replaced by the following:
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 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 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, multiplied by 1/12th of the following annual percentage rates:
* * *
SUPPLEMENT DATED MAY 1, 2000
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about the Delaware Medallion II
variable annuity policies issued by Allmerica Financial Life Insurance and
Annuity Company and Delaware Medallion I variable annuity policies issued by
Allmerica Financial Life Insurance and Annuity Company and First Allmerica
Financial Life Insurance Company. The policy is a 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.
PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE
REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Information specific to Delaware Medallion I is set forth in Appendix B. Owners
of these policies should review this Appendix first.
A Statement of Additional Information dated May 1, 2000 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by 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 Variable Account, known as Separate Account VA-K is subdivided into
Sub-Accounts. Each Sub-Account offered as an investment option under this policy
invests exclusively in shares of one of the following funds.
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<S> <C> <C>
DELAWARE GROUP PREMIUM FUND AIM VARIABLE INSURANCE FUNDS ALLIANCE VARIABLE PRODUCTS SERIES
DGPF Growth & Income Series AIM V.I. Growth Fund FUND, INC. (CLASS B)
DGPF Devon Series AIM V.I. High Yield Fund Alliance Growth Portfolio
DGPF Growth Opportunities Series AIM V.I. International Equity Fund Alliance Growth and Income Portfolio
DGPF U.S. Growth Series AIM V.I. Value Fund Alliance Premier Growth Portfolio
DGPF Select Growth Series Alliance Technology Portfolio
DGPF Social Awareness Series THE ALGER AMERICAN FUND
DGPF REIT Series Alger American Leveraged AllCap FRANKLIN TEMPLETON VARIABLE
DGPF Small Cap Value Series Portfolio INSURANCE PRODUCTS TRUST (CLASS 2)
DGPF Trend Series Alger American MidCap Growth Franklin Small Cap Fund
DGPF International Equity Series Portfolio Mutual Shares Securities Fund
DGPF Emerging Markets Series Alger American Small Capitalization Templeton Growth Securities Fund
DGPF Balanced Series Portfolio Templeton International Securities Fund
DGPF Convertible Securities Series
DGPF High Yield Series PIONEER VARIABLE CONTRACTS
DGPF Capital Reserves Series TRUST (CLASS II)
DGPF Strategic Income Series DGPF Pioneer Emerging Markets VCT
Cash Reserve Series Portfolio
DGPF Global Bond Series Pioneer Mid-Cap Value VCT Portfolio
</TABLE>
The Company's General Account is also available as an investment option and
offers a fixed interest rate guaranteed for one year from the time a payment is
received.
THIS ANNUITY IS NOT A BANK DEPOSITOR OR OBLIGATION; FEDERALLY INSURED; OR
ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED MAY 1, 2000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF POLICY FEATURES.................................. 14
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE
UNDERLYING INVESTMENT COMPANIES............................ 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 20
PERFORMANCE INFORMATION..................................... 24
CHARGES AND DEDUCTIONS...................................... 26
A. Surrender Charge..................................... 26
B. Premium Taxes........................................ 29
C. Policy Fee........................................... 29
D. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider Charge............................................ 29
E. Annual Charges Against Separate Account Assets....... 29
THE VARIABLE ANNUITY POLICIES............................... 31
A. Purchase Payments.................................... 31
B. Transfer Privilege................................... 32
C. Surrender............................................ 33
D. Partial Redemption................................... 33
E. Death Benefit........................................ 34
F. The Spouse of the Owner as Beneficiary............... 35
G. Assignment........................................... 35
H. Electing the Form of Annuity and the Annuity Date.... 36
I. Description of Variable Annuity Options.............. 37
J. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider................................................... 38
K. NORRIS Decision...................................... 40
L. Computation of Policy Values and Annuity Benefit
Payments................................................ 40
Determination of the First Variable Annuity Benefit
Payment............................................. 40
The Annuity Unit.................................... 41
Determination of the Number of Annuity Units........ 41
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 41
FEDERAL TAX CONSIDERATIONS.................................. 42
A. General.............................................. 42
The Company......................................... 42
Diversification Requirements........................ 42
Investor Control.................................... 42
B. Qualified and Non-Qualified Policies................. 43
C. Taxation of the Policies 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
D. Tax Withholding...................................... 44
E. Provisions Applicable to Qualified Employer Plans.... 45
Corporate and Self-Employed Pension and Profit
Sharing Plans....................................... 45
Individual Retirement Annuities..................... 45
Tax-Sheltered Annuities............................. 45
Texas Optional Retirement Program................... 46
LOANS (QUALIFIED POLICIES ONLY)............................. 46
</TABLE>
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<TABLE>
<S> <C>
STATEMENTS AND REPORTS...................................... 46
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 46
VOTING RIGHTS............................................... 48
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 48
LEGAL MATTERS............................................... 48
FURTHER INFORMATION......................................... 48
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.... A-1
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)............................................... B-1
APPENDIX C -- CONDENSED FINANCIAL INFORMATION............... C-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................. 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY.................................................... 3
SERVICES.................................................... 3
UNDERWRITERS................................................ 3
ANNUITY BENEFIT PAYMENTS.................................... 4
EXCHANGE OFFER.............................................. 6
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM.................................................... 8
PERFORMANCE INFORMATION................................... 8
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
3
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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 (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 portfolio of Delaware Group Premium Fund
("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American Fund
("Alger"), Alliance Variable Products Series Fund, Inc. ("Alliance"), Franklin
Templeton Variable Insurance Products Trust ("FT VIP") and Pioneer Variable
Contracts Trust ("Pioneer VCT").
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee, rider
charge and/or surrender charge that may apply upon surrender.
UNDERLYING FUNDS (FUNDS): an investment portfolio of DGPF, AVIF, Alger,
Alliance, FT VIP and Pioneer VCT in which a Sub-Account invests.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during
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which no payment, partial withdrawal, or surrender of a Policy was received)
when there is a sufficient degree of trading in an Underlying Fund 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 Funds.
5
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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" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
YEARS FROM
DATE OF PAYMENT CHARGE
1. POLICY CHARGES: --------------- ------
<S> <C> <C>
SURRENDER CHARGE:* 0-3 7.0%
This charge may be assessed upon surrender, withdrawal or 4 6.0%
annuitization under any commutable period certain option 5 5.0%
or a noncommutable period certain option of less than ten 6 4.0%
years. The charge is a percentage of payments applied to 7 3.0%
the amount surrendered (in excess of any amount that is More than 7 0%
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:
Under the following riders, 1/12th of the annual charge is
deducted pro-rata on a monthly basis at the end of each
month and, if applicable, at termination of the rider. The
charge on an annual basis as a percentage of the
Accumulated Value is:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.25%
with a ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.15%
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 Annual Expenses: 1.40%
</TABLE>
*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 "A. Surrender Charge" under CHARGES AND
DEDUCTIONS.
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3. ANNUAL UNDERLYING FUND EXPENSES: Total expenses of the Underlying Funds are
not fixed or specified under the terms of the Policy and will vary from year to
year. The levels of fees and expenses also vary among the Underlying Funds. The
following table shows the expenses of the Underlying Funds as a percentage of
average net assets for the year ended December 31, 1999, as adjusted for any
material changes.
<TABLE>
<CAPTION>
TOTAL FUND
EXPENSES
MANAGEMENT FEE OTHER EXPENSES (AFTER ANY
(AFTER ANY (AFTER ANY WAIVERS/
FUND VOLUNTARY WAIVERS) 12B-1 FEES REIMBURSEMENTS) REIMBURSEMENTS)
- ---- ------------------ ---------- --------------- -----------------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series.............. 0.60% -- 0.11% 0.71%(2)
DGPF Devon Series........................ 0.65% -- 0.12% 0.77%(2)
DGPF Growth Opportunities Series......... 0.75% -- 0.07% 0.82%(2)
DGPF U.S. Growth Series*................. 0.61% -- 0.14% 0.75%(1)(2)
DGPF Select Growth Series................ 0.74% -- 0.06% 0.80%(1)(2)
DGPF Social Awareness Series............. 0.70% -- 0.15% 0.85%(1)(2)
DGPF REIT Series......................... 0.64% -- 0.21% 0.85%(1)(2)
DGPF Small Cap Value Series.............. 0.75% -- 0.10% 0.85%(2)
DGPF Trend Series........................ 0.75% -- 0.07% 0.82%(2)
DGPF International Equity Series......... 0.83% -- 0.12% 0.95%(1)(2)
DGPF Emerging Markets Series............. 1.19% -- 0.28% 1.47%(1)(2)
DGPF Balanced Series..................... 0.65% -- 0.11% 0.76%(2)
DGPF Convertible Securities Series....... 0.75% -- 0.08% 0.83%(2)
DGPF High Yield Series................... 0.65% -- 0.09% 0.74%(2)
DGPF Capital Reserves Series............. 0.50% -- 0.26% 0.76%(2)
DGPF Strategic Income Series............. 0.65% -- 0.15% 0.80%(2)
DGPF Cash Reserve Series................. 0.45% -- 0.10% 0.55%(2)
DGPF Global Bond Series.................. 0.75% -- 0.10% 0.85%(2)
AIM V.I. Growth Fund..................... 0.63% -- 0.10% 0.73%
AIM V.I. High Yield Fund................. 0.63% -- 0.51% 1.14%(3)
AIM V.I. International Equity Fund....... 0.75% -- 0.22% 0.97%
AIM V.I. Value Fund...................... 0.61% -- 0.15% 0.76%
Alger American Leveraged AllCap
Portfolio............................... 0.85% -- 0.08%(4) 0.93%
Alger American MidCap Growth Portfolio... 0.80% -- 0.05% 0.85%
Alger American Small Capitalization
Portfolio............................... 0.85% -- 0.05% 0.90%
Alliance Growth Portfolio (Class B)...... 0.75% 0.25% 0.12% 1.12%
Alliance Growth and Income Portfolio
(Class B)............................... 0.63% 0.25% 0.09% 0.97%
Alliance Premier Growth Portfolio
(Class B)............................... 1.00% 0.25% 0.04% 1.29%
Alliance Technology Portfolio
(Class B)............................... 1.00% 0.25% 0.27% 1.52%(5)
Franklin Small Cap Fund (Class 2)........ 0.55% 0.25% 0.27% 1.07%(6)(7)
Mutual Shares Securities Fund
(Class 2)............................... 0.60% 0.25% 0.19% 1.04%(6)(8)
Templeton Growth Securities Fund
(Class 2)............................... 0.83%(9) 0.25% 0.05% 1.13%(6)(10)
Templeton International Securities Fund
(Class 2)............................... 0.69% 0.25% 0.19% 1.13%(6)(11)
Pioneer Emerging Markets VCT Portfolio**
(Class II).............................. 0.00% 0.25% 1.88% 2.13%(12)
Pioneer Mid-Cap Value VCT Portfolio**
(Class II).............................. 0.65% 0.25% 0.11% 1.01%
</TABLE>
*The DGPF U.S. Growth Series commenced operations on November 15, 1999. Expenses
shown are based on annualized amounts.
**Class II shares of the Pioneer Emerging Markets VCT Portfolio and Pioneer
Mid-Cap Value VCT Portfolio commenced operations on May 1, 2000; therefore,
expenses shown are estimated and annualized.
(1)For the fiscal year ended December 31, 1999, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.81% for DGPF Select Growth
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Series, 0.90% for DGPF Social Awareness Series, 0.96% for DGPF REIT Series,
1.53% for DGPF Emerging Markets Series, 0.97% for DGPF International Equity
Series and 0.79% for DGPF U.S. Growth Series.
(2)The investment adviser for the DGPF Growth & Income Series, DGPF Devon
Series, DGPF Growth Opportunities Series (formerly known as "DelCap Series"),
DGPF U.S. Growth Series, DGPF Select Growth Series (formerly known as
"Aggressive Growth Series"), DGPF Social Awareness Series, DGPF REIT Series,
DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series (formerly
known as "Delaware Balanced Series"), DGPF Convertible Securities Series, DGPF
High Yield Series (formerly known as "Delchester Series"), DGPF Capital Reserves
Series, DGPF Strategic Income Series, and DGPF Cash Reserve Series is Delaware
Management Company, a series of Delaware Management Business Trust ("Delaware
Management"). The investment adviser for the DGPF International Equity Series,
DGPF Emerging Markets Series and the DGPF Global Bond Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, the investment advisers for the Series of DGPF have
agreed voluntarily to waive their management fees and reimburse each Series for
expenses to the extent that total expenses will not exceed 1.50% for the DGPF
Emerging Markets Series; 0.95% for the DGPF International Equity Series; 0.85%
for DGPF Growth Opportunities Series, DGPF Select Growth Series, DGPF Social
Awareness Series, DGPF REIT Series, DGPF Small Cap Value Series, DGPF Trend
Series, DGPF Convertible Securities Series and DGPF Global Bond Series, 0.75%
for DGPF U.S. Growth Series, and 0.80% for all other Series. The fee ratios
shown above have been restated, if necessary, to reflect the new voluntary
limitations which took effect on May 1, 2000. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(3)Had there been no fee waivers or expense reimbursements, the Management Fee,
Other Expenses and Total Fund Expenses would have been 0.63%, 0.79% and 1.42%,
respectively.
(4)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(5)From time to time, the Alliance Technology Portfolio's investment adviser, in
its own discretion, may voluntarily waive all or part of its fees and/or
voluntarily assume certain portfolio expenses. An expense cap of 1.20% which was
in effect during 1999, is no longer in effect as of May 1, 2000. Therefore, the
expenses shown in the above table have been restated to reflect current fees
without the cap.
(6)The fund's class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus.
(7)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Franklin Small Cap Fund with a similar fund of the Templeton Variable
Products Series Fund, effective 5/1/00. On 2/28/00, fund shareholders approved
new management fees, which apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new fees and assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses after
May 1, 2000 would be estimated to be the same.
(8)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Mutual Shares Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund.
(9)The fund administration fee is paid indirectly through the management fee.
(10)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Templeton Growth Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund. However, if the table reflected combined assets, the fund's expenses after
5/1/00 would be estimated as: Management Fees 0.80%, 12b-1 Fees 0.25%, Other
Expenses 0.05%, and Total Fund Expenses 1.10%.
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(11)On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.65%, 12b-1 Fees 0.25%, Other Expenses 0.20%, and Total Fund
Expenses 1.10%.
(12)Fees and expenses reflect waivers/reimbursements currently applicable to the
portfolio. As of May 1, 2000, Pioneer Investment Management, Inc. has agreed
voluntarily to limit its management fee and, if necessary, to limit other
operating expenses of Class I shares to 1.75% of the Pioneer Emerging Markets
VCT Portfolio's average daily net assets attributable to Class I shares. The
portion of portfolio expenses attributable to Class II shares will be reduced
only to the extent such expenses are reduced for Class I shares. This agreement
is voluntary and temporary and may be revised or terminated at any time.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets and assumes that the Underlying Fund expenses
listed above remain the same in each of the 1, 3, 5, and 10-year intervals. 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 Fund 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 LESS THAN THOSE SHOWN.
9
<PAGE>
(1)(a) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under any commutable fixed period certain option or a
noncommutable fixed 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>
DGPF Growth & Income Series................................ $ 87 $136 $165 $247
DGPF Devon Series.......................................... $ 87 $137 $168 $253
DGPF Growth Opportunities Series........................... $ 88 $139 $170 $258
DGPF U.S. Growth Series.................................... $ 87 $137 $167 $251
DGPF Select Growth Series.................................. $ 87 $138 $169 $256
DGPF Social Awareness Series............................... $ 88 $140 $172 $262
DGPF REIT Series........................................... $ 88 $140 $172 $262
DGPF Small Cap Value Series................................ $ 88 $140 $172 $262
DGPF Trend Series.......................................... $ 88 $139 $170 $258
DGPF International Equity Series........................... $ 89 $142 $177 $272
DGPF Emerging Markets Series............................... $ 94 $157 $203 $322
DGPF Balanced Series....................................... $ 87 $137 $167 $252
DGPF Convertible Securities Series......................... $ 88 $139 $171 $260
DGPF High Yield Series..................................... $ 87 $136 $166 $250
DGPF Capital Reserves Series............................... $ 87 $137 $167 $252
DGPF Strategic Income Series............................... $ 87 $138 $169 $256
DGPF Cash Reserve Series................................... $ 85 $131 $157 $231
DGPF Global Bond Series.................................... $ 88 $140 $172 $262
AIM V.I. Growth Fund....................................... $ 87 $136 $166 $249
AIM V.I. High Yield Fund................................... $ 91 $148 $187 $290
AIM V.I. International Equity Fund......................... $ 89 $143 $178 $274
AIM V.I. Value Fund........................................ $ 87 $137 $167 $252
Alger American Leveraged AllCap Portfolio.................. $ 89 $142 $176 $270
Alger American MidCap Growth Portfolio..................... $ 88 $140 $172 $262
Alger American Small Capitalization Portfolio.............. $ 88 $141 $175 $267
Alliance Growth Portfolio.................................. $ 90 $147 $186 $289
Alliance Growth and Income Portfolio....................... $ 89 $143 $178 $274
Alliance Premier Growth Portfolio.......................... $ 92 $152 $194 $305
Alliance Technology Portfolio.............................. $ 94 $158 $205 $327
Franklin Small Cap Fund.................................... $ 90 $146 $183 $284
Mutual Shares Securities Fund.............................. $ 90 $145 $182 $281
Templeton Growth Securities Fund........................... $ 90 $147 $186 $290
Templeton International Securities Fund.................... $ 90 $147 $186 $290
Pioneer Emerging Markets VCT Portfolio..................... $100 $175 $233 $383
Pioneer Mid-Cap Value VCT Portfolio........................ $ 89 $144 $180 $278
</TABLE>
10
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under any commutable fixed period certain option or a
noncommutable fixed 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 (M-GAP) Rider** with
a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $ 89 $143 $178 $273
DGPF Devon Series.......................................... $ 89 $144 $181 $279
DGPF Growth Opportunities Series........................... $ 90 $146 $183 $284
DGPF U.S. Growth Series.................................... $ 89 $144 $180 $277
DGPF Select Growth Series.................................. $ 90 $145 $182 $282
DGPF Social Awareness Series............................... $ 90 $147 $185 $287
DGPF REIT Series........................................... $ 90 $147 $185 $287
DGPF Small Cap Value Series................................ $ 90 $147 $185 $287
DGPF Trend Series.......................................... $ 90 $146 $183 $284
DGPF International Equity Series........................... $ 91 $149 $190 $296
DGPF Emerging Markets Series............................... $ 96 $164 $214 $346
DGPF Balanced Series....................................... $ 89 $144 $180 $278
DGPF Convertible Securities Series......................... $ 90 $146 $184 $285
DGPF High Yield Series..................................... $ 89 $143 $179 $276
DGPF Capital Reserves Series............................... $ 89 $144 $180 $278
DGPF Strategic Income Series............................... $ 90 $145 $182 $282
DGPF Cash Reserve Series................................... $ 87 $138 $169 $256
DGPF Global Bond Series.................................... $ 90 $147 $185 $287
AIM V.I. Growth Fund....................................... $ 89 $143 $179 $275
AIM V.I. High Yield Fund................................... $ 93 $155 $199 $315
AIM V.I. International Equity Fund......................... $ 91 $150 $191 $298
AIM V.I. Value Fund........................................ $ 89 $144 $180 $278
Alger American Leveraged AllCap Portfolio.................. $ 91 $149 $189 $294
Alger American MidCap Growth Portfolio..................... $ 90 $147 $185 $287
Alger American Small Capitalization Portfolio.............. $ 91 $148 $187 $291
Alliance Growth Portfolio.................................. $ 93 $154 $198 $313
Alliance Growth and Income Portfolio....................... $ 91 $150 $191 $298
Alliance Premier Growth Portfolio.......................... $ 94 $159 $206 $329
Alliance Technology Portfolio.............................. $ 96 $165 $217 $350
Franklin Small Cap Fund.................................... $ 92 $153 $195 $308
Mutual Shares Securities Fund.............................. $ 92 $152 $194 $305
Templeton Growth Securities Fund........................... $ 93 $154 $198 $314
Templeton International Securities Fund.................... $ 93 $154 $198 $314
Pioneer Emerging Markets VCT Portfolio..................... $102 $182 $244 $404
Pioneer Mid-Cap Value VCT Portfolio........................ $ 92 $151 $192 $302
</TABLE>
11
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed period certain option of ten years or longer, 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>
DGPF Growth & Income Series................................ $22 $ 67 $115 $247
DGPF Devon Series.......................................... $22 $ 69 $118 $253
DGPF Growth Opportunities Series........................... $23 $ 70 $120 $258
DGPF U.S. Growth Series.................................... $22 $ 68 $117 $251
DGPF Select Growth Series.................................. $23 $ 70 $119 $256
DGPF Social Awareness Series............................... $23 $ 71 $122 $262
DGPF REIT Series........................................... $23 $ 71 $122 $262
DGPF Small Cap Value Series................................ $23 $ 71 $122 $262
DGPF Trend Series.......................................... $23 $ 70 $120 $258
DGPF International Equity Series........................... $24 $ 74 $127 $272
DGPF Emerging Markets Series............................... $29 $ 90 $153 $322
DGPF Balanced Series....................................... $22 $ 69 $117 $252
DGPF Convertible Securities Series......................... $23 $ 71 $121 $260
DGPF High Yield Series..................................... $22 $ 68 $116 $250
DGPF Capital Reserves Series............................... $22 $ 69 $117 $252
DGPF Strategic Income Series............................... $23 $ 70 $119 $256
DGPF Cash Reserve Series................................... $20 $ 62 $107 $231
DGPF Global Bond Series.................................... $23 $ 71 $122 $262
AIM V.I. Growth Fund....................................... $22 $ 68 $116 $249
AIM V.I. High Yield Fund................................... $26 $ 80 $137 $290
AIM V.I. International Equity Fund......................... $24 $ 75 $128 $274
AIM V.I. Value Fund........................................ $22 $ 69 $117 $252
Alger American Leveraged AllCap Portfolio.................. $24 $ 74 $126 $270
Alger American MidCap Growth Portfolio..................... $23 $ 71 $122 $262
Alger American Small Capitalization Portfolio.............. $24 $ 73 $125 $267
Alliance Growth Portfolio.................................. $26 $ 79 $136 $289
Alliance Growth and Income Portfolio....................... $24 $ 75 $128 $274
Alliance Premier Growth Portfolio.......................... $28 $ 84 $144 $305
Alliance Technology Portfolio.............................. $30 $ 91 $155 $327
Franklin Small Cap Fund.................................... $25 $ 78 $133 $284
Mutual Shares Securities Fund.............................. $25 $ 77 $132 $281
Templeton Growth Securities Fund........................... $26 $ 80 $136 $290
Templeton International Securities Fund.................... $26 $ 80 $136 $290
Pioneer Emerging Markets VCT Portfolio..................... $36 $109 $185 $383
Pioneer Mid-Cap Value VCT Portfolio........................ $25 $ 76 $130 $278
</TABLE>
12
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed period certain option of ten years or longer, 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 (M-GAP) Rider** with a ten-year
waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $24 $ 75 $128 $273
DGPF Devon Series.......................................... $25 $ 76 $131 $279
DGPF Growth Opportunities Series........................... $25 $ 78 $133 $284
DGPF U.S. Growth Series.................................... $25 $ 76 $130 $277
DGPF Select Growth Series.................................. $25 $ 77 $132 $282
DGPF Social Awareness Series............................... $26 $ 79 $135 $287
DGPF REIT Series........................................... $26 $ 79 $135 $287
DGPF Small Cap Value Series................................ $26 $ 79 $135 $287
DGPF Trend Series.......................................... $25 $ 78 $133 $284
DGPF International Equity Series........................... $27 $ 82 $140 $296
DGPF Emerging Markets Series............................... $32 $ 97 $165 $346
DGPF Balanced Series....................................... $25 $ 76 $130 $278
DGPF Convertible Securities Series......................... $25 $ 78 $134 $285
DGPF High Yield Series..................................... $25 $ 75 $129 $276
DGPF Capital Reserves Series............................... $25 $ 76 $130 $278
DGPF Strategic Income Series............................... $25 $ 77 $132 $282
DGPF Cash Reserve Series................................... $23 $ 70 $119 $256
DGPF Global Bond Series.................................... $26 $ 79 $135 $287
AIM V.I. Growth Fund....................................... $24 $ 75 $129 $275
AIM V.I. High Yield Fund................................... $29 $ 87 $149 $315
AIM V.I. International Equity Fund......................... $27 $ 82 $141 $298
AIM V.I. Value Fund........................................ $25 $ 76 $130 $278
Alger American Leveraged AllCap Portfolio.................. $26 $ 81 $139 $294
Alger American MidCap Growth Portfolio..................... $26 $ 79 $135 $287
Alger American Small Capitalization Portfolio.............. $26 $ 80 $137 $291
Alliance Growth Portfolio.................................. $28 $ 87 $148 $313
Alliance Growth and Income Portfolio....................... $27 $ 82 $141 $298
Alliance Premier Growth Portfolio.......................... $30 $ 92 $156 $329
Alliance Technology Portfolio.............................. $32 $ 99 $167 $350
Franklin Small Cap Fund.................................... $28 $ 85 $145 $308
Mutual Shares Securities Fund.............................. $28 $ 84 $144 $305
Templeton Growth Securities Fund........................... $28 $ 87 $148 $314
Templeton International Securities Fund.................... $28 $ 87 $148 $314
Pioneer Emerging Markets VCT Portfolio..................... $38 $116 $196 $404
Pioneer Mid-Cap Value VCT Portfolio........................ $27 $ 84 $142 $302
</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 (M-GAP) Rider is exercised, you may
only annuitize under a fixed annuity payout option involving a life contingency
at the Company's guaranteed fixed annuity option rates listed under the Annuity
Option Tables in your Policy.
13
<PAGE>
SUMMARY OF POLICY FEATURES
INVESTMENT OPTIONS. During the life of the Policy, purchase payments may be
allocated among a total of seventeen of the available 35 Sub-Accounts in
addition to the DGPF Cash Reserve Series and, where offered, a fixed interest
account ("General Account") of the Company.
The variable Sub-Accounts are subdivisions of Separate Account VA-K ("Separate
Account"), a separate account of the Company. The Separate Account is registered
as a unit investment trust under the Investment Company Act of 1940, as amended
(the "1940 Act"), but such registration does not involve the supervision of the
management or investment practices or policies of the Separate Account by the
SEC. For information about the Separate Account and the Company, see DESCRIPTION
OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING INVESTMENT COMPANIES.
For more information about the General Account see APPENDIX A -- MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
INVESTMENT IN THE SUB-ACCOUNTS. Each Sub-Account available under the Policies
invests its assets without sales charge in a corresponding investment portfolio
("Underlying Fund") of Delaware Group Premium Fund ("DGPF"), AIM Variable
Insurance Funds ("AVIF"), The Alger American Fund ("Alger"), Alliance Variable
Products Series Fund, Inc. ("Alliance"), Franklin Templeton Variable Insurance
Products Trust ("FT VIP") and Pioneer Variable Contracts Trust ("Pioneer VCT").
Each Underlying Fund operates pursuant to different investment objectives and
this range of investment options enables the Owner to allocate money among the
Funds to meet his/her particular investment needs. There can be no assurance
that the investment objectives of an Underlying Fund 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
Funds, see DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING
INVESTMENT COMPANIES. The accompanying prospectuses of the Funds describes the
investment objectives and risks of each of the Underlying Funds.
The value of each Sub-Account will vary daily depending on the performance of
the investments made by the respective Underlying Funds. Dividends or capital
gains distributions received from an Underlying Fund are reinvested in
additional shares of that Underlying Fund, which are retained as assets of the
Sub-Account
TRANSFERS AMONG INVESTMENT OPTIONS. Prior to the Annuity Date and subject to
the 17-fund limitation discussed above, amounts may be transferred among the
Sub-Accounts and between the Sub-Accounts and the General Account as described
under "B. Transfer Privilege" under THE VARIABLE ANNUITY POLICIES. Automatic
Transfers (Dollar Cost Averaging) which gradually moves money to one or more of
the Underlying Funds and Automatic Account Rebalancing which ensures that assets
remain allocated according to your designated percentage allocation mix are also
available at no additional charge.
ANNUITY PAYMENTS. The owner of a Policy ("Owner") may select variable annuity
benefit payments based on the investment performance of certain Sub-Accounts,
fixed annuity payouts, or a combination of fixed and variable payments. Fixed
annuity payouts are guaranteed by the Company.
In addition, an optional Minimum Guaranteed Annuity Payout (M-GAP) Rider is
currently available in most jurisdictions for a separate monthly charge. If
elected, the Rider provides the Annuitant a guaranteed minimum amount of income
after the specified waiting period under a life contingent fixed annuity payout
option, 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 you exercise the Rider. In order to exercise the
Rider, a fixed annuitization option involving a life contingency must be
selected. Annuitization under this
14
<PAGE>
Rider will occur at the Company's guaranteed annuity option rates listed under
the Annuity Option Tables in your Policy. The Minimum Guaranteed Annuity Payout
Benefit Base is equal to the greatest of:
(a) the Accumulated Value on the Policy Anniversary that the M-GAP Benefit
Base is being determined; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at an effective annual yield of 5% plus gross payments made
thereafter compounded daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after being increased for subsequent
payments and proportionately reduced for subsequent withdrawals.
For more details see "J. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider" under THE VARIABLE ANNUITY POLICIES.
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 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%.
15
<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 twelve 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. If the Owner has elected automatic transfers or
automatic rebalancing, the first automatic transfer or rebalancing will count as
one transfer for purposes of the twelve which are guaranteed to be free of a
transfer charge in each Policy year. Each subsequent automatic transfer or
rebalancing is without transfer charge and does not reduce the remaining number
of transfers which may be made free of a transfer charge in that Policy year.
F. CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, each Underlying Fund incurs certain
management fees and expenses which are more fully described in "Other Charges"
and in the prospectuses of the Underlying Funds. These charges vary among the
Underlying Funds and may change from year to year. In addition, management fee
waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waivers/reimbursements see "Annual Underlying Fund Expenses" under SUMMARY
OF FEES AND EXPENSES.
G. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE
Subject to state availability, the Owner may elect the following optional Rider.
If you elect the Rider, a separate monthly charge 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, if applicable, 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 "D. Optional Minimum Guaranteed Annuity
Payout (M-GAP) Rider Charge" under CHARGES AND DEDUCTIONS, and "J. Optional
Minimum Guaranteed Annuity Payout (M-GAP) Rider" under THE VARIABLE ANNUITY
POLICIES.
SURRENDER OR PARTIAL REDEMPTION. At any time before the Annuity Date, the Owner
has the right either to surrender the Policy in full and receive its Surrender
Value or 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 should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon death of the Annuitant, the
death benefit is equal to the greatest of (a) the Accumulated Value on the
Valuation Date that the Company receives due proof of death; (b) the sum of the
16
<PAGE>
gross payment(s) made under the Policy reduced proportionately to reflect the
amount of all partial redemptions, or (c) the death benefit that would have been
payable on the most recent fifth year Policy Anniversary, increased for
subsequent purchase payments and reduced proportionately to reflect withdrawals
after that date. Upon death of the Owner, who is not also the Annuitant, the
death benefit will equal the Accumulated Value of the Policy next determined
following receipt of due proof of death at the Principal Office. See "E. Death
Benefit" under THE VARIABLE ANNUITY POLICIES.
SALES OF POLICIES. The Policies were originally sold by agents of the Company
who are registered representatives of Allmerica Investments, Inc., a
broker-dealer affiliate of the Company. The Policies were also sold by certain
other broker-dealers which are members of the National Association of Securities
Dealers, Inc., and whose representatives are authorized by applicable law to
sell variable a annuity policies. See "Sales Expense." These policies are no
longer being issued.
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND
THE UNDERLYING INVESTMENT COMPANIES
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July 1974. Its principal office ("Principal Office") is located
at 440 Lincoln Street, Worcester, MA 01653, telephone 508-855-1000. The Company
is subject to the laws of the state of Delaware governing insurance companies
and to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999 the
Company had over $17 billion in assets and over $26 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is 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 $25 billion in combined assets and
over $43 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. 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 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.
THE UNDERLYING INVESTMENT COMPANIES
DELAWARE GROUP PREMIUM FUND. Delaware Group Premium Fund ("DGPF") 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 DGPF or its separate investment series. DGPF
was established to serve as an investment medium for separate accounts
supporting variable insurance policies. DGPF currently has 18 investment
portfolios, each issuing a series of shares ("Series"): DGPF Growth & Income
Series, DGPF Devon Series, DGPF Growth Opportunities Series, DGPF U.S. Growth
Series, DGPF Select Growth Series, DGPF Social Awareness Series, DGPF REIT
Series, DGPF Small Cap
18
<PAGE>
Value Series, DGPF Trend Series, DGPF International Equity Series, DGPF Emerging
Markets Series, DGPF Balanced Series, DGPF Convertible Securities Series, DGPF
High Yield Series, DGPF Capital Reserves Series, DGPF Strategic Income Series,
DGPF Cash Reserve Series, and DGPF Global Bond Series. The assets of each
Series are held separate from the assets of the other Series. Each
Series operates as a separate investment vehicle, and the income or losses of
one have no effect on the investment performance of another Series. Shares of
the Series are not offered to the general public but solely to separate accounts
of life insurance companies.
The investment adviser for the DGPF Growth & Income Series, DGPF Devon Series,
DGPF Growth Opportunities Series, DGPF U.S. Growth Series, DGPF Select Growth
Series, DGPF Social Awareness Series, DGPF Small Cap Value Series, DGPF REIT
Series, DGPF Trend Series, DGPF Balanced Series, DGPF Convertible Securities
Series, DGPF High Yield Series, DGPF Capital Reserves Series, DGPF Strategic
Income Series, and DGPF Cash Reserve Series is Delaware Management Company, a
series of Delaware Management Business Trust. ("Delaware Management"). The
investment adviser for the DGPF International Equity Series, DGPF Emerging
Markets Series and the DGPF Global Bond Series is Delaware International
Advisers Ltd. ("Delaware International").
AIM VARIABLE INSURANCE FUNDS. AIM Variable Insurance Funds ("AVIF"), an
open-end, series, management investment company registered with the SEC under
the 1940 Act, was organized as a Maryland corporation on January 22, 1993 and
changed to a Delaware business trust on May 1, 2000. The investment adviser for
the AIM V.I. Growth Fund, AIM V.I. High Yield Fund, AIM V.I. International
Equity Fund, and AIM V.I. Value Fund is A I M Advisors, Inc. ("AIM"). AIM was
organized in 1976, and, together with its subsidiaries, manages or advises over
120 investment company portfolios encompassing a broad range of investment
objectives.
THE ALGER AMERICAN FUND. The Alger American Fund ("Alger"), is an open-end,
diversified management investment company established as a Massachusetts
business trust on April 6, 1988 and registered with the SEC under the 1940 Act.
The investment adviser for the Alger American Leveraged AllCap Portfolio, Alger
American MidCap Growth Portfolio, and Alger American Small Capitalization
Portfolio is Fred Alger Management, Inc.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. Alliance Variable Products
Series Fund, Inc. ("Alliance") is registered with the SEC as an open-end,
management investment company. Four of its separate investment portfolios are
currently available under the Policy. Alliance Capital Management, L.P.
("Alliance Capital"), serves as the investment adviser to Alliance. Alliance
Capital Management Corporation, the sole general partner of Alliance Capital, is
an indirect wholly owned subsidiary of The Equitable Life Assurance Society of
the United States, which is in turn a wholly owned subsidiary of the Equitable
Companies Incorporated, a holding company which is controlled by AXA, a French
insurance holding company.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST. Franklin Templeton
Variable Insurance Products Trust ("FT VIP") and the funds' investment managers
and their affiliates manage over $224 billion (as of December 31, 1999) in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. The investment adviser to the
Franklin Small Cap Fund is Franklin Advisers, Inc. Franklin Mutual Advisers, LLC
is the investment adviser to the Mutual Shares Securities Fund. Templeton Global
Advisors Limited is the investment adviser to the Templeton Growth Securities
Fund. Templeton Investment Counsel, Inc. is the investment adviser to the
Templeton International Securities Fund.
PIONEER VARIABLE CONTRACTS TRUST. Pioneer Variable Contracts Trust ("Pioneer
VCT") is an open-end, management investment company registered with the SEC
under the 1940 Act. Pioneer Investment Management, Inc. ("Pioneer") is the
investment adviser to the Pioneer Emerging Markets VCT Portfolio and Pioneer
Mid-Cap Value VCT Portfolio. Pioneer also provides investment research and
portfolio management services to a number of other retail mutual funds and
certain institutional clients. Pioneer is a wholly owned subsidiary of The
Pioneer Group, Inc. ("PGI"). PGI, established in 1928, is one of America's
oldest investment managers and has its principal place of business at 60 State
Street, Boston, Massachusetts.
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INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND
IN THE PROSPECTUSES OF THE FUNDS, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE
READ CAREFULLY BEFORE INVESTING. Also, the Statements of Additional Information
("SAI") of the Underlying Funds are available upon request. There can be no
assurance that the investment objectives of the Underlying Funds can be achieved
or that the value of the Policy will equal or exceed the aggregate amount of
payments made under the Policy.
DELAWARE PREMIUM GROUP FUND:
DGPF GROWTH & INCOME SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Series formerly was known as
Decatur Total Return Series.
DGPF DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DGPF GROWTH OPPORTUNITIES SERIES -- seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. This Series formerly was known as the DelCap
Series.
DGPF U.S. GROWTH SERIES -- seeks to achieve maximum capital appreciation.
DGPF SELECT GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth. This Series formerly was known as the Aggressive Growth Series.
DGPF SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
DGPF REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
DGPF SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in small
cap common stocks whose market value appears low relative to their underlying
value or future earnings and growth potential. Emphasis also will be placed on
securities of companies that temporarily may be out of favor or whose value is
not yet recognized by the market.
DGPF TREND SERIES -- seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
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DGPF EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The Series is an
international fund. As such, under normal market conditions, at least 65% of the
Series' assets will be invested in equity securities of issuers organized or
having a majority of their assets or deriving a majority of their operating
income in at least three countries that are considered to be emerging or
developing.
DGPF BALANCED SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series formerly was
known as Delaware Balanced Series.
DGPF CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, including privately placed
convertible securities.
DGPF HIGH YIELD SERIES -- seeks total return and, as a secondary objective, high
current income. The Series invests in rated and unrated corporate bonds
(including high-yield bonds commonly known as "junk bonds"), foreign bonds, U.S.
government securities and commercial paper. Please read the Series' prospectus
disclosure regarding the risk factors before investing in this Series. This
Series formerly was known as Delchester Series.
DGPF CAPITAL RESERVES SERIES -- seeks a high, stable level of current income
while minimizing fluctuations in principal by investing in a diversified
portfolio of short- and intermediate-term securities.
DGPF STRATEGIC INCOME SERIES -- seeks high current income and total return. It
seeks to achieve its objective by using a multi-sector investment approach,
investing primarily in three sectors of the fixed-income securities market: high
yield, higher-risk securities; investment grade fixed-income securities; and
foreign government and other foreign fixed-income securities. The Series also
may invest in U.S. equity securities.
DGPF CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
DGPF GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
AIM VARIABLE INSURANCE FUNDS:
AIM V.I. GROWTH FUND -- seeks to provide growth of capital primarily by
investing in seasoned and better capitalized companies considered to have strong
earnings momentum.
AIM V.I. HIGH YIELD FUND -- seeks to achieve a high level of current income. The
Fund seeks to meet this objective by investing at least 65% of the value of its
assets in publicly traded, lower-quality debt securities, i.e., "junk bonds".
AIM V.I. INTERNATIONAL EQUITY FUND -- seeks to provide long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's
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<PAGE>
appraisal of the current or projected earnings of the companies issuing the
securities, or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity market generally.
Income is a secondary objective.
THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size that demonstrate promising growth potential.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO -- seeks long-term capital appreciation.
The Portfolio focuses on midsize companies with promising growth potential.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO -- seeks long-term capital
appreciation. The Portfolio focuses on small, fast-growing companies that offer
innovative products, services or technologies to a rapidly expanding
marketplace.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
ALLIANCE GROWTH PORTFOLIO (CLASS B) -- seeks to provide long-term growth of
capital. Current income is only an incidental consideration.
ALLIANCE GROWTH AND INCOME PORTFOLIO (CLASS B) -- seeks reasonable current
income and reasonable appreciation through investments primarily in
dividend-paying common stocks of good quality.
ALLIANCE PREMIER GROWTH PORTFOLIO (CLASS B) -- seeks growth of capital by
pursuing aggressive investment policies.
ALLIANCE TECHNOLOGY PORTFOLIO (CLASS B) -- seeks growth of capital and invests
for capital appreciation. Current income is only an incidental consideration.
FRANKIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST:
FRANKLIN SMALL CAP FUND (CLASS 2) -- seeks long-term capital growth. The fund
invests primarily in equity securities of small cap U.S. companies.
MUTUAL SHARES SECURITIES FUND (CLASS 2) -- seeks capital appreciation. Its
secondary goal is income. The fund invests primarily in equity securities of
companies the manager believes are available at market prices less than their
value based on certain recognized or objective criteria (intrinsic value).
TEMPLETON GROWTH SECURITIES FUND (CLASS 2) -- seeks long-term capital growth.
The fund invests primarily in the equity securities of companies located
anywhere in the world, including the U.S. and emerging markets.
TEMPLETON INTERNATIONAL SECURITIES FUND (CLASS 2) -- seeks long-term capital
growth. The fund invests in the equity securities of companies located outside
the U.S., including emerging markets.
PIONEER VARIABLE CONTRACTS TRUST:
PIONEER EMERGING MARKETS VCT PORTFOLIO (CLASS II) -- seeks long-term growth of
capital. The Portfolio invests primarily in securities of issuers in countries
with emerging economies or securities markets and related depositary receipts.
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<PAGE>
PIONEER MID-CAP VALUE VCT PORTFOLIO (CLASS II) -- seeks capital appreciation
through a diversified portfolio of securities consisting primarily of common
stocks.
There is no assurance that the investment objectives of the Underlying Funds
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Underlying Fund 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.
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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 Funds 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 Funds. 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. All
performance tables referenced in this section may be found in the SAI.
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 DGPF 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 DGPF 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 Funds 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 (M-GAP) 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 they do not reflect the Policy fee and assume that the Policy is not
surrendered at the end of the periods shown.
The performance shown in Tables 2A and 2B in the SAI is calculated in exactly
the same manner as that in Tables 1A and 1B respectively; however, the period of
time is based on the Underlying Fund's lifetime, which may predate the
Sub-Account's inception date. These performance calculations are based on the
assumption that the Sub-Account corresponding to the applicable Underlying Fund
was actually in existence throughout the stated period and that the contractual
charges and expenses during that period were equal to those currently assessed
under the Policy.
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<PAGE>
For performance of the Delaware Medallion I policy issued by First Allmerica
Financial Life Insurance Company, 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 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
Funds.
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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 Funds are described in the Prospectuses and SAIs of the Underlying
Funds.
A. SURRENDER CHARGE
No charge for sales expense is deducted from purchase payments at the time the
payments are made. However, a surrender charge is deducted from the Accumulated
Value of the Policy 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.
Where permitted by 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 Funds; 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.)
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>
26
<PAGE>
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. This means that the last payments credited to the Policy will be
withdrawn first. 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.
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
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<PAGE>
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," C. 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 Surrender Value, less 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.
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).
SALES EXPENSE. The Company pays sales commissions, not to exceed 7.0% 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.
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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 is waived for Policies issued to a trustee of a 401(k) plan.
Where Policy value has been allocated to more than one investment option
(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 investment
option. The portion of the charge deducted from each will be equal to the
percentage which the Policy value in that investment option 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 option.
D. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE
The Company currently offers an optional Minimum Guaranteed Annuity Payout
(M-GAP) Rider that may be elected by the Owner in most jurisdictions. A separate
monthly charge is made for the Rider. The charge is made through a pro-rata
reduction of the Accumulated Value of the Sub-Accounts and the General Account
(based on the relative value that the Accumulation Units of the Sub-Accounts and
the dollar amounts in the General Account bear to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month within which the Rider has been in effect and, if applicable, on the
date the Rider is terminated, multiplied by 1/12th of the following annual
percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
ten-year waiting period................................... 0.25%
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
fifteen-year waiting period............................... 0.15%
</TABLE>
For a description of the Rider, see "J. Optional Minimum Guaranteed Annuity
Payout (M-GAP) Rider" under THE VARIABLE ANNUITY POLICIES.
E. 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
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<PAGE>
both the accumulation period and the annuity period. The mortality risk arises
from the Company's special death benefit guarantee and its guarantee that it
will make annuity benefit payments in accordance with annuity rate provisions
established at the time the Policy is issued for the life of the Annuitant (or
in accordance with the annuity option selected), no matter how long the
Annuitant (or other payee) lives and no matter how long all Annuitants as a
class live. Therefore, the mortality charge is deducted during the annuity phase
on all Policies, including those that do not involve a life contingency, even
though the Company does not bear direct mortality risk with respect to variable
annuity settlement options that do not involve life contingencies. The expense
risk arises from the Company's guarantee that the charges it makes will not
exceed the limits described in the Policies and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
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. This charge may not be increased. 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
a transfer charge. For each subsequent transfer, the Company reserves the right
to assess a charge, guaranteed never to exceed $25, to reimburse it for the
expense of processing transfers. If the Policy Owner has elected automatic
transfers or automatic rebalancing, the first automatic transfer or rebalancing
will count as one transfer for purposes of the twelve which are guaranteed to be
free of a transfer charge in each Policy year. Each subsequent automatic
transfer or rebalancing is without transfer charge and does not reduce the
remaining number of transfers which may be made free of a transfer charge in
that Policy year.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
prospectuses and SAIs of the Underlying Funds contain additional information
concerning expenses of the Underlying Funds.
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<PAGE>
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 investment options, the initial purchase
payment will be returned within five business days. After a policy is issued,
Accumulation Units will be credited to the Policy at the unit value computed as
of the Valuation Date that a purchase payment is received at the Company's
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 or
prior to payment of the death benefit. Purchase payments are not limited as to
frequency and number, but there are certain limitations as to amount. Generally,
the initial payment must be at least $600. Under a salary deduction or a monthly
automatic payment plan, the minimum initial payment is $50. In all cases, each
subsequent payment must be at least $50. Where the contribution on behalf of an
employee under an employer-sponsored retirement plan is less than $600 but more
than $300 annually, the Company may issue a Policy on the employee, if the
plan's average annual contribution per eligible plan participant is at least
$600. Total payments may not exceed the maximum limit specified in the Policy.
If the payments are divided among two or more investment options, a net amount
of at least $10 of each payment must be allocated to each option.
Generally, unless otherwise requested, all payments will be allocated among the
investment options in the same proportion that the initial net payment is
allocated or, if subsequently changed, according to the most recent allocation
instructions. As of the date of this Prospectus, payments may be allocated to a
maximum of seventeen variable Sub-Accounts during the life of the Policy in
addition to the DGPF Capital Reserve Series.
The Policy Owner may change allocation instructions for new payments pursuant to
written or telephone request. If the Policy Owner elects telephone requests, 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 unauthorized or
fraudulent instructions. The procedures may include, among other things,
requiring some form of personal identification prior to acting upon instructions
received by telephone. All telephone instructions are tape-recorded.
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<PAGE>
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. If you authorize periodic transfers under
an Automatic Transfer option (Dollar Cost Averaging) or an Automatic Account
Rebalancing option, the first automatic transfer or rebalancing under a request
counts as one transfer for purposes of the 12 transfers guaranteed to be free of
a transfer charge in each Policy year. Each subsequent transfer or rebalancing
under that request is without charge and does not reduce the remaining number of
transfers which may be made free of charge in that Policy year.
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.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. 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 DGPF Capital Reserve Series, the DGPF Strategic Income Series,
or the DGPF Cash Reserve Series (the "source accounts") 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
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<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 investment option 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.
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<PAGE>
Where allocations have been made to more than one investment option, a
percentage of the partial redemption may be allocated to each. 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 on the Valuation Date that the Company receives 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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<PAGE>
Upon death of an Owner who is not the Annuitant, the death benefit is equal to
the Accumulated Value on the Valuation Date that the Company receives due proof
of death.
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
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<PAGE>
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.
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. Certain options may be
commutable or noncommutable. A commutable option provides the Owner with the
right to request a lump sum payment of any remaining balance after annuity
payments have commenced. Under a noncommutable option, the Owner may not request
a lump sum payment. Annuity payments are determined according to the annuity
tables in the Policy, by the annuity option selected, and by the investment
performance of the Sub-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 latest
possible 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 (M-GAP) Rider,
annuity benefit payments must be made under a fixed annuity payout option
involving a life contingency and will be determined based on the Company's
guaranteed fixed annuity option rates listed under the Annuity Option Tables in
the Policy.
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I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS
The Company currently provides the variable annuity options described below.
Variable annuity options may be funded through the DGPF Growth & Income Series,
the DGPF Capital Reserves Series and the DGPF 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 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 Annuitant with
the guarantee that if the Annuitant 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 Annuitant only. It would be possible under this option for the
Annuitant to receive only one annuity benefit payment if the Annuitant dies
prior to the due date of the second annuity payment, two annuity benefit
payments if the Annuitant dies before the due date of the third annuity benefit
payment, and so on. Payments will continue, however, during the lifetime of the
Annuitant, no matter how long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
periodically during the lifetime of the Annuitant 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
Annuitant.
OPTION IV-A -- JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. A variable annuity
payable jointly to the Annuitant and another individual 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 the Annuitant and another individual 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. If the Annuitant dies
before the end of the period, remaining payments will continue to be paid. A
fixed period certain annuity may be either commutable or noncommutable. A
variable period certain annuity is automatically commutable.
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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 (M-GAP) RIDER
An optional Minimum Guaranteed Annuity Payout (M-GAP) Rider is available in most
jurisdictions for a separate monthly charge. The M-GAP Rider provides a
guaranteed minimum amount of fixed lifetime income during the annuity payout
phase, after a ten-year or fifteen-year waiting period, 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 Company's guaranteed fixed
annuity option 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 increased by any positive Market Value Adjustment,
if applicable, on the Policy anniversary that the M-GAP Benefit Base is
being determined;
(b) the Accumulated Value on the effective date of the Rider compounded
daily at an effective annual yield of 5% plus gross payments made
thereafter compounded daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any prior Policy anniversary since the
Rider effective date as determined after being increased for subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced 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 ON ELECTING THE M-GAP RIDER.
- The Owner may elect the M-GAP 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/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/her 73rd birthday.
EXERCISING THE M-GAP RIDER.
- The Owner may only exercise the M-GAP 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."
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- The Owner may only annuitize at the Company's guaranteed fixed annuity
option rates listed under the Annuity Option Tables in the Policy.
TERMINATING THE M-GAP RIDER.
- The Owner may not terminate the M-GAP Rider prior to the seventh Policy
anniversary after the effective date of the Rider, unless such termination
(1) occurs on or within thirty days after any Policy anniversary and
(2) in conjunction with the repurchase of an M-GAP Rider with a waiting
period of equal or greater length at its then current price, if available.
- The Owner may terminate the Rider at any time after the seventh Policy
anniversary following the effective date of the Rider.
- 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" under THE VARIABLE ANNUITY POLICIES.
From time to time the Company may illustrate minimum guaranteed income amounts
under the M-GAP 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 M-GAP
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 Owner age 60 (at issue) and exercise of an M-GAP 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% rate of return and are the guaranteed minimums that would be received under
the M-GAP 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>
MINIMUM
POLICY MINIMUM GUARANTEED
ANNIVERSARY GUARANTEED ANNUAL
AT EXERCISE BENEFIT 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 120 Monthly Paymnents Guaranteed are available. See "I.
Description of Variable Annuity Options."
The M-GAP Rider does not create Accumulated Value or guarantee performance of
any investment option. Because this Rider is based on guaranteed actuarial
factors, the level of lifetime income that it guarantees may often be less than
the level that would be provided by applying the then current annuity factors.
Therefore, the Rider should be regarded as providing a guarantee of a minimum
amount of annuity income. As described above, withdrawals will reduce the
benefit base. The Company reserves the right to terminate the availability of
the M-GAP Rider at any time. Such a termination would not effect M-GAP Riders
issued prior to the
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termination date, but as noted above, Owners would not be able to repurchase a
new Rider under the repurchase feature (see above, "TERMINATING THE M-GAP
RIDER.")
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.
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 fixed period certain options of
ten years or more, 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 fixed and variable period certain options and any
noncommutable fixed period certain option of less than ten years, 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.
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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 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 M-GAP 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 (M-GAP) Rider" above.
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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.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Policy, the Separate Account or the
Sub-Accounts may have upon its tax. The Separate Account presently is not
subject to tax, but the Company reserves the right to assess a charge for taxes
should the Separate 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 Separate Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department provide that the investments of a segregated asset account
underlying a variable annuity contract are adequately diversified if no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three investments,
and no more than 90% by any four investments. Under this section of the Code, if
the investments are not adequately diversified, the Policy will not be treated
as an annuity contract and therefore, the income on the Policy, for any taxable
year of the Owner, would be treated as ordinary income received or accrued by
the Owner. It is anticipated that the Underlying Funds 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.
INVESTOR CONTROL. 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 policy. 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 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
policy 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-
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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.
B. 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 policies, see "E. Provisions Applicable to Qualified Employer Plans"
below.
C. TAXATION OF THE POLICIES IN GENERAL
The Company believes that the Policy described in this Prospectus will, with
certain exceptions (see "Nonnatural 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. 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.
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,
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other than by reason of death or disability, of distributions which are part of
a series of substantially equal periodic payments that occurs before the Owner's
age 59 1/2 or five years, will subject the Owner to the 10% penalty tax on the
prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity 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, 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.
D. 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.
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E. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
Federal income taxation of assets held inside a qualified retirement plan and of
earnings on those assets is deferred until distribution of plan benefits begins.
As such, it is not necessary to purchase a variable annuity policy solely to
obtain its tax deferral feature. However, other features offered under this
Policy and described in this Prospectus -- such as the minimum guaranteed death
benefit, the guaranteed fixed annuity rates and the wide variety of investment
options -- may make this Policy a suitable investment for a qualified retirement
plan.
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 an Owner of a
non-qualified Policy. 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 cancel the Policy as described in this Prospectus. See "Right to Cancel All
Other Policies."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or Simple IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
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.
45
<PAGE>
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA policy after
December 31, 1988, may not begin before the employee attains age 59, separates
from service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA policy issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
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.
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 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 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 Fund are no longer available for investment or if, in the Company's
judgment further
46
<PAGE>
investment in any Underlying Fund 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 Fund 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 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 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
underlying investment companies do not currently foresee any such disadvantages
to either variable life insurance owners or variable annuity owners, the Company
and the respective trustees of the underlying investment companies 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 the Separate Account or any of its Sub-Accounts 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,
(4) to substitute the shares of any other registered investment company for the
Underlying Fund shares held by a Sub-Account, in the event that Underlying
Fund shares are unavailable for investment, or if the Company determines
that further investment in such Underlying Fund shares is inappropriate in
view of the purpose of the Sub-Account,
(5) to change the methodology for determining the net investment factor,
(6) to change the names of the Separate Account or of the Sub-Accounts, and
(7) to combine with other Sub-Accounts or other separate accounts of the
Company.
If any of these substitutions or changes are made, the Company may endorse the
Policy to reflect the substitution or change, and will notify Owners of all such
changes. In no event will the changes described above be made without notice to
Owners in accordance with the 1940 Act.
47
<PAGE>
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 Funds, together with a form
with which to give voting instructions to the Company. Shares for which no
timely instructions are received will be voted in proportion to the instructions
which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to the Policies in the same proportion. If
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change and, as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Policies, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Funds.
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 Policy by the net
asset value of one Underlying Fund share.
During the annuity period, the number of Underlying Fund shares attributable to
each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
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.
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.
48
<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 SEPARATE ACCOUNT, AND THE UNDERLYING INVESTMENT COMPANIES). 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, 1999, First
Allmerica and its subsidiaries had over $25 billion in combined assets and over
$43 billion of life insurance in force. Effective October 16, 1995, First
Allmerica converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. First Allmerica is a wholly owned subsidiary of 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.
B-1
<PAGE>
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 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 are
the same in years one and ten as shown in the expense example (1)(b) under
SUMMARY OF FEES AND EXPENSES 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:
B-2
<PAGE>
(1)(a)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
-------- --------
<S> <C> <C>
DGPF Growth and Income Series............................... $130 $159
DGPF Devon Series........................................... $131 $162
DGPF Growth Opportunities Series............................ $133 $165
DGPF U.S. Growth Series..................................... $131 $161
DGPF Select Growth Series................................... $132 $164
DGPF Social Awareness Series................................ $134 $166
DGPF REIT Series............................................ $134 $166
DGPF Small Cap Value Series................................. $134 $166
DGPF Trend Series........................................... $133 $165
DGPF International Equity Series............................ $137 $171
DGPF Emerging Markets Series................................ $152 $197
DGPF Balanced Series........................................ $131 $162
DGPF Convertible Securities Series.......................... $133 $165
DGPF High Yield Series...................................... $131 $161
DGPF Capital Reserves Series................................ $131 $162
DGPF Strategic Income Series................................ $132 $164
DGPF Cash Reserve Series.................................... $125 $151
DGPF Global Bond Series..................................... $134 $166
AIM V.I. Growth Fund........................................ $130 $160
AIM V.I. High Yield Fund.................................... $143 $181
AIM V.I. International Equity Fund.......................... $137 $173
AIM V.I. Value Fund......................................... $131 $162
Alger American Leveraged AllCap Portfolio................... $136 $170
Alger American MidCap Growth Portfolio...................... $134 $166
Alger American Small Capitalization Portfolio............... $135 $169
Alliance Growth Portfolio................................... $142 $180
Alliance Growth and Income Portfolio........................ $137 $173
Alliance Premier Growth Portfolio........................... $147 $188
Alliance Technology Portfolio............................... $154 $200
Franklin Small Cap Fund..................................... $140 $178
Mutual Shares Securities Fund............................... $140 $176
Templeton Growth Securities Fund............................ $142 $181
Templeton International Securities Fund..................... $142 $181
Pioneer Emerging Markets VCT Portfolio...................... $172 $229
Pioneer Mid-Cap Value VCT Portfolio......................... $139 $175
</TABLE>
B-3
<PAGE>
(1)(b)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
-------- --------
<S> <C> <C>
DGPF Growth and Income Series............................... $137 $172
DGPF Devon Series........................................... $139 $175
DGPF Growth Opportunities Series............................ $140 $178
DGPF U.S. Growth Series..................................... $138 $174
DGPF Select Growth Series................................... $140 $177
DGPF Social Awareness Series................................ $141 $179
DGPF REIT Series............................................ $141 $179
DGPF Small Cap Value Series................................. $141 $179
DGPF Trend Series........................................... $140 $178
DGPF International Equity Series............................ $144 $184
DGPF Emerging Markets Series................................ $160 $210
DGPF Balanced Series........................................ $139 $175
DGPF Convertible Securities Series.......................... $141 $178
DGPF High Yield Series...................................... $138 $174
DGPF Capital Reserves Series................................ $139 $175
DGPF Strategic Income Series................................ $140 $177
DGPF Cash Reserve Series.................................... $132 $164
DGPF Global Bond Series..................................... $141 $179
AIM V.I. Growth Fund........................................ $138 $173
AIM V.I. High Yield Fund.................................... $150 $193
AIM V.I. International Equity Fund.......................... $145 $185
AIM V.I. Value Fund......................................... $139 $175
Alger American Leveraged AllCap Portfolio................... $144 $183
Alger American MidCap Growth Portfolio...................... $141 $179
Alger American Small Capitalization Portfolio............... $143 $182
Alliance Growth Portfolio................................... $149 $192
Alliance Growth and Income Portfolio........................ $145 $185
Alliance Premier Growth Portfolio........................... $155 $201
Alliance Technology Portfolio............................... $161 $212
Franklin Small Cap Fund..................................... $148 $190
Mutual Shares Securities Fund............................... $147 $188
Templeton Growth Securities Fund............................ $150 $193
Templeton International Securities Fund..................... $150 $193
Pioneer Emerging Markets VCT Portfolio...................... $179 $241
Pioneer Mid-Cap Value VCT Portfolio......................... $146 $187
</TABLE>
Expense examples (2)(a) and (2)(b) on pages 12 and 13 are the same for both
Delaware Medallion I and Delaware Medallion II.
B-4
<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 1999 1998 1997 1996 1995 1994 1993 1992
- ----------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF GROWTH & INCOME SERIES
Unit Value:
Beginning of Period............. 2.672 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period................... 2.556 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End
of Period (in thousands)......... 136,760 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DGPF DEVON SERIES
Unit Value:
Beginning of Period............. 1.543 1.261 1.000 N/A N/A N/A N/A N/A
End of Period................... 1.367 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 48,519 42,690 11,585 N/A N/A N/A N/A N/A
DGPF GROWTH OPPORTUNITIES SERIES
Unit Value:
Beginning of Period............. 2.145 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period................... 3.447 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End
of Period (in thousands)......... 60,264 58,454 57,025 44,667 35,204 29,100 20,802 4,534
DGPF U.S. GROWTH SERIES
Unit Value:
Beginning of Period............. 1.000 N/A N/A N/A N/A N/A N/A N/A
End of Period................... 1.057 N/A N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 5,522 N/A N/A N/A N/A N/A N/A N/A
DGPF SELECT GROWTH SERIES
Unit Value:
Beginning of Period............. 1.000 N/A N/A N/A N/A N/A N/A N/A
End of Period................... 1.416 N/A N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 36,671 N/A N/A N/A N/A N/A N/A N/A
DGPF SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period............. 1.448 1.272 1.000 N/A N/A N/A N/A N/A
End of Period................... 1.613 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 17,918 17,819 4,515 N/A N/A N/A N/A N/A
DGPF REIT SERIES
Unit Value:
Beginning of Period............. 0.901 1.000 N/A N/A N/A N/A N/A N/A
End of Period................... 0.865 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 2,775 1,235 N/A N/A N/A N/A N/A N/A
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996 1995 1994 1993 1992
- ----------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period............. 1.806 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period................... 1.694 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End
of Period (in thousands)......... 47,718 55,136 43,269 15,725 9,467 6,040 6 N/A
DGPF TREND SERIES
Unit Value:
Beginning of Period............. 2.036 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period................... 3.422 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End
of Period (in thousands)......... 42,570 36,571 33,256 21,711 13,410 6,197 50 N/A
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............. 1.762 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period................... 2.011 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End
of Period (in thousands)......... 49,478 51,715 48,813 30,888 21,612 18,761 6,139 182
DGPF EMERGING MARKETS SERIES
Unit Value:
Beginning of Period............. 0.586 0.880 1.000 N/A N/A N/A N/A N/A
End of Period................... 0.856 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 10,078 6,662 4,545 N/A N/A N/A N/A N/A
DGPF BALANCED SERIES
Unit Value:
Beginning of Period............. 2.357 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period................... 2.142 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End
of Period (in thousands)......... 76,644 81,359 58,759 40,855 37,203 33,332 22,046 3,145
DGPF CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period............. 1.127 1.156 1.000 N/A N/A N/A N/A N/A
End of Period................... 1.189 1.127 1.156 0 N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 5,601 4,793 1,291 N/A N/A N/A N/A N/A
DGPF HIGH YIELD SERIES
Unit Value:
Beginning of Period............. 1.599 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period................... 1.536 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End
of Period (in thousands)......... 59,311 70,679 56,733 44,760 37,818 31,735 22,281 4,571
DGPF CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period............. 1.386 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period................... 1.371 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End
of Period (in thousands)......... 25,020 28,066 20,234 20,226 19,818 20,476 16,752 3,828
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996 1995 1994 1993 1992
- ----------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period............. 1.065 1.052 1.000 N/A N/A N/A N/A N/A
End of Period................... 1.015 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 17,658 17,524 5,381 N/A N/A N/A N/A N/A
DGPF CASH RESERVE SERIES
Unit Value:
Beginning of Period............. 1.207 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period................... 1.248 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End
of Period (in thousands)......... 42,241 32,501 24,014 21,519 11,568 13,998 5,483 1,387
DGPF GLOBAL BOND SERIES
Unit Value:
Beginning of Period............. 1.172 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period................... 1.114 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands)......... 5,052 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, 1999.
C-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996 1995 1994
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DGPF GROWTH & INCOME SERIES
Unit Value:
Beginning of Period................................ 2.282 2.078 1.608 1.351 1.006 1.000
End of Period...................................... 2.183 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in
thousands).......................................... 3,250 3,440 1,311 1,044 670 455
DGPF DEVON SERIES
Unit Value:
Beginning of Period................................ 1.543 1.261 1.000 N/A N/A N/A
End of Period...................................... 1.367 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,871 1,558 106 N/A N/A N/A
DGPF GROWTH OPPORTUNITIES SERIES
Unit Value:
Beginning of Period................................ 1.929 1.646 1.453 1.287 1.008 1.000
End of Period...................................... 3.099 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,120 637 355 493 300 149
DGPF U.S. GROWTH SERIES
Unit Value:
Beginning of Period................................ 1.000 N/A N/A N/A N/A N/A
End of Period...................................... 1.057 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 241 N/A N/A N/A N/A N/A
DGPF SELECT GROWTH SERIES
Unit Value:
Beginning of Period................................ 1.000 N/A N/A N/A N/A N/A
End of Period...................................... 1.416 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,118 N/A N/A N/A N/A N/A
DGPF SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period................................ 1.448 1.272 1.000 N/A N/A N/A
End of Period...................................... 1.612 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 369 394 101 N/A N/A N/A
DGPF REIT SERIES
Unit Value:
Beginning of Period................................ 1.000 1.000 N/A N/A N/A N/A
End of Period...................................... 0.955 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 59 0 N/A N/A N/A N/A
DGPF SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................................ 1.820 1.938 1.478 1.223 1.002 1.000
End of Period...................................... 1.707 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in
thousands).......................................... 823 731 235 204 146 82
DGPF TREND SERIES
Unit Value:
Beginning of Period................................ 2.104 1.839 1.536 1.404 1.022 1.000
End of Period...................................... 3.537 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,269 1,099 1,579 285 1,486 790
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996 1995 1994
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................................ 1.527 1.403 1.335 1.128 1.004 1.000
End of Period...................................... 1.743 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in
thousands).......................................... 888 652 554 2,244 358 193
DGPF EMERGING MARKETS SERIES
Unit Value:
Beginning of Period................................ 0.502 0.754 1.000 N/A N/A N/A
End of Period...................................... 0.734 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 756 184 1 N/A N/A N/A
DGPF BALANCED SERIES
Unit Value:
Beginning of Period................................ 2.063 1.764 1.415 1.238 0.991 1.000
End of Period...................................... 1.875 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,290 1,070 420 405 304 173
DGPF CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period................................ 1.127 1.156 1.000 N/A N/A N/A
End of Period...................................... 1.188 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 432 375 84 N/A N/A N/A
DGPF HIGH YIELD SERIES
Unit Value:
Beginning of Period................................ 1.346 1.391 1.240 1.116 0.980 1.000
End of Period...................................... 1.293 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in
thousands).......................................... 3,190 3,962 1,388 1,003 670 287
DGPF CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................................ 1.278 1.214 1.144 1.115 0.991 1.000
End of Period...................................... 1.264 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in
thousands).......................................... 937 1,069 287 208 195 181
DGPF STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period................................ 1.065 1.052 1.000 N/A N/A N/A
End of Period...................................... 1.016 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,882 1,799 276 N/A N/A N/A
DGPF CASH RESERVE SERIES
Unit Value:
Beginning of Period................................ 1.179 1.138 1.096 1.059 1.018 1.000
End of Period...................................... 1.219 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in
thousands).......................................... 2,558 1,603 401 125 126 302
DGPF GLOBAL BOND SERIES
Unit Value:
Beginning of Period................................ 1.171 1.102 1.107 1.000 1.000 N/A
End of Period...................................... 1.113 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 63 31 7 0 N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1999.
9. First Allmerica Financial Life Insurance Company first offered the Delaware
Medallion I policy to the public in 1994.
C-5
<PAGE>
SEPARATE ACCOUNT VA-K
(Delaware Medallion III)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 2000
* * *
An Application for an Order of Exemption has been filed with the Securities
and Exchange Commission on behalf of Allmerica Financial Life Insurance and
Annuity Company, First Allmerica Financial Life Insurance Company, Separate
Account VA-K, and Allmerica Investments, Inc. (collectively referred to
herein as the "Applicants"), to permit the Applicants to deduct a charge for
an optional benefit rider in the manner set out in "WHAT CHARGES WILL I INCUR
UNDER MY CONTRACT?" under the SUMMARY OF CONTRACT FEATURES, and "C. Optional
Minimum Guaranteed Annuity Payout Rider Charge" under the CHARGES AND
DEDUCTIONS sections of the prospectus. The language contained in the
prospectus describing the charge for the optional benefit rider will apply
once the Application for an Order of Exemption has been granted.
While the Application for an Order of Exemption is pending, the fifth
paragraph of "WHAT CHARGES WILL I INCUR UNDER MY CONTRACT" and the first two
paragraphs of "C. Optional Minimum Guaranteed Annuity Payout Rider Charge"
are hereby replaced by the following:
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 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 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, multiplied by 1/12th of the following annual percentage rates:
* * *
SUPPLEMENT DATED MAY 1, 2000
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about the Delaware Medallion III
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company. The contract is a flexible payment tax-deferred combination
variable and fixed annuity offered on both a group and individual basis. PLEASE
READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE
REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information dated May 1, 2000 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by 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.
The Variable Account, known as Separate Account VA-K is subdivided into
Sub-Accounts. Each Sub-Account offered as an investment option under this
contract invests exclusively in shares of one of the following funds:
<TABLE>
<S> <C> <C>
DELAWARE GROUP PREMIUM FUND AIM VARIABLE INSURANCE FUNDS ALLIANCE VARIABLE PRODUCTS SERIES
DGPF Growth & Income Series AIM V.I. Growth Fund FUND, INC. (CLASS B)
DGPF Devon Series AIM V.I. High Yield Fund Alliance Growth Portfolio
DGPF Growth Opportunities Series AIM V.I. International Equity Fund Alliance Growth and Income Portfolio
DGPF U.S. Growth Series AIM V.I. Value Fund Alliance Premier Growth Portfolio
DGPF Select Growth Series Alliance Technology Portfolio
DGPF Social Awareness Series THE ALGER AMERICAN FUND
DGPF REIT Series Alger American Leveraged AllCap FRANKLIN TEMPLETON VARIABLE
DGPF Small Cap Value Series Portfolio INSURANCE PRODUCTS TRUST (CLASS 2)
DGPF Trend Series Alger American MidCap Growth Franklin Small Cap Fund
DGPF International Equity Series Portfolio Mutual Shares Securities Fund
DGPF Emerging Markets Series Alger American Small Capitalization Templeton Growth Securities Fund
DGPF Balanced Series Portfolio Templeton International Securities Fund
DGPF Convertible Securities Series
DGPF High Yield Series PIONEER VARIABLE CONTRACTS
DGPF Capital Reserves Series TRUST (CLASS II)
DGPF Strategic Income Series DGPF Pioneer Emerging Markets VCT
Cash Reserve Series Portfolio
DGPF Global Bond Series Pioneer Mid-Cap Value VCT Portfolio
</TABLE>
The Fixed Account, which is part of the Company's General Account, is an
investment option that pays an interest rate guaranteed for one year from the
time a payment is received. Another investment option, the Guarantee Period
Accounts, offers 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
Value Adjustment may be positive or negative. Payments allocated to a Guarantee
Period Account GPA are held in the Company's Separate Account.
This Prospectus and the Statement of Additional Information can also be obtained
from the Securities and Exchange Commission's website (http://www.sec.gov).
THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; FEDERALLY INSURED; OR ENDORSED
BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED MAY 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF CONTRACT FEATURES................................ 14
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND THE
UNDERLYING INVESTMENT COMPANIES............................ 20
INVESTMENT OBJECTIVES AND POLICIES.......................... 22
PERFORMANCE INFORMATION..................................... 25
DESCRIPTION OF THE CONTRACT................................. 27
A. Payments............................................. 27
B. Right to Cancel Individual Retirement Annuity........ 28
C. Right to Cancel All Other Contracts.................. 28
D. Transfer Privilege................................... 28
Automatic Transfers and Automatic Account
Rebalancing Options................................. 29
E. Surrender............................................ 29
F. Withdrawals.......................................... 30
Systematic Withdrawals.............................. 31
Life Expectancy Distributions....................... 31
G. Death Benefit........................................ 32
Death of the Annuitant Prior to the Annuity Date.... 32
Death of an Owner Who is Not Also the Annuitant
Prior to the Annuity Date........................... 32
Payment of the Death Benefit Prior to the Annuity
Date................................................ 32
Death of the Annuitant On or After the Annuity
Date................................................ 33
H. The Spouse of the Owner as Beneficiary............... 33
I. Assignment........................................... 33
J. Electing the Form of Annuity and the Annuity Date.... 33
K. Description of Variable Annuity Payout Options....... 34
L. Annuity Benefit Payments............................. 35
Determination of the First Variable Annuity Benefit
Payment............................................. 35
The Annuity Unit.................................... 36
Determination of the Number of Annuity Units........ 36
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 36
M. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider................................................... 36
N. NORRIS Decision...................................... 38
O. Computation of Values................................ 39
The Accumulation Unit............................... 39
Net Investment Factor............................... 39
CHARGES AND DEDUCTIONS...................................... 40
A. Variable Account Deductions.......................... 40
Mortality and Expense Risk Charge................... 40
Administrative Expense Charge....................... 40
Other Charges....................................... 40
B. Contract Fee......................................... 41
C. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider Charge............................................ 41
D. Premium Taxes........................................ 41
E. Surrender Charge..................................... 42
Charge for Surrender and Withdrawal................. 42
Reduction or Elimination of Surrender Charge and
Additional Amounts Credited......................... 43
Withdrawal Without Surrender Charge................. 44
Surrenders.......................................... 44
Charge at the Time Annuity Benefit Payments Begin... 44
F. Transfer Charge...................................... 45
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS................................... 46
FEDERAL TAX CONSIDERATIONS.................................. 49
A. General.............................................. 49
The Company......................................... 49
Diversification Requirements........................ 49
Investor Control.................................... 49
B. Qualified and Non-Qualified Contracts................ 50
C. Taxation of the Contracts in General................. 50
Withdrawals Prior to Annuitization.................. 50
Annuity Payouts After Annuitization................. 50
Penalty on Distribution............................. 50
Assignments or Transfers............................ 51
Nonnatural Owners................................... 51
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations............ 51
D. Tax Withholding...................................... 51
E. Provisions Applicable to Qualified Employer Plans.... 52
Corporate and Self-Employed Pension and Profit
Sharing Plans....................................... 52
Individual Retirement Annuities..................... 52
Tax-Sheltered Annuities............................. 52
Texas Optional Retirement Program................... 53
STATEMENTS AND REPORTS...................................... 53
LOANS (QUALIFIED CONTRACTS ONLY)............................ 53
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 53
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 54
VOTING RIGHTS............................................... 55
DISTRIBUTION................................................ 55
LEGAL MATTERS............................................... 55
FURTHER INFORMATION......................................... 56
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE
ADJUSTMENT................................................. B-1
APPENDIX C -- THE DEATH BENEFIT............................. C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION............... D-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................. 2
TAXATION OF THE CONTRACT, THE SEPARATE ACCOUNT AND THE
COMPANY.................................................... 3
SERVICES.................................................... 3
UNDERWRITERS................................................ 4
ANNUITY BENEFIT PAYMENTS.................................... 4
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM.................................................... 6
EXCHANGE OFFER.............................................. 8
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 (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 investment portfolio of Delaware Group Premium Fund
("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American Fund
("Alger"), Alliance Variable Products Series Fund, Inc. ("Alliance"), Franklin
Templeton Variable Insurance Products Trust ("FT VIP") and Pioneer Variable
Contracts Trust ("Pioneer VCT").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, surrender charge, rider charge and
Market Value Adjustment.
4
<PAGE>
UNDERLYING FUNDS (FUNDS): an investment portfolio of DGPF, AVIF, Alger,
Alliance, FT VIP and Pioneer VCT in which a Sub-Account invests.
VALUATION DATE: a day on which the 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" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
YEARS FROM
DATE OF PAYMENT CHARGE
1. CONTRACT CHARGES: --------------- ------
<S> <C> <C>
0-1 7.0%
2 6.0%
3 5.0%
4 4.0%
5 3.0%
6 2.0%
7 1.0%
More than 7 0.0%
SURRENDER CHARGE:*
This charge may be assessed upon surrender, withdrawal or
annuitization under any commutable period certain option
or a noncommutable period certain option of less than ten
years. The charge is a percentage of 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
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:
Under the following riders, 1/12th of the annual charge is
deducted pro-rata on a monthly basis at the end of each
month and, if applicable, at termination of the rider. The
charge for these riders on an annual basis as a percentage
of Accumulated Value is:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.25%
with ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.15%
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 Annual Expenses: 1.40%
</TABLE>
*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" under "E. Surrender Charge" in the CHARGES AND
DEDUCTIONS section.
6
<PAGE>
(3) ANNUAL UNDERLYING FUND EXPENSES: Total expenses of the Underlying Funds are
not fixed or specified under the terms of the Contract and will vary from year
to year. The levels of fees and expenses also vary among the Underlying Funds.
The following table shows the expenses of the Underlying Portfolios as a
percentage of average net assets for the year ended December 31, 1999, as
adjusted for any material changes.
<TABLE>
<CAPTION>
TOTAL FUND
EXPENSES
MANAGEMENT FEE OTHER EXPENSES (AFTER ANY
(AFTER ANY (AFTER ANY WAIVERS/
FUND VOLUNTARY WAIVERS) 12B-1 FEES REIMBURSEMENTS) REIMBURSEMENTS)
- ---- ------------------ ---------- --------------- -----------------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series.............. 0.60% -- 0.11% 0.71%(2)
DGPF Devon Series........................ 0.65% -- 0.12% 0.77%(2)
DGPF Growth Opportunities Series......... 0.75% -- 0.07% 0.82%(2)
DGPF U. S. Growth Series*................ 0.61% -- 0.14% 0.75%(1)(2)
DGPF Select Growth Series................ 0.74% -- 0.06% 0.80%(1)(2)
DGPF Social Awareness Series............. 0.70% -- 0.15% 0.85%(1)(2)
DGPF REIT Series......................... 0.64% -- 0.21% 0.85%(1)(2)
DGPF Small Cap Value Series.............. 0.75% -- 0.10% 0.85%(2)
DGPF Trend Series........................ 0.75% -- 0.07% 0.82%(2)
DGPF International Equity Series......... 0.83% -- 0.12% 0.95%(1)(2)
DGPF Emerging Markets Series............. 1.19% -- 0.28% 1.47%(1)(2)
DGPF Balanced Series..................... 0.65% -- 0.11% 0.76%(2)
DGPF Convertible Securities Series....... 0.75% -- 0.08% 0.83%(2)
DGPF High Yield Series................... 0.65% -- 0.09% 0.74%(2)
DGPF Capital Reserves Series............. 0.50% -- 0.26% 0.76%(2)
DGPF Strategic Income Series............. 0.65% -- 0.15% 0.80%(2)
DGPF Cash Reserve Series................. 0.45% -- 0.10% 0.55%(2)
DGPF Global Bond Series.................. 0.75% -- 0.10% 0.85%(2)
AIM V.I. Growth Fund..................... 0.63% -- 0.10% 0.73%
AIM V.I. High Yield Fund................. 0.35% -- 0.79% 1.14%(3)
AIM V.I. International Equity Fund....... 0.75% -- 0.22% 0.97%
AIM V.I. Value Fund...................... 0.61% -- 0.15% 0.76%
Alger American Leveraged AllCap
Portfolio............................... 0.85% -- 0.08%(4) 0.93%
Alger American MidCap Growth Portfolio... 0.80% -- 0.05% 0.85%
Alger American Small Capitalization
Portfolio............................... 0.85% -- 0.05% 0.90%
Alliance Growth Portfolio (Class B)...... 0.75% 0.25% 0.12% 1.12%
Alliance Growth and Income Portfolio
(Class B)............................... 0.63% 0.25% 0.09% 0.97%
Alliance Premier Growth Portfolio
(Class B)............................... 1.00% 0.25% 0.04% 1.29%
Alliance Technology Portfolio
(Class B)............................... 1.00% 0.25% 0.27% 1.52%(5)
Franklin Small Cap Fund (Class 2)........ 0.55% 0.25% 0.27% 1.07%(6)(7)
Mutual Shares Securities Fund
(Class 2)............................... 0.60% 0.25% 0.19% 1.04%(6)(8)
Templeton Growth Securities Fund
(Class 2)............................... 0.83%(9) 0.25% 0.05% 1.13%(6)(10)
Templeton International Securities Fund
(Class 2)............................... 0.69% 0.25% 0.19% 1.13%(6)(11)
Pioneer Emerging Markets VCT Portfolio**
(Class II).............................. 0.00% 0.25% 1.88% 2.13%(12)
Pioneer Mid-Cap Value VCT Portfolio**
(Class II).............................. 0.65% 0.25% 0.11% 1.01%
</TABLE>
*The DGPF U.S. Growth Series commenced operations on November 15, 1999. Expenses
shown are based on annualized amounts.
**Class II shares of the Pioneer Emerging Markets VCT Portfolio and Pioneer
Mid-Cap Value VCT Portfolio commenced operations on May 1, 2000; therefore,
expenses shown are estimated and annualized.
(1)For the fiscal year ended December 31, 1999, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.81% for DGPF Select Growth
7
<PAGE>
Series, 0.90% for DGPF Social Awareness Series, 0.96% for DGPF REIT Series,
1.53% for DGPF Emerging Markets Series, 0.97% for DGPF International Equity
Series and 0.79% for DGPF U.S. Growth Series.
(2)The investment adviser for the DGPF Growth & Income Series, DGPF Devon
Series, DGPF Growth Opportunities Series (formerly known as "DelCap Series"),
DGPF U.S. Growth Series, DGPF Select Growth Series (formerly known as
"Aggressive Growth Series"), DGPF Social Awareness Series, DGPF REIT Series,
DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series (formerly
known as "Delaware Balanced Series"), DGPF Convertible Securities Series, DGPF
High Yield Series (formerly known as "Delchester Series"), DGPF Capital Reserves
Series, DGPF Strategic Income Series, and DGPF Cash Reserve Series is Delaware
Management Company, a series of Delaware Management Business Trust ("Delaware
Management"). The investment adviser for the DGPF International Equity Series,
DGPF Emerging Markets Series and the DGPF Global Bond Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, the investment advisers for the Series of DGPF have
agreed voluntarily to waive their management fees and reimburse each Series for
expenses to the extent that total expenses will not exceed 1.50% for the DGPF
Emerging Markets Series; 0.95% for the DGPF International Equity Series; 0.85%
for DGPF Growth Opportunities Series, DGPF Select Growth Series, DGPF Social
Awareness Series, DGPF REIT Series, DGPF Small Cap Value Series, DGPF Trend
Series, DGPF Convertible Securities Series and DGPF Global Bond Series, 0.75%
for DGPF U.S. Growth Series, and 0.80% for all other Series. The fee ratios
shown above have been restated, if necessary, to reflect the new voluntary
limitations which took effect on May 1, 2000. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(3)Had there been no fee waivers or expense reimbursements, the Management Fee,
Other Expenses and Total Fund Expenses would have been 0.63%, 0.79% and 1.42%,
respectively.
(4)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(5)From time to time, the Alliance Technology Portfolio's investment adviser, in
its own discretion, may voluntarily waive all or part of its fees and/or
voluntarily assume certain portfolio expenses. An expense cap of 1.20% which was
in effect during 1999, is no longer in effect as of May 1, 2000. Therefore, the
expenses shown in the above table have been restated to reflect current fees
without the cap.
(6)The fund's class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus.
(7)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Franklin Small Cap Fund with a similar fund of the Templeton Variable
Products Series Fund, effective 5/1/00. On 2/28/00, fund shareholders approved
new management fees, which apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new fees and assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses after
May 1, 2000 would be estimated to be the same.
(8)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Mutual Shares Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund.
(9)The fund administration fee is paid indirectly through the management fee.
(10)On 2/8/00, a merger and reorganization was approved that combined the assets
of the Templeton Growth Securities Fund with a similar fund of the Templeton
Variable Products Series Fund, effective 5/1/00. The table shows total expenses
based on the fund's assets as of 12/31/99, and not the assets of the combined
fund. However, if the table reflected combined assets, the fund's expenses after
5/1/00 would be estimated as: Management Fees 0.80%, 12b-1 Fees 0.25%, Other
Expenses 0.05%, and Total Fund Expenses 1.10%.
8
<PAGE>
(11)On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.65%, 12b-1 Fees 0.25%, Other Expenses 0.20%, and Total Fund
Expenses 1.10%.
(12)Fees and expenses reflect waivers/reimbursements currently applicable to the
portfolio. As of May 1, 2000, Pioneer Investment Management, Inc. has agreed
voluntarily to limit its management fee and, if necessary, to limit other
operating expenses of Class I shares to 1.75% of the Pioneer Emerging Markets
VCT Portfolio's average daily net assets attributable to Class I shares. The
portion of portfolio expenses attributable to Class II shares will be reduced
only to the extent such expenses are reduced for Class I shares. This agreement
is voluntary and temporary and may be revised or terminated at any time.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets and assumes that the Underlying Fund expenses
listed above remain the same in each of the 1, 3, 5, and 10-year intervals.
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 LESS THAN THOSE SHOWN.
9
<PAGE>
(1)(a) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under any commutable period certain option or a noncommutable
fixed 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>
DGPF Growth & Income Series................................ $83 $113 $144 $247
DGPF Devon Series.......................................... $83 $115 $147 $253
DGPF Growth Opportunities Series........................... $84 $116 $150 $258
DGPF U.S. Growth Series.................................... $83 $114 $146 $251
DGPF Select Growth Series.................................. $84 $116 $149 $256
DGPF Social Awareness Series............................... $84 $117 $151 $262
DGPF REIT Series........................................... $84 $117 $151 $262
DGPF Small Cap Value Series................................ $84 $117 $151 $262
DGPF Trend Series.......................................... $84 $116 $150 $258
DGPF International Equity Series........................... $85 $120 $156 $272
DGPF Emerging Markets Series............................... $90 $135 $181 $322
DGPF Balanced Series....................................... $83 $115 $147 $252
DGPF Convertible Securities Series......................... $84 $117 $150 $260
DGPF High Yield Series..................................... $83 $114 $146 $250
DGPF Capital Reserves Series............................... $83 $115 $147 $252
DGPF Strategic Income Series............................... $84 $116 $149 $256
DGPF Cash Reserve Series................................... $81 $109 $136 $231
DGPF Global Bond Series.................................... $84 $117 $151 $262
AIM V.I. Growth Fund....................................... $83 $114 $145 $249
AIM V.I. High Yield Fund................................... $87 $126 $165 $290
AIM V.I. International Equity Fund......................... $85 $121 $157 $274
AIM V.I. Value Fund........................................ $83 $115 $147 $252
Alger American Leveraged AllCap Portfolio.................. $85 $120 $155 $270
Alger American MidCap Growth Portfolio..................... $84 $117 $151 $262
Alger American Small Capitalization Portfolio.............. $85 $119 $154 $267
Alliance Growth Portfolio.................................. $87 $125 $164 $289
Alliance Growth and Income Portfolio....................... $85 $121 $157 $274
Alliance Premier Growth Portfolio.......................... $88 $130 $173 $305
Alliance Technology Portfolio.............................. $91 $136 $183 $327
Franklin Small Cap Fund.................................... $86 $124 $162 $284
Mutual Shares Securities Fund.............................. $86 $123 $160 $281
Templeton Growth Securities Fund........................... $87 $125 $165 $290
Templeton International Securities Fund.................... $87 $125 $165 $290
Pioneer Emerging Markets VCT Portfolio..................... $96 $153 $212 $383
Pioneer Mid-Cap Value VCT Portfolio........................ $86 $122 $159 $278
</TABLE>
10
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under any commutable period certain option or a noncommutable
fixed 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 (M-GAP) Rider** with a ten-year
waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $85 $120 $157 $273
DGPF Devon Series.......................................... $86 $122 $159 $279
DGPF Growth Opportunities Series........................... $86 $124 $162 $284
DGPF U.S. Growth Series.................................... $86 $122 $159 $277
DGPF Select Growth Series.................................. $86 $123 $161 $282
DGPF Social Awareness Series............................... $87 $124 $163 $287
DGPF REIT Series........................................... $87 $124 $163 $287
DGPF Small Cap Value Series................................ $87 $124 $163 $287
DGPF Trend Series.......................................... $86 $124 $162 $284
DGPF International Equity Series........................... $88 $127 $168 $296
DGPF Emerging Markets Series............................... $92 $142 $193 $346
DGPF Balanced Series....................................... $86 $122 $159 $278
DGPF Convertible Securities Series......................... $86 $124 $162 $285
DGPF High Yield Series..................................... $86 $121 $158 $276
DGPF Capital Reserves Series............................... $86 $122 $159 $278
DGPF Strategic Income Series............................... $86 $123 $161 $282
DGPF Cash Reserve Series................................... $84 $116 $149 $256
DGPF Global Bond Series.................................... $87 $124 $163 $287
AIM V.I. Growth Fund....................................... $85 $121 $158 $275
AIM V.I. High Yield Fund................................... $89 $133 $177 $315
AIM V.I. International Equity Fund......................... $88 $128 $169 $298
AIM V.I. Value Fund........................................ $86 $122 $159 $278
Alger American Leveraged AllCap Portfolio.................. $87 $127 $167 $294
Alger American MidCap Growth Portfolio..................... $87 $124 $163 $287
Alger American Small Capitalization Portfolio.............. $87 $126 $166 $291
Alliance Growth Portfolio.................................. $89 $132 $176 $313
Alliance Growth and Income Portfolio....................... $88 $128 $169 $298
Alliance Premier Growth Portfolio.......................... $91 $137 $184 $329
Alliance Technology Portfolio.............................. $93 $143 $195 $350
Franklin Small Cap Fund.................................... $89 $131 $174 $308
Mutual Shares Securities Fund.............................. $88 $130 $173 $305
Templeton Growth Securities Fund........................... $89 $132 $177 $314
Templeton International Securities Fund.................... $89 $132 $177 $314
Pioneer Emerging Markets VCT Portfolio..................... $99 $160 $223 $404
Pioneer Mid-Cap Value VCT Portfolio........................ $88 $129 $171 $302
</TABLE>
11
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed 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>
DGPF Growth & Income Series................................ $22 $ 67 $115 $247
DGPF Devon Series.......................................... $22 $ 69 $118 $253
DGPF Growth Opportunities Series........................... $23 $ 70 $120 $258
DGPF U.S. Growth Series.................................... $22 $ 68 $117 $251
DGPF Select Growth Series.................................. $23 $ 70 $119 $256
DGPF Social Awareness Series............................... $23 $ 71 $122 $262
DGPF REIT Series........................................... $23 $ 71 $122 $262
DGPF Small Cap Value Series................................ $23 $ 71 $122 $262
DGPF Trend Series.......................................... $23 $ 70 $120 $258
DGPF International Equity Series........................... $24 $ 74 $127 $272
DGPF Emerging Markets Series............................... $29 $ 90 $153 $322
DGPF Balanced Series....................................... $22 $ 69 $117 $252
DGPF Convertible Securities Series......................... $23 $ 71 $121 $260
DGPF High Yield Series..................................... $22 $ 68 $116 $250
DGPF Capital Reserves Series............................... $22 $ 69 $117 $252
DGPF Strategic Income Series............................... $23 $ 70 $119 $256
DGPF Cash Reserve Series................................... $20 $ 62 $107 $231
DGPF Global Bond Series.................................... $23 $ 71 $122 $262
AIM V.I. Growth Fund....................................... $22 $ 68 $116 $249
AIM V.I. High Yield Fund................................... $26 $ 80 $137 $290
AIM V.I. International Equity Fund......................... $24 $ 75 $128 $274
AIM V.I. Value Fund........................................ $22 $ 69 $117 $252
Alger American Leveraged AllCap Portfolio.................. $24 $ 74 $126 $270
Alger American MidCap Growth Portfolio..................... $23 $ 71 $122 $262
Alger American Small Capitalization Portfolio.............. $24 $ 73 $125 $267
Alliance Growth Portfolio.................................. $26 $ 79 $136 $289
Alliance Growth and Income Portfolio....................... $24 $ 75 $128 $274
Alliance Premier Growth Portfolio.......................... $28 $ 84 $144 $305
Alliance Technology Portfolio.............................. $30 $ 91 $155 $327
Franklin Small Cap Fund.................................... $25 $ 78 $133 $284
Mutual Shares Securities Fund.............................. $25 $ 77 $132 $281
Templeton Growth Securities Fund........................... $26 $ 80 $136 $290
Templeton International Securities Fund.................... $26 $ 80 $136 $290
Pioneer Emerging Markets VCT Portfolio..................... $36 $109 $185 $383
Pioneer Mid-Cap Value VCT Portfolio........................ $25 $ 76 $130 $278
</TABLE>
12
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed 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 (M-GAP) Rider** with a ten-year
waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series................................ $24 $ 75 $128 $273
DGPF Devon Series.......................................... $25 $ 76 $131 $279
DGPF Growth Opportunities Series........................... $25 $ 78 $133 $284
DGPF U.S. Growth Series.................................... $25 $ 76 $130 $277
DGPF Select Growth Series.................................. $25 $ 77 $132 $282
DGPF Social Awareness Series............................... $26 $ 79 $135 $287
DGPF REIT Series........................................... $26 $ 79 $135 $287
DGPF Small Cap Value Series................................ $26 $ 79 $135 $287
DGPF Trend Series.......................................... $25 $ 78 $133 $284
DGPF International Equity Series........................... $27 $ 82 $140 $296
DGPF Emerging Markets Series............................... $32 $ 97 $165 $346
DGPF Balanced Series....................................... $25 $ 76 $130 $278
DGPF Convertible Securities Series......................... $25 $ 78 $134 $285
DGPF High Yield Series..................................... $25 $ 75 $129 $276
DGPF Capital Reserves Series............................... $25 $ 76 $130 $278
DGPF Strategic Income Series............................... $25 $ 77 $132 $282
DGPF Cash Reserve Series................................... $23 $ 70 $119 $256
DGPF Global Bond Series.................................... $26 $ 79 $135 $287
AIM V.I. Growth Fund....................................... $24 $ 75 $129 $275
AIM V.I. High Yield Fund................................... $29 $ 87 $149 $315
AIM V.I. International Equity Fund......................... $27 $ 82 $141 $298
AIM V.I. Value Fund........................................ $25 $ 76 $130 $278
Alger American Leveraged AllCap Portfolio.................. $26 $ 81 $139 $294
Alger American MidCap Growth Portfolio..................... $26 $ 79 $135 $287
Alger American Small Capitalization Portfolio.............. $26 $ 80 $137 $291
Alliance Growth Portfolio.................................. $28 $ 87 $148 $313
Alliance Growth and Income Portfolio....................... $27 $ 82 $141 $298
Alliance Premier Growth Portfolio.......................... $30 $ 92 $156 $329
Alliance Technology Portfolio.............................. $32 $ 99 $167 $350
Franklin Small Cap Fund.................................... $28 $ 85 $145 $308
Mutual Shares Securities Fund.............................. $28 $ 84 $144 $305
Templeton Growth Securities Fund........................... $28 $ 87 $148 $314
Templeton International Securities Fund.................... $28 $ 87 $148 $314
Pioneer Emerging Markets VCT Portfolio..................... $38 $116 $196 $404
Pioneer Mid-Cap Value VCT Portfolio........................ $27 $ 84 $142 $302
</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 fixed 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
fixed period certain option of ten years or more.
**If the Minimum Guaranteed Annuity Payout (M-GAP) Rider is exercised, you may
only annuitize under a fixed annuity payout option involving a life contingency
at the Company's guaranteed fixed annuity option rates listed under the Annuity
Option Tables in your Contract.
13
<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 (as long as the Annuitant is under age
90.)
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 seventeen of the thirty-five available Sub-Accounts investing in the
Underlying Funds (in addition to the DGPF Cash Reserve Series), to the Guarantee
Period Accounts, and to the Fixed Account (collectively "the investment
options.") You select the investment options most appropriate for your
investment needs. As those needs change, you may also change your allocation
without incurring any tax consequences. The Contract's Accumulated Value is
based on the investment performance of the Funds and any accumulations in the
Guarantee Period and Fixed Accounts. You do not pay taxes on any earnings under
the Contract until 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
Underlying Funds, fixed-amount annuity benefit payments with payment amounts
guaranteed by the Company, or a combination of fixed-amount and variable annuity
benefit payments. Among the payout options available during the annuity payout
phase are:
- periodic payments for the Annuitant's lifetime;
- periodic payments for the Annuitant's life and the life of another person
selected by you;
- periodic payments for the Annuitant's lifetime with any remaining
guaranteed payments continuing to your beneficiary for 10 years in the
event that the Annuitant dies before the end of ten years;
- periodic payments over a specified number of years (1 to 30) -- under the
fixed version of this option you may reserve the right to convert
remaining payments to a lump-sum payout by electing a "commutable" option.
Variable period certain options are automatically commutable.
An optional Minimum Guaranteed Annuity Payout ("M-GAP") Rider is currently
available during the accumulation phase in most jurisdictions for a separate
monthly charge. If elected, the Rider provides the Annuitant a guaranteed
minimum amount of income after the specified waiting period under a life
contingent fixed annuity payout option, subject to certain conditions. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base
14
<PAGE>
(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 Company's guaranteed fixed annuity option 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, on the Contract anniversary that the M-GAP Benefit Base is
being determined; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at an effective annual yield of 5% plus gross payments made
thereafter compounded daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after being increased for subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced for subsequent withdrawals.
For more details see "M. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider" under DESCRIPTION OF THE CONTRACT.
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. As of the date of this Prospectus, payments may be
allocated to a maximum of seventeen variable Sub-Accounts (in addition to the
DGPF Cash Reserve Series) during the life of the Contract and prior to the
Annuity Date.
15
<PAGE>
VARIABLE ACCOUNT. Subject to the 17 fund maximum, you have the choice of
Sub-Accounts investing in the following thirty-five Underlying Funds:
<TABLE>
<S> <C>
DGPF Growth & Income Series AIM V.I. Growth Fund
DGPF Devon Series AIM V.I. High Yield Fund
Growth Opportunities Series AIM V.I. International Equity Fund
DGPF U.S. Growth Series AIM V.I. Value Fund
DGPF Select Growth Series Alger American Leveraged AllCap Portfolio
DGPF Social Awareness Series Alger American MidCap Growth Portfolio
DGPF REIT Series Alger American Small Capitalization Portfolio
DGPF Small Cap Value Series Alliance Growth Portfolio
DGPF Trend Series Alliance Growth and Income Portfolio
DGPF International Equity Series Alliance Premier Growth Portfolio
DGPF Emerging Markets Series Alliance Technology Portfolio
DGPF Balanced Series Franklin Small Cap Fund
DGPF Convertible Securities Series Mutual Shares Securities Fund
DGPF High Yield Series Templeton Growth Securities Fund
DGPF Capital Reserves Series Templeton International Securities Fund
DGPF Strategic Income Series Pioneer Emerging Markets VCT Portfolio
DGPF Cash Reserve Series Pioneer Mid-Cap Value VCT Portfolio
DGPF Global Bond Series
</TABLE>
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. For a more
detailed description of the Underlying Funds, see INVESTMENT OBJECTIVES AND
POLICIES.
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 AND/OR SOME OF THE SUB-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.
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WHO ARE THE INVESTMENT ADVISERS OF THE UNDERLYING FUNDS?
Delaware Management Company, a series of Delaware Management Business Trust
("Delaware Management") is the investment adviser for the DGPF Growth & Income
Series, DGPF Devon Series, DGPF Growth Opportunities Series, DGPF U. S. Growth
Series, DGPF Select Growth Series, DGPF Social Awareness Series, DGPF REIT
Series, DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series,
DGPF Convertible Securities Series, DGPF High Yield Series, DGPF Capital
Reserves Series, DGPF Strategic Income Series, and DGPF Cash Reserve Series. The
investment adviser for the DGPF International Equity Series, DGPF Emerging
Markets Series and the DGPF Global Bond Series is Delaware International
Advisers Ltd. ("Delaware International"). A I M Advisors, Inc. is the investment
adviser for the AIM V.I. Growth Fund, AIM V.I. High Yield Fund, AIM V.I.
International Equity Fund and AIM V.I. Value Fund of AIM Variable Insurance
Funds. The investment adviser of the Alger American Leveraged AllCap Portfolio,
Alger American MidCap Growth Portfolio and Alger American Small Capitalization
Portfolio is Fred Alger Management, Inc. Alliance Capital Management, L.P.
serves as the investment adviser to the Alliance Growth Portfolio, Alliance
Growth and Income Portfolio, Alliance Premier Growth Portfolio and Alliance
Technology Portfolio of Alliance Variable Products Series Fund, Inc. The
investment adviser for Franklin Small Cap Fund is Franklin Advisers, Inc. The
investment adviser to the Mutual Shares Securities Fund is Franklin Mutual
Advisers, LLC. Templeton Global Advisors Limited is the investment adviser for
the Templeton Growth Securites Fund. Templeton Investment Counsel, Inc. is the
investment adviser of the Templeton International Securities Fund. Pioneer
Investment Management, Inc. is the investment adviser to the Pioneer Emerging
Markets VCT Portfolio and Pioneer Mid-Cap Value VCT Portfolio.
CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS?
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. As
of the date of the Prospectus, transfers may be made to a maximum of seventeen
variable Sub-Accounts in addition to the DGPF Cash Reserve Series during the
life of the Contract. You will incur no current taxes on transfers while your
money remains in the Contract. 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. See "D. Transfer
Privilege" under DESCRIPTION OF THE CONTRACT.
You may also elect at no additional charge Automatic Transfers (Dollar Cost
Averaging) to gradually move money to one or more of the Underlying Funds or
Automatic Account Rebalancing to ensure assets remain allocated according to
your designated percentage allocation mix.
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
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<PAGE>
"Reduction or Elimination of Surrender Charge and Additional Amounts Credited"
in "E. Surrender Charge" under CHARGES AND DEDUCTIONS.
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 on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment;
- Gross payments, with interest compounding daily at an effective annual
yield 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 an effective annual yield
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 an effective annual yield 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 on the Valuation Date
the Company receives proof of death increased by any positive Market Value
Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary or upon surrender is less
than $50,000, the Company will deduct a $30 Contract fee from the Contract. The
Contract fee is currently 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
in "D. Premium Taxes" under CHARGES AND DEDUCTIONS.
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<PAGE>
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" under "A. Variable Account Deductions" and in the prospectuses
of the Underlying Funds which accompany this Prospectus. These charges vary
among the Underlying Funds and may change from year to year. In addition,
management fee waivers and/or reimbursements may be in effect for certain or all
of the Underlying Funds. For more specific information regarding the existence
and effect of any waivers/ reimbursements see "Annual Underlying Fund Expenses"
under SUMMARY OF FEES AND EXPENSES.
Subject to state availability, the Company currently offers an optional Minimum
Guaranteed Annuity Payout (M-GAP) 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, if applicable, on the date the Rider is terminated by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout (M-GAP) Rider with a
ten-year waiting period................................... 0.25%
Minimum Guaranteed Annuity Payout (M-GAP) Rider with a
fifteen-year waiting period............................... 0.15%
</TABLE>
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout (M-GAP) Rider Charge" under CHARGES AND DEDUCTIONS, and "M. Optional
Minimum Guaranteed Annuity Payout (M-GAP) 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" under DESCRIPTION OF THE CONTRACT.
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.
- 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).
19
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND
THE UNDERLYING INVESTMENT COMPANIES
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999,
Allmerica Financial had over $17 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is 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, 1999, First Allmerica and its
subsidiaries had over $25 billion in combined assets and over $43 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
referred to as Separate Account VA-K (the "Variable Account"). 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 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.
Each Sub-Account invests in a corresponding investment portfolio. The assets
used to fund the variable portions of the Contract are set aside in the
Sub-Accounts of the Variable Account, and are kept separate and apart from the
general assets of the Company. Each Sub-Account is administered and accounted
for as part of the general business of the Company. The income, capital gains or
capital losses of each Sub-Account, however, are allocated to each Sub-Account,
without regard to any other income, capital gains or capital losses of the
Company. Obligations under the Contract are obligations of the Company. Under
Delaware 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.
20
<PAGE>
THE UNDERLYING INVESTMENT COMPANIES
DELAWARE GROUP PREMIUM FUND. Delaware Group Premium Fund ("DGPF") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of DGPF or its separate investment series.
DGPF was established to serve as an investment vehicle for various separate
accounts supporting variable insurance contracts. DGPF currently has 18
investment portfolios, each issuing a series of shares ("Series"): DGPF
Growth & Income Series, DGPF Devon Series, DGPF Growth Opportunities Series,
DGPF U. S. Growth Series, DGPF Select Growth Series, DGPF Social Awareness
Series, DGPF REIT Series, DGPF Small Cap Value Series, DGPF Trend Series, DGPF
International Equity Series, DGPF Emerging Markets Series, DGPF Balanced Series,
DGPF Convertible Securities Series, DGPF High Yield Series, DGPF Capital
Reserves Series, DGPF Strategic Income Series, DGPF Cash Reserve Series, and
DGPF Global Bond Series. The assets of each Underlying Fund are held separate
from the assets of the other Series. Each Series operates as a separate
investment vehicle, and the income or losses of one Series have no effect on the
investment performance of another Series. Shares of the Series are not offered
to the general public but solely to separate accounts of life insurance
companies.
The investment adviser for the DGPF Growth & Income Series, DGPF Devon Series,
DGPF Growth Opportunities Series, DGPF U. S. Growth Series, DGPF Select Growth
Series, DGPF Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value
Series, DGPF Trend Series, DGPF Balanced Series, DGPF Convertible Securities
Series, DGPF High Yield Series, DGPF Capital Reserves Series, DGPF Strategic
Income Series, and DGPF Cash Reserve Series is Delaware Management Company, a
series of Delaware Management Business Trust ("Delaware Management"). The
investment adviser for the DGPF International Equity Series, DGPF Emerging
Markets Series and the DGPF Global Bond Series is Delaware International
Advisers Ltd. ("Delaware International").
AIM VARIABLE INSURANCE FUNDS. AIM Variable Insurance Funds ("AVIF"), an
open-end, series, management investment company, was organized as a Maryland
corporation on January 22, 1993, changed to a Delaware business trust on May 1,
2000, and is registered with the SEC under the 1940 Act. The investment adviser
for the AIM V.I. Growth Fund, AIM V.I. High Yield Fund, AIM V.I. International
Equity Fund, and AIM V.I. Value Fund is A I M Advisors, Inc. ("AIM"). AIM was
organized in 1976, and, together with its subsidiaries, manages or advises over
120 investment company portfolios encompassing a broad range of investment
objectives.
THE ALGER AMERICAN FUND. The Alger American Fund ("Alger"), is an open-end,
diversified management investment company established as a Massachusetts
business trust on April 6, 1988 and registered with the SEC under the 1940 Act.
The investment adviser for the Alger American Leveraged AllCap Portfolio, Alger
American MidCap Growth Portfolio, and Alger American Small Capitalization
Portfolio is Fred Alger Management, Inc.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. Alliance Variable Products
Series Fund, Inc. ("Alliance") is registered with the SEC as an open-end,
management investment company. Four of its separate investment portfolios are
currently available under the Contract. Alliance Capital Management, L.P.
("Alliance Capital"), serves as the investment adviser to Alliance. Alliance
Capital Management Corporation, the sole general partner of Alliance Capital, is
an indirect wholly owned subsidiary of The Equitable Life Assurance Society of
the United States, which is in turn a wholly owned subsidiary of the Equitable
Companies Incorporated, a holding company which is controlled by AXA, a French
insurance holding company.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST. Franklin Templeton
Variable Insurance Products Trust ("FT VIP") and the funds' investment managers
and their affiliates manage over $224 billion (as of December 31, 1999) in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. The investment adviser to the
Franklin Small Cap Fund is Franklin Advisers, Inc. Franklin Mutual
21
<PAGE>
Advisers, LLC is the investment adviser to the Mutual Shares Securities Fund.
Templeton Global Advisors Limited is the investment adviser to the Templeton
Growth Securities Fund. Templeton Investment Counsel, Inc. is the investment
adviser to the Templeton International Securities Fund.
PIONEER VARIABLE CONTRACTS TRUST. Pioneer Variable Contracts Trust ("Pioneer
VCT") is an open-end, management investment company registered with the SEC
under the 1940 Act. Pioneer Investment Management, Inc. ("Pioneer") is the
investment adviser to the Pioneer Emerging Markets VCT Portfolio and Pioneer
Mid-Cap Value VCT Portfolio. Pioneer also provides investment research and
portfolio management services to a number of other retail mutual funds and
certain institutional clients. Pioneer is a wholly owned subsidiary of The
Pioneer Group, Inc. ("PGI"). PGI, established in 1928, is one of America's
oldest investment managers and has its principal place of business at 60 State
Street, Boston, Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Funds, and other
relevant information regarding the underlying investment companies may be found
in the prospectuses of the Underlying Funds which accompany this Prospectus, and
should be read carefully before investing. The Statements of Additional
Information ("SAI") of the Underlying Funds are available upon request. There
can be no assurance that the investment objectives of the Underlying Funds can
be achieved or that the value of the Contract will equal or exceed the aggregate
amount of payments made under the Contract.
DELAWARE GROUP PREMIUM FUND:
DGPF GROWTH & INCOME SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income.
DGPF DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DGPF GROWTH OPPORTUNITIES SERIES -- seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. This Series formerly was known as the DelCap
Series.
DGPF U.S. GROWTH SERIES -- seeks to achieve maximum capital appreciation.
DGPF SELECT GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth. This Series formerly was known as the Aggressive Growth Series.
DGPF SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
DGPF REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
DGPF SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in
small-to mid- cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis also will be
placed on securities of companies that temporarily may be out of favor or whose
value is not yet recognized by the market.
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<PAGE>
DGPF TREND SERIES -- seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
DGPF EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The Series is an
international fund. As such, under normal market conditions, at least 65% of the
Series' assets will be invested in equity securities of issuers organized or
having a majority of their assets or deriving a majority of their operating
income in at least three countries that are considered to be emerging or
developing.
DGPF BALANCED SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series formerly was
known as Delaware Balanced Series.
DGPF CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, which may include privately
placed convertible securities.
DGPF HIGH YIELD SERIES -- seeks total return and, as a secondary objective, high
current income. The Series invests in rated and unrated corporate bonds
(including high-yield bonds commonly known as "junk bonds"), foreign bonds, U.S.
government securities and commercial paper. Please read the Series' prospectus
disclosure regarding the risk factors before investing in this Series. This
Series formerly was known as Delchester Series.
DGPF CAPITAL RESERVES SERIES -- seeks a high, stable level of current income
while minimizing fluctuations in principal by investing in a diversified
portfolio of short- and intermediate-term securities.
DGPF STRATEGIC INCOME SERIES -- seeks high current income and total return. It
seeks to achieve its objective by using a multi-sector investment approach,
investing primarily in three sectors of the fixed-income securities market: high
yield, higher-risk securities; investment grade fixed-income securities; and
foreign government and other foreign fixed- income securities. The Series also
may invest in U.S. equity securities.
DGPF CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
DGPF GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
AIM VARIABLE INSURANCE FUNDS:
AIM V.I. GROWTH FUND -- seeks to provide growth of capital primarily by
investing in seasoned and better capitalized companies considered to have strong
earnings momentum.
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<PAGE>
AIM V.I. HIGH YIELD FUND -- seeks to achieve a high level of current income. The
Fund seeks to meet this objective by investing at least 65% of the value of its
assets in publicly traded, lower-quality debt securities, i.e., "junk bonds".
AIM V.I. INTERNATIONAL EQUITY FUND -- seeks to provide long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities or
relative to the equity market generally. Income is a secondary objective.
THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size that demonstrate promising growth potential.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO -- seeks long-term capital appreciation.
The Portfolio focuses on midsize companies with promising growth potential.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO -- seeks long-term capital
appreciation. The Portfolio focuses on small, fast-growing companies that offer
innovative products, services or technologies to a rapidly expanding
marketplace.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
ALLIANCE GROWTH PORTFOLIO (CLASS B) -- seeks to provide long-term growth of
capital. Current income is only an incidental consideration.
ALLIANCE GROWTH AND INCOME PORTFOLIO (CLASS B) -- seeks reasonable current
income and reasonable appreciation through investments primarily in
dividend-paying common stocks of good quality.
ALLIANCE PREMIER GROWTH PORTFOLIO (CLASS B) -- seeks growth of capital by
pursuing aggressive investment policies.
ALLIANCE TECHNOLOGY PORTFOLIO (CLASS B) -- seeks growth of capital and invests
for capital appreciation. Current income is only an incidental consideration.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST:
FRANKLIN SMALL CAP FUND (CLASS 2) -- seeks long-term capital growth. The fund
invests primarily in equity securities of small cap U.S. companies.
MUTUAL SHARES SECURITIES FUND (CLASS 2) -- seeks capital appreciation. Its
secondary goal is income. The fund invests primarily in equity securities of
companies the manager believes are available at market prices less than their
value based on certain recognized or objective criteria (intrinsic value).
TEMPLETON GROWTH SECURITIES FUND (CLASS 2) -- seeks long-term capital growth.
The fund invests primarily in the equity securities of companies located
anywhere in the world, including the U.S. and emerging markets.
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TEMPLETON INTERNATIONAL SECURITIES FUND (CLASS 2) -- seeks long-term capital
growth. The fund invests in the equity securities of companies located outside
the U.S., including emerging markets.
PIONEER VARIABLE CONTRACTS TRUST:
PIONEER EMERGING MARKETS VCT PORTFOLIO (CLASS II) -- seeks long-term growth of
capital. The Portfolio invests primarily in securities of issuers in countries
with emerging economies or securities markets and related depositary receipts.
PIONEER MID-CAP VALUE VCT PORTFOLIO (CLASS II) -- seeks capital appreciation
through a diversified portfolio of securities consisting primarily of common
stocks.
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.
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. All performance tables referenced in this
section may be found in the SAI.
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 DGPF 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 DGPF 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
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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 (M-GAP) 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 they do not reflect the Contract fee and assume that the Contract is not
surrendered at the end of the periods shown.
The performance shown in Tables 2A and 2B in the SAI is calculated in exactly
the same manner as that 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. 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.
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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 investment
options 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 applicant authorizes the Company to retain it pending
completion of all issue 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, or
prior to payment of the death benefit, 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.
- 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 DGPF Cash Reserve Series.
Generally, unless otherwise requested, all payments will be allocated among the
investment options in the same proportion that the initial net payment is
allocated or, if subsequently changed, according to the most recent allocation
instructions. As of the date of this Prospectus, payments may be allocated to a
maximum of seventeen variable Sub-Accounts during the life of the Contract, in
addition to the DGPF Cash Reserve Series. There are no restrictions on the
number of times the Fixed Account and the Guarantee Period Accounts may be used
over the life of the Contract.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If the Owner elects telephone requests, 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. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape recorded.
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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, an Owner may transfer amounts among
investment options subject to the seventeen variable Sub-Account restriction
discussed in "A. Payments" above. The Company will make transfers pursuant to
written or telephone requests. However, as discussed in "A. Payments," a
properly completed authorization form must be on file before telephone requests
will be honored. Transfer values will be based on the Accumulated Value next
computed after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the DGPF Cash Reserve Series. Transfers from a
Guarantee Period Account prior to the expiration of the Guarantee Period will be
subject to a Market Value Adjustment.
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. The
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first automatic transfer or rebalancing under an Automatic Transfer (Dollar Cost
Averaging) program, or Automatic Account Rebalancing program counts as one
transfer for purposes of the 12 transfers guaranteed to be free of a transfer
charge in each Contract year. Each subsequent automatic transfer or rebalancing
under that request is without charge and does not reduce the remaining number of
transfers which may be made free of charge in that Contract year.
The 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 either the Fixed Account, the Sub-Account
investing in the DGPF Capital Reserves Series, the Sub-Account investing in the
DGPF Strategic Income Series or the Sub-Account investing in the DGPF Cash
Reserve Series (the "source accounts") to one or more of the available
Sub-Accounts. 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 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.
To the extent permitted by 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 "Enhanced Automatic Transfer (Dollar Cost
Averaging) Program" in the SAI.
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 Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. Currently, Dollar Cost Averaging and Automatic
Account Rebalancing may not be in effect simultaneously. Either option may be
elected 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,
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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.
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 investment options 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 investment option, a
percentage of the withdrawal may be allocated to each option. 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" under DESCRIPTION OF THE CONTRACT.
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.
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SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals ("systematic withdrawals") from amounts in the Sub-Accounts and/or
the Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual
basis. Systematic withdrawals from Guarantee Period Accounts are not available.
The minimum amount of each automatic withdrawal is $100, and will be subject to
any applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals 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, "C. 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.
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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 as of the Valuation Date that the
Company receives proof of death, increased by any positive Market Value
Adjustment; (b) gross payments compounded daily at an effective annual yield of
5% starting on the date each payment is applied and continuing throughout the
payment's entire accumulation phase, decreased proportionately to reflect
withdrawals (except in Hawaii and New York where (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.
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.
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 as of the Valuation Date that the Company
receives proof of death (increased by any positive Market Value Adjustment) or
(b) gross payments compounded daily at an effective annual yield 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 an effective annual yield 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 C -- 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 distributions over the life of the beneficiary 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 DGPF Cash Reserve Series. The excess, if any, of the death benefit over
the Accumulated Value also will be added to the Sub-Account investing in the
DGPF 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 will be based on the
unit values next computed after due proof of the death has been received.
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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.
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 rather than receiving payment of the death benefit. The
spouse will then become the Owner and Annuitant subject to the following:
(1) any value in the Guarantee Period Accounts will be transferred to the
Sub-Account investing in the DGPF Cash Reserve Series; (2) the excess, if any,
of the death benefit over the Contract's Accumulated Value also will be added to
the Sub-Account investing in the DGPF Cash Reserve Series. The resulting value
will never be subject to a surrender charge when withdrawn. The new Owner may
also make additional payments; however, a surrender charge will apply to these
amounts if they are withdrawn before they have been invested in the Contract for
at least seven years. 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 when the new Owner dies.
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 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 latest possible 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. Certain annuity
options may be commutable or noncommutable. A commutable option provides the
Owner with the right to request a lump sum payment of any remaining balance
after annuity payments have commenced. Under a noncommutable option, the Owner
may not request a lump sum payment. Annuity benefit payments are determined
according to the annuity tables in the Contract, by the annuity option selected,
and by the investment performance of the account(s) selected. See "Annuity
Benefit Payments" in the SAI.
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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
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 M-GAP Rider, annuity benefit payments must be made
under a fixed annuity payout option involving a life contingency and must occur
at the Company's guaranteed fixed annuity option 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 DGPF Growth &
Income Series, the DGPF Delaware Balanced Series, and the DGPF 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 Annuitant with
the guarantee that if he or she 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 Annuitant's life. It would
be possible under this option for the Annuitant to receive only one annuity
benefit payment if he or she dies prior to the due date of the second annuity
benefit payment, two annuity benefit payments if he or she dies before the due
date of the third annuity benefit payment, and so on. Payments will continue,
however, during the Annuitant's lifetime, 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 Annuitant 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
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(1) (2) is the number of payments paid prior to the death of the
Annuitant.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY -- This variable annuity is payable
jointly to the Annuitant and another individual 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 under 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 the Annuitant and another individual 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 under the Contract or the beneficiary. There is no minimum number
of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY -- This variable annuity provides periodic
payments for a stipulated number of years ranging from one to 30. If the
Annuitant dies before the end of the period, remaining payments will continue to
be paid. A fixed period certain annuity may be either commutable or
noncommutable. A variable period certain annuity is automatically commutable.
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 fixed 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, any noncommutable fixed period
certain option of less than ten years (less than six years under New York
Contracts) and all variable period certain options, 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.
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- 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 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 M-GAP 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 (M-GAP) Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER
An optional M-GAP Rider is currently available in most jurisdictions for a
separate monthly charge. The Minimum Guaranteed Annuity Payout Rider provides a
guaranteed minimum amount of fixed lifetime income during the annuity payout
phase, after a ten-year or fifteen-year waiting period, 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
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at the Company's guaranteed fixed annuity option 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, on the Contract anniversary that the M-GAP Benefit Base is
being determined; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at an effective annual yield of 5% plus gross payments made
thereafter compounded daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any prior Contract anniversary since
the Rider effective date as determined after being increased for
subsequent payments and any positive Market Value Adjustment, if
applicable, and proportionately reduced 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 ON ELECTING THE M-GAP RIDER.
- The Owner may elect the M-GAP 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/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/her 73rd birthday.
EXERCISING THE M-GAP RIDER.
- The Owner may only exercise the M-GAP 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 Company's guaranteed fixed annuity
option rates listed under the Annuity Option Tables in the Contract.
TERMINATING THE M-GAP RIDER.
- The Owner may not terminate the M-GAP Rider prior to the seventh Contract
anniversary after the effective date of the Rider, unless such termination
(1) occurs on or within thirty days after any contract anniversary and
(2) in conjunction with the repurchase of an M-GAP Rider with a waiting
period of equal or greater length at its then current price, if available.
- The Owner may terminate the Rider at any time after the seventh Contract
anniversary following the effective date of the Rider.
- 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.
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- 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" (see DESCRIPTION OF THE CONTRACT).
From time to time the Company may illustrate minimum guaranteed income amounts
under the M-GAP 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 M-GAP
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 Owner age 60 (at issue) and exercise of an M-GAP 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% rate of return and are the guaranteed minimums that would be received under
the M-GAP 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>
MINIMUM
CONTRACT MINIMUM GUARANTEED
ANNIVERSARY GUARANTEED ANNUAL
AT EXERCISE BENEFIT 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 M-GAP Rider does not create Accumulated Value or guarantee performance of
any investment option. Because this Rider is based on guaranteed actuarial
factors, the level of lifetime income that it guarantees may often be less than
the level that would be provided by applying the then current annuity factors.
Therefore, the Rider should be regarded as providing a guarantee of a minimum
amount of annuity income. As described above, withdrawals will reduce the
benefit base. The Company reserves the right to terminate the availability of
the M-GAP Rider at any time. Such a termination would not effect M-GAP Riders
issued prior to the termination date, but as noted above, Owners would not be
able to repurchase a new Rider under the repurchase feature (see above,
"Terminating the M-GAP Rider.")
NOTE: Adding the M-GAP 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 M-GAP 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
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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 investment options
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each Sub-
Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received at the
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent split of Accumulation Unit
value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account, and will reflect
the investment performance, expenses and charges of its Underlying Funds. The
value of an Accumulation Unit was set at $1.00 on the first Valuation Date for
each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. 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.
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CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and the SAIs of the
Underlying Funds.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The 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 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. This charge may not be increased. 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. Management fee waivers
and/or reimbursements may be in effect for certain or all of the Underlying
Funds. For specific information regarding the existence and effect of any
waivers/reimbursements see "Annual Underlying Fund Expenses" under SUMMARY OF
FEES AND EXPENSES. The prospectuses and SAIs of
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the Underlying Funds contain additional information concerning expenses of the
Underlying Funds and should be read in conjunction with the Prospectus.
B. CONTRACT FEE
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 currently waived for a Contract issued to and
maintained by the trustee of a 401(k) plan. The Company reserves the right to
impose a Contract fee up to $30 on Contracts issued to 401(k) plans but only
with respect to Contracts issued after the date the waiver is no longer
available. 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 "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited" in "E. Surrender Charge" under CHARGES AND
DEDUCTIONS.
C. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE
The Company currently offers an optional M-GAP Rider that may be elected by the
Owner in most jurisdictions. A separate monthly charge is made for the Rider.
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 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 within which the Rider has been in effect and, if applicable, on the
date the Rider is terminated, multiplied by 1/12th of the following annual
percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
ten-year waiting period.................................... 0.25%
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
fifteen-year waiting period................................ 0.15%
</TABLE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout (M-GAP) 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
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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.
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>
CHARGE AS PERCENTAGE OF
YEARS FROM NEW PAYMENTS
DATE OF PAYMENT WITHDRAWN
- --------------- -----------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
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<PAGE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total 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 care facility after the issue date 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 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 of
the Underlying Funds; and the spouses of and immediate family members residing
in the same household with such eligible persons. "Immediate family members"
means children, siblings, parents and grandparents. 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.
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<PAGE>
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 (last-in/first-out) basis. This means that the
last payments credited to the Contract will be withdrawn first. 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.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Surrender Value, net of any applicable tax
withholding. 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 any
commutable period certain option or a non-commutable fixed 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.
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<PAGE>
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 fixed
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. For more information, see "D. Transfer
Privilege" under DESCRIPTION OF THE CONTRACT.
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<PAGE>
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%.
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,
the Company currently gives 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 with notice at the Company's
discretion. Under Contracts issued in New York, the Company guarantees that it
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
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<PAGE>
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" under DESCRIPTION OF THE CONTRACT. 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)]to the power of n/365 - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation
Date to the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B -- 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 an
M-GAP 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" under DESCRIPTION OF THE CONTRACT.
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" under DESCRIPTION OF THE CONTRACT. 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%.
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<PAGE>
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"
under CHARGES AND DEDUCTIONS after application of the Market Value Adjustment.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
owner, annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Contract, the Variable Account or the
Sub-Accounts may have upon its tax. The Variable Account presently is not
subject to tax, but the Company reserves the right to assess a charge for taxes
should the Variable Account at any time become subject to tax. Any charge for
taxes will be assessed on a fair and equitable basis in order to preserve equity
among classes of Owners and with respect to each separate account as though that
separate account 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.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department provide that the investments of a segregated asset account
underlying a variable annuity contract are adequately diversified if no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three investments,
and no more than 90% by any four investments. Under this section of the Code, if
the investments are not adequately diversified, the Contract will not be treated
as an annuity contract and therefore, the income on the Contract, for any
taxable year of the Owner, would be treated as ordinary income received or
accrued by the Owner. It is anticipated that the Underlying Funds will comply
with the current diversification requirements. In the event that future IRS
regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
INVESTOR CONTROL. In order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity contract owners may now be considered the owners of these
assets for federal income tax purposes. Specifically, the IRS has stated in
published rulings that a variable annuity contract owner may be considered the
owner of segregated account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account. This announcement also states
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their
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investments to particular sub-accounts without being treated as owners of the
underlying assets." As of the date of this Prospectus, no such guidance has been
issued. The Company, therefore, additionally reserves the right to modify the
Contract as necessary in order to attempt to prevent a contract owner from being
considered the owner of a pro rata share of the assets of the segregated asset
account underlying the variable annuity contracts.
B. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 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 "E. Provisions Applicable to Qualified Employer Plans"
below.
C. 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. 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
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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.
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.
D. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
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.
51
<PAGE>
E. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
Federal income taxation of assets held inside a qualified retirement plan and of
earnings on those assets is deferred until distribution of plan benefits begins.
As such, it is not necessary to purchase a variable annuity contract solely to
obtain its tax deferral feature. However, other features offered under this
Contract and described in this Prospectus -- such as the minimum guaranteed
death benefit, the guaranteed fixed annuity rates and the wide variety of
investment options -- may make this Contract a suitable investment for your
qualified retirement plan.
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of a non-qualified
Contract. Individuals purchasing a qualified Contract should review carefully
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408 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.
52
<PAGE>
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 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
53
<PAGE>
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 underlying investment companies
do not foresee any such disadvantages to either variable life insurance owners
or variable annuity owners, they 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.
The Company reserves the right, subject to compliance with applicable law, to:
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets
of the same class,
(2) to operate the Variable Account or any Sub-Account as a management
investment company under the 1940 Act or in any other form permitted by
law,
(3) to deregister the Variable Account under the 1940 Act in accordance with
the requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for
the Underlying Fund shares held by a Sub-Account, in the event that
Underlying Fund shares are unavailable for investment, or if the Company
determines that further investment in such Underlying Fund shares is
inappropriate in view of the purpose of the Sub-Account,
(5) to change the methodology for determining the net investment factor,
(6) to change the names of the Variable Account or of the Sub-Accounts, and
(7) to combine with other Sub-Accounts or other Separate Accounts of the
Company.
If any of these substitutions or changes are made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
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. Any such changes will be applied uniformly
to all Contracts that are affected.
54
<PAGE>
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 7.0% of purchase payments, to
broker-dealers which sell the Contract. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of Contract value. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated 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.
55
<PAGE>
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.
56
<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.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a payment of $50,000 is made on the issue date and no
additional payments are made. Assume there are no withdrawals and that the
Withdrawal Without Surrender Charge Amount is equal to the greater of 15% of the
Accumulated Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender based
on hypothetical Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
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)] to the power of 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.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.0093) to the power of 7 - 1
= .06694
The market value adjustment = the market value factor multiplied by the withdrawal
= .06694 X $62,985.60
= $4,216.26
</TABLE>
*Uncapped is a straight application of the Market Value Adjustment formula when
the value produced is less than the cap.
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 7 - 1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the negative of the excess interest earned
over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.06)] to the power of 2555/365 - 1
= (1.01887) to the power of 7 - 1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
B-3
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- -------- ------------ ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (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
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- --------------------- ------------ ----------- ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $0.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 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>
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%
C-1
<PAGE>
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
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH BENEFIT
- -------- ------------ ------------ -------------
<S> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-2
<PAGE>
APPENDIX D
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF GROWTH & INCOME SERIES
Unit Value:
Beginning of Period.......... 2.672 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period................ 2.556 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at
End of Period (in
thousands).................... 136,760 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DGPF DEVON SERIES
Unit Value:
Beginning of Period.......... 1.543 1.261 1.000 N/A N/A N/A N/A N/A
End of Period................ 1.367 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 48,519 42,690 11,585 N/A N/A N/A N/A N/A
DGPF GROWTH OPPORTUNITIES
SERIES
Unit Value:
Beginning of Period.......... 2.145 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period................ 3.447 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at
End of Period (in
thousands).................... 60,264 58,454 57,025 44,667 35,204 29,100 20,802 4,534
DGPF U.S. GROWTH SERIES
Unit Value:
Beginning of Period.......... 1.000 N/A N/A N/A N/A N/A N/A N/A
End of Period................ 1.057 N/A N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 5,522 N/A N/A N/A N/A N/A N/A N/A
DGPF SELECT GROWTH SERIES
Unit Value:
Beginning of Period.......... 1.000 N/A N/A N/A N/A N/A N/A N/A
End of Period................ 1.416 N/A N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 36,671 N/A N/A N/A N/A N/A N/A N/A
DGPF SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period.......... 1.448 1.272 1.000 N/A N/A N/A N/A N/A
End of Period................ 1.613 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 17,918 17,819 4,515 N/A N/A N/A N/A N/A
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF REIT SERIES
Unit Value:
Beginning of Period.......... 0.901 1.000 N/A N/A N/A N/A N/A N/A
End of Period................ 0.865 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 2,775 1,235 N/A N/A N/A N/A N/A N/A
DGPF SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.......... 1.806 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period................ 1.694 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 47,718 55,136 43,269 15,725 9,467 6,040 6 N/A
DGPF TREND SERIES
Unit Value:
Beginning of Period.......... 2.036 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period................ 3.422 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 42,570 36,571 33,256 21,711 13,410 6,197 50 N/A
DGPF INTERNATIONAL EQUITY
SERIES
Unit Value:
Beginning of Period.......... 1.762 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period................ 2.011 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at
End of Period (in
thousands).................... 49,478 51,715 48,813 30,888 21,612 18,761 6,139 182
DGPF EMERGING MARKETS SERIES
Unit Value:
Beginning of Period.......... 0.586 0.880 1.000 N/A N/A N/A N/A N/A
End of Period................ 0.856 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 10,078 6,662 4,545 N/A N/A N/A N/A N/A
DGPF BALANCED SERIES
Unit Value:
Beginning of Period.......... 2.357 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period................ 2.142 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at
End of Period (in
thousands).................... 76,644 81,359 58,759 40,855 37,203 33,332 22,046 3,145
DGPF CONVERTIBLE SECURITIES
SERIES
Unit Value:
Beginning of Period.......... 1.127 1.156 1.000 N/A N/A N/A N/A N/A
End of Period................ 1.189 1.127 1.156 0 N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 5,601 4,793 1,291 N/A N/A N/A N/A N/A
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DGPF HIGH YIELD SERIES
Unit Value:
Beginning of Period.......... 1.599 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period................ 1.536 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at
End of Period (in
thousands).................... 59,311 70,679 56,733 44,760 37,818 31,735 22,281 4,571
DGPF CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.......... 1.386 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period................ 1.371 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at
End of Period (in
thousands).................... 25,020 28,066 20,234 20,226 19,818 20,476 16,752 3,828
DGPF STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period.......... 1.065 1.052 1.000 N/A N/A N/A N/A N/A
End of Period................ 1.015 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 17,658 17,524 5,381 N/A N/A N/A N/A N/A
DGPF CASH RESERVE SERIES
Unit Value:
Beginning of Period.......... 1.207 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period................ 1.248 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at
End of Period (in
thousands).................... 42,241 32,501 24,014 21,519 11,568 13,998 5,483 1,387
DGPF GLOBAL BOND SERIES
Unit Value:
Beginning of Period.......... 1.172 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period................ 1.114 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at
End of Period (in
thousands).................... 5,052 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, 1999.
D-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DGPF GROWTH & INCOME SERIES
Unit Value:
Beginning of Period.......................... 2.282 2.078 1.608 1.351 1.006 1.000
End of Period................................ 2.183 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period
(in thousands)................................ 3,250 3,440 1,311 1,044 670 455
DGPF DEVON SERIES
Unit Value:
Beginning of Period.......................... 1.543 1.261 1.000 N/A N/A N/A
End of Period................................ 1.367 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 1,871 1,558 106 N/A N/A N/A
DGPF GROWTH OPPORTUNITIES SERIES
Unit Value:
Beginning of Period.......................... 1.929 1.646 1.453 1.287 1.008 1.000
End of Period................................ 3.099 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period
(in thousands)................................ 1,120 637 355 493 300 149
DGPF U.S. GROWTH SERIES
Unit Value:
Beginning of Period.......................... 1.000 N/A N/A N/A N/A N/A
End of Period................................ 1.057 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 241 N/A N/A N/A N/A N/A
DGPF SELECT GROWTH SERIES
Unit Value:
Beginning of Period.......................... 1.000 N/A N/A N/A N/A N/A
End of Period................................ 1.416 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 1,118 N/A N/A N/A N/A N/A
DGPF SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period.......................... 1.448 1.272 1.000 N/A N/A N/A
End of Period................................ 1.612 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 369 394 101 N/A N/A N/A
DGPF REIT SERIES
Unit Value:
Beginning of Period.......................... 1.000 1.000 N/A N/A N/A N/A
End of Period................................ 0.955 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 59 0 N/A N/A N/A N/A
</TABLE>
D-4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DGPF SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.......................... 1.820 1.938 1.478 1.223 1.002 1.000
End of Period................................ 1.707 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period
(in thousands)................................ 823 731 235 204 146 82
DGPF TREND SERIES
Unit Value:
Beginning of Period.......................... 2.104 1.839 1.536 1.404 1.022 1.000
End of Period................................ 3.537 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period
(in thousands)................................ 1,269 1,099 1,579 285 1,486 790
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period.......................... 1.527 1.403 1.335 1.128 1.004 1.000
End of Period................................ 1.743 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period
(in thousands)................................ 888 652 554 2,244 358 193
DGPF EMERGING MARKETS SERIES
Unit Value:
Beginning of Period.......................... 0.502 0.754 1.000 N/A N/A N/A
End of Period................................ 0.734 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 756 184 1 N/A N/A N/A
DGPF BALANCED SERIES
Unit Value:
Beginning of Period.......................... 2.063 1.764 1.415 1.238 0.991 1.000
End of Period................................ 1.875 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period
(in thousands)................................ 1,290 1,070 420 405 304 173
DGPF CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period.......................... 1.127 1.156 1.000 N/A N/A N/A
End of Period................................ 1.188 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 432 375 84 N/A N/A N/A
DGPF HIGH YIELD SERIES
Unit Value:
Beginning of Period.......................... 1.346 1.391 1.240 1.116 0.980 1.000
End of Period................................ 1.293 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period
(in thousands)................................ 3,190 3,962 1,388 1,003 670 287
</TABLE>
D-5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DGPF CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.......................... 1.278 1.214 1.144 1.115 0.991 1.000
End of Period................................ 1.264 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period
(in thousands)................................ 937 1,069 287 208 195 181
DGPF STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period.......................... 1.065 1.052 1.000 N/A N/A N/A
End of Period................................ 1.016 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 1,882 1,799 276 N/A N/A N/A
DGPF CASH RESERVE SERIES
Unit Value:
Beginning of Period.......................... 1.179 1.138 1.096 1.059 1.018 1.000
End of Period................................ 1.219 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period
(in thousands)................................ 2,558 1,603 401 125 126 302
DGPF GLOBAL BOND SERIES
Unit Value:
Beginning of Period.......................... 1.171 1.102 1.107 1.000 1.000 N/A
End of Period................................ 1.113 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period
(in thousands)................................ 63 31 7 0 N/A N/A
</TABLE>
No information is shown above for the Sub-Accounts that commenced operations
after December 31, 1999.
D-6
<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 THE UNDERLYING FUNDS
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE DELAWARE MEDALLION PROSPECTUS OF SEPARATE ACCOUNT VA-K
DATED MAY 1, 2000 ("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, 2000
FAFLIC Delaware Medallion
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 6
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM 7
PERFORMANCE INFORMATION 8
FINANCIAL STATEMENTS F-1
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") authorized
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, 1999, the Company and its subsidiaries
had over $43 billion in combined assets and over $25 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, 35 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 ("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American
Fund ("Alger"), Alliance Variable Products Series Fund, Inc. ("Alliance"),
Franklin Templeton Variable Insurance Products Trust ("FT VIP"), and Pioneer
Variable Contracts Trust ("Pioneer VCT").
The Fund is an open-end, diversified management investment company. Eighteen
different investment series of DGPF are available under the Contract: the DGPF
Growth & Income Series, DGPF High Yield Series (formerly Delchester Series),
DGPF Capital Reserves Series, DGPF Cash Reserve Series, DGPF Growth
Opportunities Series (formerly DelCap Series), DGPF U.S. Growth Series, DGPF
Select Growth Series (formerly Aggressive Growth Series), DGPF Balanced Series
(formerly Delaware Balanced Series), DGPF Small Cap Value Series, DGPF Trend
Series, DGPF Global Bond Series, DGPF International Equity Series,
2
<PAGE>
DGPF Strategic Income Series, DGPF Devon Series, DGPF Emerging Markets Series,
DGPF Convertible Securities Series, DGPF REIT Series, and DGPF Social Awareness
Series. Four funds of AVIF are available under the Contract: the AIM V.I. Growth
Fund, AIM V.I. International Equity Fund, AIM V.I. Value Fund and AIM V.I. High
Yield Fund. Three portfolios of Alger are available under the Contract: the
Alger American MidCap Growth Portfolio, Alger American Small Capitalization
Portfolio and Alger American Leveraged AllCap Portfolio. Four Alliance
portfolios are available under the Contract: the Alliance Premier Growth
Portfolio, Alliance Growth and Income Portfolio, Alliance Growth Portfolio and
Alliance Technology Portfolio. Four funds of FT VIP are available under the
Contract: the Franklin Small Cap Fund, Mutual Shares Securities Fund, Templeton
Growth Securities Fund and Templeton International Securities Fund. Two Pioneer
VCT portfolios are available under the Contract: the Pioneer Emerging Markets
VCT Portfolio and Pioneer Mid-Cap Value VCT Portfolio (together, the "Underlying
Funds"). Each Underlying Fund has its own investment objectives and certain
attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
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 Fund shares owned by the Sub-Account are held on an
open account basis. A Sub-Account's ownership of Underlying Fund shares is
reflected on the records of the Underlying Fund and is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account VA-K of the Company as of December
31, 1999 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
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
3
<PAGE>
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.
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 7.0% 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.
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.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all Delaware contracts funded by Separate Account VA-K (including contracts not
described in the Prospectus) for the years 1997, 1998 and 1999 were $189,715,
$1,339,187 and $546,848.
No commissions were retained by Allmerica Investments for sales of all Delaware
contracts funded by Separate Account VA-K (including contracts not described in
the Prospectus) for the years 1997, 1998 and 1999.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period............................$ 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
<PAGE>
(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.
The method for determining the amount of annuity benefit payments is described
in detail under "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
Accumulated Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or surrender
charge, the first monthly payment would be $44.80 ($44,800 divided by $1,000)
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed interest 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 fixed period certain annuity options and
commutable variable period certain options. A commutable option gives the
Annuitant the right to exchange any remaining payments for a lump sum payment
based on the commuted value. The Commuted Value is the present value of
remaining payments calculated at 3.5% interest. The determination of the
Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the Commuted Value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
5
<PAGE>
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 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.
6
<PAGE>
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.
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 Fund 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 Fund. 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.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM
To the extent permitted by law, the Company reserves the right to offer an
Enhanced Automatic Transfer (Dollar Cost Averaging) Program from time to time.
If an Owner elects automatic transfers while the
7
<PAGE>
enhanced program is in effect, the Company will credit an enhanced interest rate
to eligible payments made to the Enhanced Automatic Transfer Program. Eligible
payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source
account,
- must be automatically transferred out of the Fixed Account to one or
more Sub-Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed
Account.
Any new eligible payments made to an existing Enhanced Automatic Transfer
program will start a new Enhanced Automatic Transfer program. In this case, the
following rules apply:
- The money remaining in the Fixed Account from the original program
will be combined with the new eligible payment to determine the new
monthly transfer amount.
- The new monthly transfer amount will be transferred out of the Fixed
Account in accordance with the allocation instructions specified for
the new payment. If no allocation instructions are specified with the
new eligible payment, the allocation instructions for the original
eligible payment will be used. The new monthly transfer amount will
be transferred out of the Fixed Account on a LIFO (last-in, first-out
basis) to the selected Sub-Accounts on the date designated for the
new eligible payment.
- A new enhanced interest rate may be applied to the new eligible
payment, while the money remaining in the Fixed Account from the
original program will continue to receive the enhanced rate in effect
at the time the older payment was received.
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 Fund and/or 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 being offered will be calculated as if the Contract had been offered
during that period of time, with all charges assumed to be those applicable to
the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a 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.
8
<PAGE>
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:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
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:
CONTRACT FORM A3019-GRC-94 (DELAWARE MEDALLION I)
---------------------------------------------------------
(NO GUARANTEE PERIOD ACCOUNT OPTIONS)
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
-----------------------------------------------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
Thereafter 0%
-----------------------------------------------------------------
</TABLE>
9
<PAGE>
CONTRACT FORM A3025-GRC-96 (DELAWARE MEDALLION III)
---------------------------------------------------------
(WITH GUARANTEE PERIOD ACCOUNT OPTIONS)
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL 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:
(n)
P(1 + T) = 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.
10
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DELAWARE MEDALLION III
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT FOR YEAR ENDED INCEPTION OF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- --------------- -------------- -------- ------- -----------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series......................... 5/1/94 -10.61% 16.05% 14.16%
DGPF Devon Series................................... 5/1/97 -16.83% N/A 10.72%
DGPF Growth Opportunities Series.................... 4/20/94 53.42% 24.69% 21.54%
DGPF U.S. Growth Series............................. 11/16/99 N/A N/A -0.57%
DGPF Select Growth Series........................... 5/3/99 N/A N/A 34.56%
DGPF Social Awareness Series........................ 5/1/97 4.63% N/A 18.13%
DGPF REIT Series.................................... 8/20/99 N/A N/A -10.16%
DGPF Small Cap Value Series......................... 5/11/94 -12.03% 10.67% 9.51%
DGPF Trend Series................................... 5/11/94 60.80% 27.70% 24.70%
DGPF International Equity Series.................... 4/20/94 7.12% 10.86% 9.62%
DGPF Emerging Markets Series........................ 5/1/97 39.19% N/A -12.42%
DGPF Balanced Series................................ 4/20/94 -14.81% 13.01% 11.21%
DGPF Convertible Securities Series.................. 5/1/97 -0.85% N/A 4.93%
DGPF High Yield Series.............................. 5/23/94 -10.04% 4.90% 4.04%
DGPF Capital Reserves Series........................ 6/23/94 -7.06% 4.42% 3.96%
DGPF Strategic Income Series........................ 5/1/97 -10.48% N/A -1.21%
DGPF Cash Reserve Series............................ 4/ 7/94 -2.84% 3.10% 3.17%
DGPF Global Bond Series............................. 5/1/96 -10.61% N/A 2.00%
AIM V.I. Growth Fund................................ N/A N/A N/A N/A
AIM V.I. High Yield Fund............................ N/A N/A N/A N/A
AIM V.I. International Equity Fund.................. N/A N/A N/A N/A
AIM V.I. Value Fund................................. N/A N/A N/A N/A
Alger American Leveraged AllCap Portfolio........... N/A N/A N/A N/A
Alger American MidCap Growth Portfolio.............. N/A N/A N/A N/A
Alger American Small Capitalization Portfolio....... N/A N/A N/A N/A
Alliance Growth Portfolio........................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio................ N/A N/A N/A N/A
Alliance Premier Growth Portfolio................... N/A N/A N/A N/A
Alliance Technology Portfolio....................... N/A N/A N/A N/A
Mutual Shares Securities Fund....................... N/A N/A N/A N/A
Franklin Small Cap Fund............................. N/A N/A N/A N/A
Templeton Growth Securities Fund.................... N/A N/A N/A N/A
Templeton International Securities Fund............. N/A N/A N/A N/A
Pioneer Emerging Markets VCT Portfolio.............. N/A N/A N/A N/A
Pioneer Mid-Cap Value VCT Portfolio................. N/A N/A N/A N/A
</TABLE>
11
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT FOR YEAR ENDED INCEPTION OF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- --------------- -------------- -------- ------- -----------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series......................... 5/1/94 -4.34% 16.75% 14.76%
DGPF Devon Series................................... 5/1/97 -11.39% N/A 12.42%
DGPF Growth Opportunities Series.................... 4/20/94 60.67% 25.20% 21.96%
DGPF U.S. Growth Series............................. 11/16/99 N/A N/A 5.72%
DGPF Select Growth Series........................... 5/3/99 N/A N/A 41.57%
DGPF Social Awareness Series........................ 5/1/97 11.33% N/A 19.61%
DGPF REIT Series.................................... 8/20/99 N/A N/A -4.48%
DGPF Small Cap Value Series......................... 5/11/94 -6.19% 11.25% 9.94%
DGPF Trend Series................................... 5/11/94 68.07% 28.18% 25.10%
DGPF International Equity Series.................... 4/20/94 14.14% 11.66% 10.24%
DGPF Emerging Markets Series........................ 5/1/97 46.20% N/A -10.96%
DGPF Balanced Series................................ 4/20/94 -9.14% 13.59% 11.66%
DGPF Convertible Securities Series.................. 5/1/97 5.47% N/A 6.68%
DGPF High Yield Series.............................. 5/23/94 -3.94% 5.71% 4.69%
DGPF Capital Reserves Series........................ 6/23/94 -1.09% 4.98% 4.33%
DGPF Strategic Income Series........................ 5/1/97 -4.64% N/A 0.58%
DGPF Cash Reserve Series............................ 4/ 7/94 3.37% 3.66% 3.51%
DGPF Global Bond Series............................. 5/1/96 -4.95% N/A 2.97%
AIM V.I. Growth Fund................................ N/A N/A N/A N/A
AIM V.I. High Yield Fund............................ N/A N/A N/A N/A
AIM V.I. International Equity Fund.................. N/A N/A N/A N/A
AIM V.I. Value Fund................................. N/A N/A N/A N/A
Alger American Leveraged AllCap Portfolio........... N/A N/A N/A N/A
Alger American MidCap Growth Portfolio.............. N/A N/A N/A N/A
Alger American Small Capitalization Portfolio....... N/A N/A N/A N/A
Alliance Growth Portfolio........................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio................ N/A N/A N/A N/A
Alliance Premier Growth Portfolio................... N/A N/A N/A N/A
Alliance Technology Portfolio....................... N/A N/A N/A N/A
Mutual Shares Securities Fund....................... N/A N/A N/A N/A
Franklin Small Cap Fund............................. N/A N/A N/A N/A
Templeton Growth Securities Fund.................... N/A N/A N/A N/A
Templeton International Securities Fund............. N/A N/A N/A N/A
Pioneer Emerging Markets VCT Portfolio.............. N/A N/A N/A N/A
Pioneer Mid-Cap Value VCT Portfolio................. N/A N/A N/A N/A
</TABLE>
12
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS (OR
UNDERLYING TOTAL RETURN SINCE
SUB-ACCOUNT INVESTING IN FUND FOR YEAR ENDED INCEPTION IF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS LESS)
- --------------- -------------- -------- ------- -----
<S> <C> <C> <C> <C>
DGPF Growth & Income Series......................... 7/28/88 -10.61% 16.05% 9.97%
DGPF Devon Series................................... 5/1/97 -16.83% N/A 10.72%
DGPF Growth Opportunities Series.................... 7/12/91 53.42% 24.69% 15.84%
DGPF U.S. Growth Series............................. 11/16/99 N/A N/A -0.57%
DGPF Select Growth Series........................... 5/3/99 N/A N/A 34.56%
DGPF Social Awareness Series........................ 5/1/97 4.63% N/A 18.13%
DGPF REIT Series.................................... 5/1/98 -9.68% N/A -11.11%
DGPF Small Cap Value Series......................... 12/27/93 -12.03% 10.67% 9.21%
DGPF Trend Series................................... 12/27/93 60.80% 27.70% 22.61%
DGPF International Equity Series.................... 10/29/92 7.12% 10.86% 9.96%
DGPF Emerging Markets Series........................ 5/1/97 39.19% N/A -12.42%
DGPF Balanced Series................................ 7/28/88 -14.81% 13.01% 10.20%
DGPF Convertible Securities Series.................. 5/1/97 -0.85% N/A 4.93%
DGPF High Yield Series.............................. 7/28/88 -10.04% 4.90% 6.99%
DGPF Capital Reserves Series........................ 7/28/88 -7.06% 4.42% 4.61%
DGPF Strategic Income Series........................ 5/1/97 -10.48% N/A -1.21%
DGPF Cash Reserve Series............................ 7/28/88 -2.84% 3.10% 3.32%
DGPF Global Bond Series............................. 5/1/96 -10.61% N/A 2.00%
AIM V.I. Growth Fund................................ 5/3/93 26.34% 27.59% 21.10%
AIM V.I. High Yield Fund............................ 5/1/98 2.49% N/A -3.52%
AIM V.I. International Equity Fund.................. 5/5/93 45.87% 19.93% 17.06%
AIM V.I. Value Fund................................. 5/5/93 21.29% 25.39% 21.35%
Alger American Leveraged AllCap Portfolio........... 1/25/95 68.57% N/A 44.17%
Alger American MidCap Growth Portfolio.............. 5/3/93 22.26% 23.73% 22.72%
Alger American Small Capitalization Portfolio....... 9/21/88 34.40% 20.64% 16.56%
Alliance Growth Portfolio*.......................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio*............... N/A N/A N/A N/A
Alliance Premier Growth Portfolio................... 6/26/92 23.46% 33.93% 24.40%
Alliance Technology Portfolio....................... 1/11/96 66.25% N/A 33.45%
Mutual Shares Securities Fund**..................... 11/8/96 4.89% N/A 7.18%
Franklin Small Cap Fund**........................... 11/1/95 86.68% N/A 27.38%
Templeton Growth Securities Fund**.................. 3/15/94 12.04% 13.13% 11.50%
Templeton International Securities Fund**........... 1/27/92 17.58% 12.95% 10.69%
Pioneer Emerging Markets VCT Portfolio.............. 10/30/98 69.23% N/A 61.55%
Pioneer Mid-Cap Value VCT Portfolio................. 3/1/95 4.90% N/A 11.03%
</TABLE>
* Performance figures are not available.
** These are hypothetical performance figures for Class 2 shares. The figures
are based upon the historical performance of the Class 1 shares increased by
0.25% to reflect the effect of the 12b-1 fee on Class 2 shares performance.
13
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
10 YEARS (OR
UNDERLYING TOTAL RETURN SINCE
SUB-ACCOUNT INVESTING IN FUND FOR YEAR ENDED INCEPTION IF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS LESS)
- --------------- -------------- -------- ------- -----
<S> <C> <C> <C> <C>
DGPF Growth & Income Series......................... 7/28/88 -4.34% 16.75% 10.41%
DGPF Devon Series................................... 5/1/97 -11.39% N/A 12.42%
DGPF Growth Opportunities Series.................... 7/12/91 60.67% 25.20% 16.14%
DGPF U.S. Growth Series............................. 11/16/99 N/A N/A 5.72%
DGPF Select Growth Series........................... 5/3/99 N/A N/A 41.57%
DGPF Social Awareness Series........................ 5/1/97 11.33% N/A 19.61%
DGPF REIT Series.................................... 5/1/98 -3.97% N/A -8.27%
DGPF Small Cap Value Series......................... 12/27/93 -6.19% 11.25% 9.54%
DGPF Trend Series................................... 12/27/93 68.07% 28.18% 22.98%
DGPF International Equity Series.................... 10/29/92 14.14% 11.66% 10.39%
DGPF Emerging Markets Series........................ 5/1/97 46.20% N/A -10.96%
DGPF Balanced Series................................ 7/28/88 -9.14% 13.59% 10.41%
DGPF Convertible Securities Series.................. 5/1/97 5.47% N/A 6.68%
DGPF High Yield Series.............................. 7/28/88 -3.94% 5.71% 7.27%
DGPF Capital Reserves Series........................ 7/28/88 -1.09% 4.98% 4.66%
DGPF Strategic Income Series........................ 5/1/97 -4.64% N/A 0.58%
DGPF Cash Reserve Series............................ 7/28/88 3.37% 3.66% 3.35%
DGPF Global Bond Series............................. 5/1/96 -4.95% N/A 2.97%
AIM V.I. Growth Fund................................ 5/3/93 33.34% 27.83% 21.11%
AIM V.I. High Yield Fund............................ 5/1/98 8.98% N/A -0.43%
AIM V.I. International Equity Fund.................. 5/5/93 52.87% 20.22% 17.07%
AIM V.I. Value Fund................................. 5/5/93 28.29% 25.64% 21.41%
Alger American Leveraged AllCap Portfolio........... 1/25/95 75.57% N/A 44.37%
Alger American MidCap Growth Portfolio.............. 5/3/93 30.00% 24.37% 22.89%
Alger American Small Capitalization Portfolio....... 9/21/88 41.41% 20.93% 16.56%
Alliance Growth Portfolio*.......................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio*............... N/A N/A N/A N/A
Alliance Premier Growth Portfolio................... 6/26/92 30.46% 34.13% 24.44%
Alliance Technology Portfolio....................... 1/11/96 73.25% N/A 33.99%
Mutual Shares Securities Fund**..................... 11/8/96 11.53% N/A 8.54%
Franklin Small Cap Fund**........................... 11/1/95 93.69% N/A 27.83%
Templeton Growth Securities Fund**.................. 3/15/94 19.04% 13.50% 11.81%
Templeton International Securities Fund**........... 1/27/92 24.59% 13.32% 10.76%
Pioneer Emerging Markets VCT Portfolio.............. 10/30/98 76.24% N/A 67.07%
Pioneer Mid-Cap Value VCT Portfolio................. 3/1/95 11.54% N/A 11.59%
</TABLE>
* Performance figures are not available.
** These are hypothetical performance figures for Class 2 shares. The figures
are based upon the historical performance of the Class 1 shares increased by
0.25% to reflect the effect of the 12b-1 fee on Class 2 shares performance.
14
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DELAWARE MEDALLION I (POLICY FORM A3019-94GRC)
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- --------------- -------------- -------- ------- -----------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series........................ 5/1/94 -10.94% 15.83% 13.98%
DGPF Devon Series.................................. 5/1/97 -17.14% N/A 10.08%
DGPF Growth Opportunities Series................... 4/20/94 53.42% 24.52% 21.40%
DGPF U.S. Growth Series............................ 11/16/99 N/A N/A -0.57%
DGPF Select Growth Series.......................... 5/3/99 N/A N/A 34.56%
DGPF Social Awareness Series....................... 5/1/97 4.25% N/A 17.56%
DGPF REIT Series................................... 8/20/99 N/A N/A -10.50%
DGPF Small Cap Value Series........................ 5/11/94 -12.35% 10.51% 9.28%
DGPF Trend Series.................................. 5/11/94 60.80% 27.72% 24.58%
DGPF International Equity Series................... 4/20/94 6.90% 10.60% 9.39%
DGPF Emerging Markets Series....................... 5/1/97 39.19% N/A -13.13%
DGPF Balanced Series............................... 4/20/94 -15.13% 12.77% 11.00%
DGPF Convertible Securities Series................. 5/1/97 -1.22% N/A 4.24%
DGPF High Yield Series............................. 5/23/94 -10.37% 4.56% 3.74%
DGPF Capital Reserves Series....................... 6/23/94 -7.41% 4.08% 3.65%
DGPF Strategic Income Series....................... 5/1/97 -10.81% N/A -2.01%
DGPF Cash Reserve Series........................... 4/ 7/94 -3.20% 2.74% 2.87%
DGPF Global Bond Series............................ 5/1/96 -10.94% N/A 1.42%
AIM V.I. Growth Fund............................... N/A N/A N/A N/A
AIM V.I. High Yield Fund........................... N/A N/A N/A N/A
AIM V.I. International Equity Fund................. N/A N/A N/A N/A
AIM V.I. Value Fund................................ N/A N/A N/A N/A
Alger American Leveraged AllCap Portfolio.......... N/A N/A N/A N/A
Alger American MidCap Growth Portfolio............. N/A N/A N/A N/A
Alger American Small Capitalization Portfolio...... N/A N/A N/A N/A
Alliance Growth Portfolio.......................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio............... N/A N/A N/A N/A
Alliance Premier Growth Portfolio.................. N/A N/A N/A N/A
Alliance Technology Portfolio...................... N/A N/A N/A N/A
Mutual Shares Securities Fund...................... N/A N/A N/A N/A
Franklin Small Cap Fund............................ N/A N/A N/A N/A
Templeton Growth Securities Fund................... N/A N/A N/A N/A
Templeton International Securities Fund............ N/A N/A N/A N/A
Pioneer Emerging Markets VCT Portfolio............. N/A N/A N/A N/A
Pioneer Mid-Cap Value VCT Portfolio................ N/A N/A N/A N/A
</TABLE>
15
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- --------------- -------------- -------- ------- -----------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series...................... 5/1/94 -4.34% 16.75% 14.77%
DGPF Devon Series................................ 5/1/97 -11.39% N/A 12.42%
DGPF Growth Opportunities Series................. 4/20/94 60.67% 25.20% 21.96%
DGPF U.S. Growth Series.......................... 11/16/99 N/A N/A 5.72%
DGPF Select Growth Series........................ 5/3/99 N/A N/A 41.57%
DGPF Social Awareness Series..................... 5/1/97 11.33% N/A 19.61%
DGPF REIT Series................................. 8/20/99 N/A N/A -4.48%
DGPF Small Cap Value Series...................... 5/11/94 -6.19% 11.25% 9.95%
DGPF Trend Series................................ 5/11/94 68.07% 28.18% 25.11%
DGPF International Equity Series................. 4/20/94 14.14% 11.66% 10.24%
DGPF Emerging Markets Series..................... 5/1/97 46.20% N/A -10.96%
DGPF Balanced Series............................. 4/20/94 -9.14% 13.59% 11.66%
DGPF Convertible Securities Series............... 5/ 1/97 5.47% N/A 6.68%
DGPF High Yield Series........................... 5/23/94 -3.94% 5.71% 4.69%
DGPF Capital Reserves Series..................... 6/23/94 -1.09% 4.98% 4.33%
DGPF Strategic Income Series..................... 5/1/97 -4.64% N/A 0.58%
DGPF Cash Reserve Series......................... 4/ 7/94 3.37% 3.66% 3.51%
DGPF Global Bond Series.......................... 5/1/96 -4.95% N/A 2.97%
AIM V.I. Growth Fund............................. N/A N/A N/A N/A
AIM V.I. High Yield Fund......................... N/A N/A N/A N/A
AIM V.I. International Equity Fund............... N/A N/A N/A N/A
AIM V.I. Value Fund.............................. N/A N/A N/A N/A
Alger American Leveraged AllCap Portfolio........ N/A N/A N/A N/A
Alger American MidCap Growth Portfolio........... N/A N/A N/A N/A
Alger American Small Capitalization Portfolio.... N/A N/A N/A N/A
Alliance Growth Portfolio........................ N/A N/A N/A N/A
Alliance Growth and Income Portfolio............. N/A N/A N/A N/A
Alliance Premier Growth Portfolio................ N/A N/A N/A N/A
Alliance Technology Portfolio.................... N/A N/A N/A N/A
Mutual Shares Securities Fund.................... N/A N/A N/A N/A
Franklin Small Cap Fund.......................... N/A N/A N/A N/A
Templeton Growth Securities Fund................. N/A N/A N/A N/A
Templeton International Securities Fund.......... N/A N/A N/A N/A
Pioneer Emerging Markets VCT Portfolio........... N/A N/A N/A N/A
Pioneer Mid-Cap Value VCT Portfolio.............. N/A N/A N/A N/A
</TABLE>
16
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
UNDERLYING FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN FUND ENDED INCEPTION IF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS LESS)
- --------------- -------------- -------- ------- -----
<S> <C> <C> <C> <C>
DGPF Growth & Income Series...................... 7/28/88 -10.94% 15.83% 9.97%
DGPF Devon Series................................ 5/1/97 -17.14% N/A 10.08%
DGPF Growth Opportunities Series................. 7/12/91 53.42% 24.52% 15.84%
DGPF U. S. Growth Series......................... 11/16/99 N/A N/A -0.57%
DGPF Select Growth Series........................ 5/3/99 N/A N/A 34.56%
DGPF Social Awareness Series..................... 5/1/97 4.25% N/A 17.56%
DGPF REIT Series................................. 5/1/98 -10.02% N/A -11.58%
DGPF Small Cap Value Series...................... 12/27/93 -12.35% 10.51% 8.99%
DGPF Trend Series................................ 12/27/93 60.80% 27.72% 22.50%
DGPF International Equity Series................. 10/29/92 6.90% 10.60% 9.96%
DGPF Emerging Markets Series..................... 5/1/97 39.19% N/A -13.13%
DGPF Balanced Series............................. 7/28/88 -15.13% 12.77% 10.20%
DGPF Convertible Securities Series............... 5/1/97 -1.22% N/A 4.24%
DGPF High Yield Series........................... 7/28/88 -10.37% 4.56% 6.99%
DGPF Capital Reserves Series..................... 7/28/88 -7.41% 4.08% 4.61%
DGPF Strategic Income Series..................... 5/1/97 -10.81% N/A -2.01%
DGPF Cash Reserve Series......................... 7/28/88 -3.20% 2.74% 3.32%
DGPF Global Bond Series.......................... 5/1/96 -10.94% N/A 1.42%
AIM V.I. Growth Fund............................. 5/3/93 26.34% 27.44% 21.10%
AIM V.I. High Yield Fund......................... 5/1/98 2.11% N/A -4.25%
AIM V.I. International Equity Fund............... 5/5/93 45.87% 19.73% 17.06%
AIM V.I. Value Fund.............................. 5/5/93 21.29% 25.23% 21.25%
Alger American Leveraged AllCap Portfolio........ 1/25/95 68.57% N/A 44.07%
Alger American MidCap Growth Portfolio........... 5/3/93 23.00% 23.95% 22.38%
Alger American Small Capitalization Portfolio.... 9/21/88 34.40% 20.45% 16.56%
Alliance Growth Portfolio*....................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio*............ N/A N/A N/A N/A
Alliance Premier Growth Portfolio................ 6/26/92 23.46% 33.81% 24.34%
Alliance Technology Portfolio.................... 1/11/96 66.25% N/A 33.23%
Mutual Shares Securities Fund**.................. 11/8/96 4.53% N/A 6.63%
Franklin Small Cap Fund**........................ 11/1/95 86.68% N/A 27.16%
Templeton Growth Securities Fund**............... 3/15/94 12.04% 12.88% 11.29%
Templeton International Securities Fund**........ 1/27/92 17.58% 12.71% 10.57%
Pioneer Emerging Markets VCT Portfolio........... 10/30/98 69.23% N/A 61.55%
Pioneer Mid-Cap Value VCT Portfolio.............. 3/1/95 4.53% N/A 10.76%
</TABLE>
* Performance figures are not available.
** These are hypothetical performance figures for Class 2 shares. The figures
are based upon the historical performance of the Class 1 shares increased by
0.25% to reflect the effect of the 12b-1 fee on Class 2 shares performance.
17
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN 10 YEARS
UNDERLYING FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN FUND ENDED INCEPTION IF
UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS LESS)
- --------------- -------------- -------- ------- -----
<S> <C> <C> <C> <C>
DGPF Growth & Income Series...................... 7/28/88 -4.34% 16.75% 10.41%
DGPF Devon Series................................ 5/1/97 -11.39% N/A 12.42%
DGPF Growth Opportunities Series................. 7/12/91 60.67% 25.20% 16.14%
DGPF U.S. Growth Series.......................... 11/16/99 N/A N/A 5.72%
DGPF Select Growth Series........................ 5/3/99 N/A N/A 41.57%
DGPF Social Awareness Series..................... 5/1/97 11.33% N/A 19.61%
DGPF REIT Series................................. 5/1/98 -3.97% N/A -8.27%
DGPF Small Cap Value Series...................... 12/27/93 -6.19% 11.25% 9.54%
DGPF Trend Series................................ 12/27/93 68.07% 28.18% 22.98%
DGPF International Equity Series................. 10/29/92 14.14% 11.66% 10.39%
DGPF Emerging Markets Series..................... 5/1/97 46.20% N/A -10.96%
DGPF Balanced Series............................. 7/28/88 -9.14% 13.59% 10.41%
DGPF Convertible Securities Series............... 5/1/97 5.47% N/A 6.68%
DGPF High Yield Series........................... 7/28/88 -3.94% 5.71% 7.27%
DGPF Capital Reserves Series..................... 7/28/88 -1.09% 4.98% 4.66%
DGPF Strategic Income Series..................... 5/1/97 -4.64% N/A 0.58%
DGPF Cash Reserve Series......................... 7/28/88 3.37% 3.66% 3.35%
DGPF Global Bond Series.......................... 5/1/96 -4.95% N/A 2.97%
AIM V.I. Growth Fund............................. 5/3/93 33.34% 27.83% 21.11%
AIM V.I. High Yield Fund......................... 5/1/98 8.98% N/A -0.43%
AIM V.I. International Equity Fund............... 5/5/93 52.87% 20.22% 17.07%
AIM V.I. Value Fund.............................. 5/5/93 28.29% 25.64% 21.41%
Alger American Leveraged AllCap Portfolio........ 1/25/95 75.57% N/A 44.37%
Alger American MidCap Growth Portfolio........... 5/3/93 30.00% 24.37% 22.89%
Alger American Small Capitalization Portfolio.... 9/21/88 41.41% 20.93% 16.56%
Alliance Growth Portfolio*....................... N/A N/A N/A N/A
Alliance Growth and Income Portfolio*............ N/A N/A N/A N/A
Alliance Premier Growth Portfolio................ 6/26/92 30.46% 34.13% 24.44%
Alliance Technology Portfolio.................... 1/11/96 73.25% N/A 33.99%
Mutual Shares Securities Fund**.................. 11/8/96 11.53% N/A 8.54%
Franklin Small Cap Fund**........................ 11/1/95 93.69% N/A 27.83%
Templeton Growth Securities Fund**............... 3/15/94 19.04% 13.50% 11.81%
Templeton International Securities Fund**........ 1/27/92 24.59% 13.32% 10.76%
Pioneer Emerging Markets VCT Portfolio........... 10/30/98 76.24% N/A 67.07%
Pioneer Mid-Cap Value VCT Portfolio.............. 3/1/95 11.54% N/A 11.59%
</TABLE>
* Performance figures are not available.
** These are hypothetical performance figures for Class 2 shares. The figures
are based upon the historical performance of the Class 1 shares increased by
0.25% to reflect the effect of the 12b-1 fee on Class 2 shares performance.
YIELD AND EFFECTIVE YIELD - THE DGPF CASH RESERVE SUB-ACCOUNT
18
<PAGE>
Set forth below is yield and effective yield information for the DGPF Cash
Reserve Sub-Account investing in the DGPF Cash Reserve Series for the seven-day
period ended December 31, 1999:
<TABLE>
<S> <C>
Yield 5.80%
Effective Yield 5.97%
</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 DGPF Cash Reserve Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 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.
19
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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 (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</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) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</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) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
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)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
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 services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). 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.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for 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,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance 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 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.
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' 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.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at 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 the
foreign currency exchange risk associated with investment securities 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 associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. 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
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 6.0%
for life insurance and 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, variable universal life and variable annuities include deposits
received from customers and investment earnings on their fund balances, less
administrative charges. Universal life fund balances are also assessed mortality
and surrender charges. Liabilities for variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
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.
Premiums for property and casualty 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 ("GICs"),
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 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 include annuity benefit claims in excess of a
guaranteed minimum fund value, and net investment income credited to the fund
values after deduction for investment and risk charges. Revenues for universal
life products consist of net investment income, with mortality, administration
and surrender charges assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Certain policy charges
that represent compensation for services
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life 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.
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, 2000. 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 of 1998, 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
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. 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 (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted Statement No. 130
for the first quarter of 1998, which resulted primarily in reporting unrealized
gains and losses on investments in debt and equity securities in comprehensive
income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
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 Corporation 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..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty 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 $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, 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, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company'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.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of 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 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. 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 recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
6. 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>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<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>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</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>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans 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 $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. 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 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
- -- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific 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 $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, 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") and other funding agreements. 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. 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 was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not 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 $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
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 losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</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.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities 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 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 $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. 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 1999, 1998 and 1997. 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 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
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. 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, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, 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 hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. 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 insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, 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 its
counterparties and the underlying companies in default swap contracts, 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, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. 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 on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ------ ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. 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 $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
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.
F-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 is
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. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values 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.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, 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.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, there was no commercial
paper outstanding.
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. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. 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) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory 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) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
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, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("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 1994. 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.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999, 1998 and 1997 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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
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 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
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 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies 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.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
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
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 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, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. 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 postretirement medical and death
benefits plans previously provided by the affiliated Companies 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.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
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 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
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 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented 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 Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The 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 GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. 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. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, 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 segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, 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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 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 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses 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 Statement of Financial
Accounting Standards 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.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, 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"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded 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 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) 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-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
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...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</TABLE>
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.
19. 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
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's 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 Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company 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,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. 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.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. 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. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. 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, 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,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
22. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, 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. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
F-45
<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 of First Allmerica Financial
Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account VA-K of First Allmerica Financial Life
Insurance Company at December 31, 1999, 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 accounting principles generally accepted in the United
States. These financial statements are the responsibility of First Allmerica
Financial Life Insurance Company; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the Fund, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROWTH CAPITAL CASH
& INCOME* DELCHESTER RESERVES RESERVE DELCAP
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ............ $7,092,450 $4,112,020 $1,177,184 $3,113,134 $3,471,097
Investment income receivable .................................... - 13,058 2,182 4,862 -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ............................................. 492 6 4,955 10 -
---------- ---------- ---------- ---------- ----------
Total assets ............................................... 7,092,942 4,125,084 1,184,321 3,118,006 3,471,097
LIABILITIES: - - - - -
---------- ---------- ---------- ---------- ----------
Net assets .................................................. $7,092,942 $4,125,084 $1,184,321 $3,118,006 $3,471,097
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net asset distribution by category:
Variable annuity contracts .................................... $7,092,942 $4,125,084 $1,184,321 $3,118,006 $3,471,097
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .......................................... - - - - -
---------- ---------- ---------- ---------- ----------
$7,092,942 $4,125,084 $1,184,321 $3,118,006 $3,471,097
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Units outstanding, December 31, 1999 ............................ 3,249,609 3,189,893 937,010 2,558,348 1,120,003
Net asset value per unit, December 31, 1999 ..................... $ 2.182706 $ 1.293173 $ 1.263939 $ 1.218758 $ 3.099187
<CAPTION>
DELAWARE INTERNATIONAL SMALL CAP
BALANCED* EQUITY VALUE TREND
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ............ $ 2,416,536 $ 1,548,273 $ 1,404,278 $ 4,487,087
Investment income receivable .................................... - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ............................................. 942 - - -
------------- ------------- ------------- -------------
Total assets ............................................... 2,417,478 1,548,273 1,404,278 4,487,087
LIABILITIES: ................................................... - - - -
------------- ------------- ------------- -------------
Net assets .................................................. $ 2,417,478 $ 1,548,273 $ 1,404,278 $ 4,487,087
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net asset distribution by category:
Variable annuity contracts .................................... $ 2,417,478 $ 1,548,273 $ 1,404,278 $ 4,487,087
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .......................................... - - - -
------------- ------------- ------------- -------------
$ 2,417,478 $ 1,548,273 $ 1,404,278 $ 4,487,087
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Units outstanding, December 31, 1999 ............................ 1,289,546 888,316 822,611 1,268,607
Net asset value per unit, December 31, 1999 ..................... $ 1.874676 $ 1.742931 $ 1.707099 $ 3.537016
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
GLOBAL STRATEGIC EMERGING CONVERTIBLE
BOND INCOME DEVON MARKETS SECURITIES
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ............ $ 69,977 $1,911,709 $2,557,779 $ 554,773 $ 513,057
Investment income receivable .................................... - - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ............................................. - - - - -
---------- ---------- ---------- ---------- -----------
Total assets ............................................... 69,977 1,911,709 2,557,779 554,773 513,057
LIABILITIES: - - - - -
---------- ---------- ---------- ---------- -----------
Net assets .................................................. $ 69,977 $1,911,709 $2,557,779 $ 554,773 $ 513,057
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Net asset distribution by category:
Variable annuity contracts .................................... $ 69,977 $1,911,709 $2,557,779 $ 554,773 $ 513,057
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .......................................... - - - - -
---------- ---------- ---------- ---------- -----------
$ 69,977 $1,911,709 $2,557,779 $ 554,773 $ 513,057
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Units outstanding, December 31, 1999 ............................ 62,850 1,882,413 1,871,337 756,219 431,733
Net asset value per unit, December 31, 1999 ..................... $ 1.113405 $ 1.015563 $ 1.366819 $ 0.733613 $ 1.188369
<CAPTION>
SOCIAL AGGRESSIVE US
AWARENESS REIT GROWTH GROWTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Delaware Group Premium Fund ............ $ 594,535 $ 27,943 $1,582,623 $ 255,195
Investment income receivable .................................... - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ............................................. - - - -
---------- ---------- ---------- ----------
Total assets ............................................... 594,535 27,943 1,582,623 255,195
LIABILITIES: ................................................... - - - -
---------- ---------- ---------- ----------
Net assets .................................................. $ 594,535 $ 27,943 $1,582,623 $ 255,195
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net asset distribution by category:
Variable annuity contracts .................................... $ 594,535 $ 27,943 $1,582,623 $ 253,081
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .......................................... - - - 2,114
---------- ---------- ---------- ----------
$ 594,535 $ 27,943 $1,582,623 $ 255,195
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Units outstanding, December 31, 1999 ............................ 368,719 29,253 1,117,897 241,398
Net asset value per unit, December 31, 1999 ..................... $ 1.612435 $ 0.955211 $ 1.415714 $ 1.057154
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROWTH CAPITAL
& INCOME* DELCHESTER RESERVES
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 157,602 $ 481,736 $ 80,698
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . 100,851 61,910 17,845
Administrative expense fees . . . . . . . . . . . . . . . 12,102 7,430 2,142
--------------- --------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . 112,953 69,340 19,987
--------------- --------------- ---------------
Net investment income (loss) . . . . . . . . . . . . . . 44,649 412,396 60,711
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 600,055 30,782 -
Net realized gain (loss) from sales of investments . . . . 13,557 (468,339) (24,751)
--------------- --------------- ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . 613,612 (437,557) (24,751)
Net unrealized gain (loss) . . . . . . . . . . . . . . . . (1,019,631) (158,819) (54,917)
--------------- --------------- ---------------
Net realized and unrealized gain (loss) . . . . . . . . (406,019) (596,376) (79,668)
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations. . $ (361,370) $ (183,980) $ (18,957)
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
CASH DELAWARE
RESERVE DELCAP BALANCED*
--------------- -------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $114,779 $ - $ 48,390
--------------- -------------- ---------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . 30,328 23,637 31,088
Administrative expense fees . . . . . . . . . . . . . . . 3,639 2,836 3,731
--------------- -------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . 33,967 26,473 34,819
--------------- -------------- ---------------
Net investment income (loss) . . . . . . . . . . . . . . 80,812 (26,473) 13,571
--------------- -------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . - 68,723 93,161
Net realized gain (loss) from sales of investments . . . . - 68,787 17,728
--------------- -------------- ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . - 137,510 110,889
Net unrealized gain (loss) . . . . . . . . . . . . . . . . - 1,094,520 (356,807)
--------------- -------------- ---------------
Net realized and unrealized gain (loss) . . . . . . . . - 1,232,030 (245,918)
--------------- -------------- ---------------
Net increase (decrease) in net assets from operations. . $ 80,812 $1,205,557 $ (232,347)
--------------- -------------- ---------------
--------------- -------------- ---------------
<CAPTION>
INTERNATIONAL SMALL CAP
EQUITY VALUE TREND
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 20,162 $ 16,299 $ 267
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . 14,858 17,380 38,986
Administrative expense fees . . . . . . . . . . . . . . . 1,783 2,085 4,678
--------------- --------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . 16,641 19,465 43,664
--------------- --------------- ---------------
Net investment income (loss) . . . . . . . . . . . . . . 3,521 (3,166) (43,397)
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 1,473 6,687 -
Net realized gain (loss) from sales of investments . . . . 46,157 (39,232) 471,227
--------------- --------------- ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . 47,630 (32,545) 471,227
Net unrealized gain (loss) . . . . . . . . . . . . . . . . 106,481 (89,282) 1,345,295
--------------- --------------- ---------------
Net realized and unrealized gain (loss) . . . . . . . . 154,111 (121,827) 1,816,522
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations . $157,632 $ (124,993) $1,773,125
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GLOBAL STRATEGIC
BOND INCOME DEVON
--------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,868 $ 112,125 $ 15,367
--------------- -------------- --------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . . . . 979 25,344 33,018
Administrative expense fees . . . . . . . . . . . . . . . . . . 118 3,041 3,962
--------------- -------------- --------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,097 28,385 36,980
--------------- -------------- --------------
Net investment income (loss) . . . . . . . . . . . . . . . . . 2,771 83,740 (21,613)
--------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . . . . 370 - 29,710
Net realized gain (loss) from sales of investments . . . . . . . (3,196) (29,076) 1,808
--------------- -------------- --------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . (2,826) (29,076) 31,518
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . (4,475) (151,476) (326,940)
--------------- -------------- --------------
Net realized and unrealized gain (loss) . . . . . . . . . . . (7,301) (180,552) (295,422)
--------------- -------------- --------------
Net increase (decrease) in net assets from operations . . . . $ (4,530) $ (96,812) $ (317,035)
--------------- -------------- --------------
--------------- -------------- --------------
<CAPTION>
EMERGING CONVERTIBLE SOCIAL
MARKETS SECURITIES AWARENESS
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,199 $ 16,647 $ 2,712
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . . . . 4,533 6,352 7,707
Administrative expense fees . . . . . . . . . . . . . . . . . . 544 762 925
--------------- --------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 5,077 7,114 8,632
--------------- --------------- ---------------
Net investment income (loss) . . . . . . . . . . . . . . . . . (2,878) 9,533 (5,920)
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . . . . - - -
Net realized gain (loss) from sales of investments . . . . . . . 58,805 (2,239) 23,438
--------------- --------------- ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . 58,805 (2,239) 23,438
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . 134,668 19,115 48,152
--------------- --------------- ---------------
Net realized and unrealized gain (loss) . . . . . . . . . . . 193,473 16,876 71,590
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations . . . . $ 190,595 $ 26,409 $ 65,670
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
AGGRESSIVE U.S.
REIT(a) GROWTH(b) GROWTH(c)
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
--------------- --------------- ---------------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . . . . 126 2,726 113
Administrative expense fees . . . . . . . . . . . . . . . . . . 15 328 14
--------------- --------------- ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 141 3,054 127
--------------- --------------- ---------------
Net investment income (loss) . . . . . . . . . . . . . . . . . (141) (3,054) (127)
--------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . . . - - -
Net realized gain (loss) from sales of investments . . . . . . . (9) 8,792 -
--------------- --------------- ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . (9) 8,792 -
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . (1,160) 279,499 6,423
--------------- --------------- ---------------
Net realized and unrealized gain (loss) . . . . . . . . . . . (1,169) 288,291 6,423
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations. . . . . $ (1,310) $285,237 $ 6,296
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
(a) For the Period 8/20/99 to 12/31/99.
(b) For the Period 5/3/99 to 12/31/99.
(c) For the Period 11/16/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH & INCOME* DELCHESTER
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ 44,649 $ 22,107 $ 412,396 $ 392,371
Net realized gain (loss) ......................................... 613,612 214,812 (437,557) (36,076)
Net unrealized gain (loss) ....................................... (1,019,631) 129,300 (158,819) (579,052)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations ............ (361,370) 366,219 (183,980) (222,757)
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 1,592,922 4,963,746 465,972 2,864,937
Withdrawals ...................................................... (453,693) (453,179) (477,789) (419,388)
Contract benefits ................................................ (184,220) (253) (162,744) (81,886)
Contract charges ................................................. (2,328) (914) (1,541) (647)
Transfers between sub-accounts (including fixed account), net .... (1,568,466) (33,344) (1,145,727) 590,551
Other transfers from (to) the General Account .................... 220,466 282,747 296,574 673,045
Net increase (decrease) in investment by Sponsor ................. - - - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions.. (395,319) 4,758,803 (1,025,255) 3,626,612
----------- ----------- ----------- -----------
Net increase (decrease) in net assets ............................ (756,689) 5,125,022 (1,209,235) 3,403,855
NET ASSETS:
Beginning of year .................................................. 7,849,631 2,724,609 5,334,319 1,930,464
----------- ----------- ----------- -----------
End of year ........................................................ $ 7,092,942 $ 7,849,631 $ 4,125,084 $ 5,334,319
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
CAPITAL RESERVES CASH RESERVE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ 60,711 $ 29,401 $ 80,812 $ 46,930
Net realized gain (loss) ......................................... (24,751) 2,126 - -
Net unrealized gain (loss) ....................................... (54,917) 708 - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations ............. (18,957) 32,235 80,812 46,930
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 750,951 933,977 1,198,545 1,396,824
Withdrawals ...................................................... (77,509) (234,236) (137,113) (70,449)
Contract benefits ................................................ (98,005) (55,937) (4,404) -
Contract charges ................................................. (240) (113) (367) (63)
Transfers between sub-accounts (including fixed account), net .... (819,257) 262,343 201,241 251,741
Other transfers from (to) the General Account .................... 81,814 79,048 (111,220) (190,998)
Net increase (decrease) in investment by Sponsor ................. - - - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions.. (162,246) 985,082 1,146,682 1,387,055
----------- ----------- ----------- -----------
Net increase (decrease) in net assets ............................ (181,203) 1,017,317 1,227,494 1,433,985
NET ASSETS:
Beginning of year .................................................. 1,365,524 348,207 1,890,512 456,527
----------- ----------- ----------- -----------
End of year ........................................................ $ 1,184,321 $ 1,365,524 $ 3,118,006 $ 1,890,512
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DELCAP DELAWARE BALANCED*
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (26,473) $ (11,112) $ 13,571 $ 1,366
Net realized gain (loss) ........................................... 137,510 67,173 110,889 100,026
Net unrealized gain (loss) ......................................... 1,094,520 100,062 (356,807) 150,586
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations .............. 1,205,557 156,123 (232,347) 251,978
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .............................................. 315,852 484,559 543,696 1,218,323
Withdrawals ........................................................ (105,672) (51,098) (95,276) (69,415)
Contract benefits .................................................. (18,312) - (86,559) (81,219)
Contract charges ................................................... (739) (471) (924) (459)
Transfers between sub-accounts (including fixed account), net ...... 749,154 (39,520) (26,702) 25,961
Other transfers from (to) the General Account ...................... 97,083 93,969 107,093 122,254
Net increase (decrease) in investment by Sponsor ................... - - - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions .. 1,037,366 487,439 441,328 1,215,445
----------- ----------- ----------- -----------
Net increase (decrease) in net assets .............................. 2,242,923 643,562 208,981 1,467,423
NET ASSETS:
Beginning of year .................................................... 1,228,174 584,612 2,208,497 741,074
----------- ----------- ----------- -----------
End of year .......................................................... $ 3,471,097 $ 1,228,174 $ 2,417,478 $ 2,208,497
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
INTERNATIONAL EQUITY SMALL CAP VALUE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 3,521 $ 16,940 $ (3,166) $ (7,243)
Net realized gain (loss) ........................................... 47,630 (25,772) (32,545) 16,703
Net unrealized gain (loss) ......................................... 106,481 28,658 (89,282) (29,729)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations .............. 157,632 71,370 (124,993) (20,269)
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .............................................. 442,531 264,912 367,777 750,092
Withdrawals ........................................................ (95,457) (93,238) (77,305) (39,961)
Contract benefits .................................................. (55,715) (118) (27,302) -
Contract charges ................................................... (468) (404) (488) (243)
Transfers between sub-accounts (including fixed account), net ...... 27,726 (50,184) (117,134) 142,052
Other transfers from (to) the General Account ...................... 75,740 26,857 53,821 42,652
Net increase (decrease) in investment by Sponsor ................... - - - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions .. 394,357 147,825 199,369 894,592
----------- ----------- ----------- -----------
Net increase (decrease) in net assets .............................. 551,989 219,195 74,376 874,323
NET ASSETS:
Beginning of year .................................................... 996,284 777,089 1,329,902 455,579
----------- ----------- ----------- -----------
End of year .......................................................... $ 1,548,273 $ 996,284 $ 1,404,278 $ 1,329,902
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
TREND GLOBAL BOND
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ (43,397) $ (19,932) $ 2,771 $ 448
Net realized gain (loss) .......................................... 471,227 (58,984) (2,826) 306
Net unrealized gain (loss) ........................................ 1,345,295 126,288 (4,475) (36)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations ............. 1,773,125 47,372 (4,530) 718
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 229,544 525,702 61,893 24,922
Withdrawals ....................................................... (933,942) (115,013) (2,171) -
Contract benefits ................................................. (114,130) - (35,273) -
Contract charges .................................................. (746) (433) (5) (8)
Transfers between sub-accounts (including fixed account), net ..... 1,192,948 (1,172,031) 17,252 1,236
Other transfers from (to) the General Account ..................... 27,044 123,852 (3,847) 2,584
Net increase (decrease) in investment by Sponsor .................. - - - -
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions .. 400,718 (637,923) 37,849 28,734
----------- ----------- ----------- -----------
Net increase (decrease) in net assets ............................. 2,173,843 (590,551) 33,319 29,452
NET ASSETS:
Beginning of year ................................................... 2,313,244 2,903,795 36,658 7,206
----------- ----------- ----------- -----------
End of year ......................................................... $ 4,487,087 $ 2,313,244 $ 69,977 $ 36,658
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
STRATEGIC INCOME DEVON
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ...................................... $ 83,740 $ (4,538) $ (21,613) $ (17,814)
Net realized gain (loss) .......................................... (29,076) 599 31,518 7,269
Net unrealized gain (loss) ........................................ (151,476) 8,674 (326,940) 266,494
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations ............. (96,812) 4,735 (317,035) 255,949
----------- ----------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................. 324,332 1,569,678 417,684 1,964,135
Withdrawals ....................................................... (206,609) (37,334) (35,920) (39,202)
Contract benefits ................................................. (79,956) (46,400) (9,154) (249)
Contract charges .................................................. (511) (82) (501) (14)
Transfers between sub-accounts (including fixed account), net ..... (39,115) 44,987 (31,762) 37,266
Other transfers from (to) the General Account ..................... 94,431 89,625 131,179 52,354
Net increase (decrease) in investment by Sponsor .................. - - - (25)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from contract transactions .. 92,572 1,620,474 471,526 2,014,265
----------- ----------- ----------- -----------
Net increase (decrease) in net assets ............................. (4,240) 1,625,209 154,491 2,270,214
NET ASSETS:
Beginning of year ................................................... 1,915,949 290,740 2,403,288 133,074
----------- ----------- ----------- -----------
End of year ......................................................... $ 1,911,709 $ 1,915,949 $ 2,557,779 $ 2,403,288
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EMERGING MARKETS CONVERTIBLE SECURITIES
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .......................................... $ (2,878) $ (802) $ 9,533 $ (305)
Net realized gain (loss) .............................................. 58,805 (12,804) (2,239) (634)
Net unrealized gain (loss) ............................................ 134,668 (33,828) 19,115 (2,428)
-------- ---------- ---------- ----------
Net increase (decrease) in net assets from operations ................. 190,595 (47,434) 26,409 (3,367)
-------- ---------- ---------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................................. 179,259 157,103 137,502 352,459
Withdrawals ........................................................... (6,953) (4,005) (67,314) (17,837)
Contract benefits ..................................................... - - - (42,033)
Contract charges ...................................................... (163) (3) (103) (35)
Transfers between sub-accounts (including fixed account), net ......... 74,926 (16,144) (30,589) (2,286)
Other transfers from (to) the General Account ......................... 24,753 1,998 24,584 38,440
Net increase (decrease) in investment by Sponsor ...................... - (9) - -
-------- ---------- ---------- ----------
Net increase (decrease) in net assets from contract transactions ..... 271,822 138,940 64,080 328,708
-------- ---------- ---------- ----------
Net increase (decrease) in net assets ................................. 462,417 91,506 90,489 325,341
NET ASSETS:
Beginning of year ....................................................... 92,356 850 422,568 97,227
-------- ---------- ---------- ----------
End of year ............................................................. $554,773 $ 92,356 $ 513,057 $ 422,568
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
<CAPTION>
SOCIAL AWARENESS AGGRESSIVE
YEAR ENDED REIT GROWTH U.S. GROWTH
DECEMBER 31, PERIOD PERIOD PERIOD
----------------------- FROM 8/20/99* FROM 5/3/99* FROM 11/16/99*
1999 1998 TO 12/31/99 TO 12/31/99 TO 12/31/99
---------- ---------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .............................. $ (5,920) $ (4,890) $ (141) $ (3,054) $ (127)
Net realized gain (loss) .................................. 23,438 (9,396) (9) 8,792
Net unrealized gain (loss) ................................ 48,152 35,743 (1,160) 279,499 6,423
--------- --------- --------- ----------- ---------
Net increase (decrease) in net assets from operations ..... 65,670 21,457 (1,310) 285,237 6,296
--------- --------- --------- ----------- ---------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ..................................... 140,249 457,590 28,944 10,984 -
Withdrawals ............................................... (18,010) (4,912) - (5,378) (355)
Contract benefits ......................................... (21,294) - - - -
Contract charges .......................................... (142) (22) - (20) -
Transfers between sub-accounts (including fixed account),
net .................................................... (153,762) (42,629) 309 1,382,384 247,254
Other transfers from (to) the General Account ............. 10,622 10,787 - (90,557) -
Net increase (decrease) in investment by Sponsor .......... - (24) - (27) 2,000
--------- --------- --------- ----------- ---------
Net increase (decrease) in net assets from contract
transactions ........................................... (42,337) 420,790 29,253 1,297,386 248,899
--------- --------- --------- ----------- ---------
Net increase (decrease) in net assets ..................... 23,333 442,247 27,943 1,582,623 255,195
NET ASSETS:
Beginning of year ........................................... 571,202 128,955 - - -
--------- --------- --------- ----------- ---------
End of year ................................................. $ 594,535 $ 571,202 $ 27,943 $ 1,582,623 $ 255,195
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Separate Account VA-K, which funds the Delaware Medallion variable annuity
contracts (the Delaware contracts) in addition to other contracts (the Allmerica
Advantage and ExecAnnuity Plus variable annuity contracts), is a separate
investment account of 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 eighteen Sub-Accounts under the Delaware contracts. Each
Sub-Account invests exclusively in a corresponding investment portfolio of the
Delaware Group Premium Fund (DGPF), managed by Delaware Management Company, or
Delaware International Advisers Ltd. DGPF is an open-end, diversified management
investment company registered under the 1940 Act.
Effective May 1, 1999, Decatur Total Return Fund was renamed Growth and
Income Fund and Delaware Fund was renamed Delaware Balanced Fund.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of DGPF. Realized gains and losses on
securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of DGPF
at net asset value.
FEDERAL INCOME TAXES - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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-9
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share
of each Sub-Account's investment in DGPF at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
-------------------- --------------- --------------- --------------
<S> <C> <C> <C>
Growth & Income*.................. 416,713 $ 7,440,168 $ 17.020
Delchester........................ 554,181 4,769,645 7.420
Capital Reserves.................. 125,768 1,227,382 9.360
Cash Reserve...................... 311,313 3,113,134 10.000
DelCap............................ 121,580 2,187,508 28.550
Delaware Balanced*................ 139,362 2,467,885 17.340
International Equity.............. 83,106 1,323,664 18.630
Small Cap Value................... 91,424 1,417,999 15.360
Trend............................. 133,306 2,891,968 33.660
Global Bond....................... 7,192 74,454 9.730
Strategic Income.................. 197,899 2,053,220 9.660
Devon............................. 187,796 2,614,210 13.620
Emerging Markets.................. 66,044 454,097 8.400
Convertible Securities............ 44,652 494,825 11.490
Social Awareness.................. 36,341 508,465 16.360
REIT.............................. 3,223 29,103 8.670
Aggressive Growth................. 110,750 1,303,124 14.290
U. S. Growth...................... 24,098 248,772 10.590
</TABLE>
*Name changed. See Note 1.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily
net assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is $50,000 or less on
contracts issued on Form A3019-94 and Form A3022-93 (Delaware Medallion I & II)
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), an indirect
wholly-owned subsidiary of the Company, is principal underwriter and general
distributor of Separate Account VA-K, and does not receive any compensation for
sales of the contracts. Commissions are paid by the Company to registered
representatives of Allmerica Investments and to certain independent
broker-dealers.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------------------------ -----------------------------------------------
UNITS AMOUNT UNITS AMOUNT
-------------------- ----------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
Growth & Income*
Issuance of Units........... 1,409,110 $ 3,198,360 2,680,164 $ 5,914,222
Redemption of Units......... (1,599,773) (3,593,679) (551,136) (1,155,419)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... (190,663) $ (395,319) 2,129,028 $ 4,758,803
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Delchester
Issuance of Units........... 2,042,797 $ 2,688,612 5,043,925 $ 7,108,606
Redemption of Units......... (2,815,392) (3,713,867) (2,469,663) (3,481,994)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... (772,595) $ (1,025,255) 2,574,262 $ 3,626,612
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Capital Reserves
Issuance of Units........... 761,067 $ 967,941 1,215,646 $ 1,542,507
Redemption of Units......... (892,640) (1,130,187) (433,955) (557,425)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... (131,573) $ (162,246) 781,691 $ 985,082
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Cash Reserve
Issuance of Units........... 5,120,948 $ 6,099,027 4,450,736 $ 5,109,401
Redemption of Units......... (4,166,078) (4,952,345) (3,248,497) (3,722,346)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 954,870 $ 1,146,682 1,202,239 $ 1,387,055
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
DelCap
Issuance of Units........... 707,027 $ 1,559,337 384,486 $ 656,282
Redemption of Units......... (223,737) (521,971) (102,901) (168,843)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 483,290 $ 1,037,366 281,585 $ 487,439
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Delaware Balanced*
Issuance of Units........... 607,092 $ 1,199,317 763,840 $ 1,453,838
Redemption of Units......... (387,918) (757,989) (113,638) (238,393)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 219,174 $ 441,328 650,202 $ 1,215,445
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
International Equity
Issuance of Units........... 538,825 $ 848,836 268,156 $ 394,673
Redemption of Units......... (302,943) (454,479) (169,418) (246,848)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 235,882 $ 394,357 98,738 $ 147,825
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Small Cap Value
Issuance of Units........... 711,142 $ 1,192,795 540,420 $ 988,214
Redemption of Units......... (619,326) (993,426) (44,677) (93,622)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 91,816 $ 199,369 495,743 $ 894,592
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Trend
Issuance of Units........... 942,814 $ 2,701,540 1,421,182 $ 2,626,819
Redemption of Units......... (773,397) (2,300,822) (1,901,174) (3,264,742)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease).... 169,417 $ 400,718 (479,992) $ (637,923)
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
</TABLE>
* Name changed. See Note 1.
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------------------------ -----------------------------------------------
UNITS AMOUNT UNITS AMOUNT
-------------------- ----------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
Global Bond
Issuance of Units . . . . 141,216 $ 136,784 46,094 $ 53,839
Redemption of Units . . . . (109,661) (98,935) (21,340) (25,105)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 31,555 $ 37,849 24,754 $ 28,734
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Strategic Income
Issuance of Units . . . . 617,030 $ 669,157 1,762,649 $ 1,875,968
Redemption of Units. . . . (533,672) (576,585) (239,893) (255,494)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 83,358 $ 92,572 1,522,756 $ 1,620,474
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Devon
Issuance of Units . . . . 1,293,851 $ 1,832,033 1,598,494 $ 2,221,232
Redemption of Units . . . (980,535) (1,360,507) (146,013) (206,967)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 313,316 $ 471,526 1,452,481 $ 2,014,265
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Emerging Markets
Issuance of Units . . . . 1,918,546 $ 1,110,189 215,600 $ 162,428
Redemption of Units . . . (1,346,384) (838,367) (32,671) (23,488)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 572,162 $ 271,822 182,929 $ 138,940
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Convertible Securities
Issuance of Units . . . . 227,308 $ 261,127 364,829 $ 415,406
Redemption of Units. . . . (170,605) (197,047) (73,901) (86,698)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 56,703 $ 64,080 290,928 $ 328,708
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Social Awareness
Issuance of Units . . . . 162,138 $ 237,968 402,874 $ 557,588
Redemption of Units . . . (187,808) (280,305) (109,864) (136,798)
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . (25,670) $ (42,337) 293,010 $ 420,790
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
REIT
Issuance of Units . . . . 29,253 $ 29,253 - $ -
Redemption of Units . . . - - - -
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 29,253 $ 29,253 - $ -
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
Aggressive Growth
Issuance of Units . . . . 1,229,182 $ 1,417,037 - $ -
Redemption of Units. . . . (111,285) (119,651) - -
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 1,117,897 $ 1,297,386 - $ -
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
U.S. Growth
Issuance of Units . . . . 241,748 $ 249,254 - $ -
Redemption of Units . . . (350) (355) - -
-------------------- ----------------------- -------------------- -----------------------
Net increase (decrease) . 241,398 $ 248,899 - $ -
-------------------- ----------------------- -------------------- -----------------------
-------------------- ----------------------- -------------------- -----------------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h)
of the Code. The Company believes that Separate Account VA-K satisfies the
current requirements of the regulations, and it intends that Separate Account
VA-K will continue to meet such requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of DGPF by Separate
Account VA-K during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
-------------------- ----------------- -------------
<S> <C> <C>
Growth & Income*. . . . . . . . . $ 2,927,416 $ 2,678,523
Delchester. . . . . . . . . . . . 3,302,599 3,884,551
Capital Reserves. . . . . . . . . 986,008 1,092,833
Cash Reserve. . . . . . . . . . . 6,205,880 4,980,845
DelCap. . . . . . . . . . . . . . 1,428,235 348,619
Delaware Balanced*. . . . . . . . 1,219,996 672,878
International Equity. . . . . . . 816,224 416,873
Small Cap Value . . . . . . . . . 1,123,278 920,388
Trend . . . . . . . . . . . . . . 2,977,010 2,619,689
Global Bond . . . . . . . . . . . 158,435 117,445
Strategic Income. . . . . . . . . 691,758 515,446
Devon . . . . . . . . . . . . . . 1,679,457 1,199,834
Emerging Markets. . . . . . . . . 1,079,276 810,332
Convertible Securities. . . . . . 280,704 207,091
Social Awareness. . . . . . . . . 228,366 276,623
REIT. . . . . . . . . . . . . . . 29,249 137
Aggressive Growth . . . . . . . . 1,415,274 120,942
U. S. Growth . . . . . . . . . . 249,194 422
--------------- -------------
$ 26,798,359 $ 20,863,471
--------------- -------------
--------------- -------------
</TABLE>
* Name changed. See Note 1.
S-13
<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
and 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.
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws, as
amended to reflect its name change,
<PAGE>
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 Schedule for Computation of Performance Quotations was
previously filed on October 18, 1994 in a post-effective
amendment, and is incorporated by reference herein.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Form of Amendment to Delaware Participation Agreement
is filed herewith. Form of Participation Agreement with
Delaware Group Premium Fund and Amendment were previously
filed on April 24, 1998 in Post-Effective Amendment No. 9
of Registration Statement No. 33-71054/811-8114, and are
incorporated by reference herein.
(b) Form of Amendment to AIM Participation Agreement is filed
Form of herewith. Participation Agreement with AIM Variable
Insurance Funds, Inc. was previously filed on August 27,
1998 in Post-Effective Amendment No. 2 in Registration
Statement No. 333-16929/811-7747, and is incorporated by
reference herein.
(c) Participation Agreement with Alger was previously filed in
April 2000 in Post-Effective Amendment No. 6 of
Registration Statement No. 333-10285/811-7769, and is
incorporated by reference herein.
(d) Form of Participation Agreement with Alliance is filed
herewith.
(e) Form of Participation Agreement with Franklin Templeton is
filed herewith.
(f) Form of Amendment to Pioneer Participation Agreement was
previously filed in April 2000 in Post-Effective Amendment
No. 12 of Registration Statement No. 33-86664/811-8872, and
is incorporated by reference herein. . Participation
Agreement with Pioneer was previously filed on April 24,
1998 in Post-Effective Amendment No. 8 of Registration
Statement No. 33-86664/811-8872, and is incorporated by
reference herein.
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director and Vice President Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998)
Vice President and of First Allmerica
Corporate Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992) of First
Director and Vice President Allmerica.
Mary Eldridge Secretary (since 1999) of Allmerica Financial; Secretary (since
Secretary 1999) of Allmerica Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First Allmerica
Director, Vice President and (since 2000); Vice President (1999) of Promos Hotel Corporation;
General Counsel Vice President & Deputy General Counsel (1998-1999) of Legg
Mason, Inc.; Vice President and Deputy General Counsel (1995-
1998) of USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; Vice President (since
Chief Investment Officer 1998) of Allmerica Financial Investment Management Services,
Inc.; and President (since 1995) and Director (since 1996)
of Allmerica Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President
Director (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 (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since 2000) of First
Vice President and Treasurer Allmerica; Associate, Investment Banking (1996 -1997) of
Merrill Lynch & Co.; Associate, Investment Banking (1995) of
Salomon Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc. and
Allmerica Financial Investment Management Services, Inc.
<PAGE>
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of First
Director, President and Chief Allmerica
Executive Officer
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice President
Director, Vice President, (since 1993), and Treasurer (1993 - 2000) of First Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; President (since 1995) of Allmerica Financial Life
Insurance and Annuity Company; Director (since 1990) of
Allmerica Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management Services,
Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica;
Director and Vice President Director (since 1998) of The Hanover Insurance Company; Chief
Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; Director (since 1991) of Allmerica Investments, Inc.; and
Director (since 1991) of Allmerica Financial Investment
Management Services, Inc.
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
|_________________________________________________________________________________________________________________________
| | | | | | | | | |
| 100% 100% 100% 100% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
- ----------------- ----------------- -----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
----------------- -----------------
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
<PAGE>
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 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable
as SMA Life Assurance Company annuities and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services,
Inc. and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investments Insurance Agency 200 Southbridge Parkway Insurance Agency
Inc. of Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency of 14211 Commerce Way Insurance Agency
Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency 1455 Lincoln Parkway Insurance Agency
<PAGE>
Inc. of Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Barkley Bldg-Suite 105 Insurance Agency
Inc. of Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency 631 Lakeland East Drive Insurance Agency
Inc. of Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & 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
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
<PAGE>
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 29, 2000, there were 155 Contract holders of qualified
Contracts and 473 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:
- VEL Account, VEL II Account, VEL Account III, Separate Account SPL-D,
Separate Account IMO, 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
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select Separate
Account of First Allmerica Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
<S> <C>
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Claudia J. Eckels Vice President
Mary M. Eldridge Secretary/Clerk
Philip L. Heffernan Vice President
J. Kendall Huber Director
<PAGE>
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief Executive
Officer
David J. Mueller Vice President, Chief Financial Officer,
Financial Operations Principal and
Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
(c) As indicated in Part B (Statement of Additional Information) in response to
Item 20(c), there were no commissions retained by Allmerica Investments,
Inc., the principal underwriter of the Contracts, for sales of variable
contracts funded by the Registrant in 1999. No other commissions or other
compensation was received by the principal underwriter, directly or
indirectly, from the Registrant during the Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by
Section 31(a) of the 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) The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(b) The registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information and any financial statements promptly upon written or oral
request, according to the requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may
be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the 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 3rd day of April,
2000.
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
------------------------------
Mary Eldridge, 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 3, 2000
- ------------------------- Controller
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief
- ------------------------- Financial Officer
Richard M. Reilly* Director and Vice President
- -------------------------
John F. O'Brien* Director, President and Chief
- ------------------------- Executive Officer
Bruce C. Anderson* Director and Vice President
- -------------------------
Mark R. Colborn* Director and Vice President
- -------------------------
John P. Kavanaugh* Director, Vice President and Chief
- ------------------------- Investment Officer
J. Kendall Huber* Director, Vice President and
- ------------------------- General Counsel
J. Barry May* Director
- -------------------------
James R. McAuliffe* Director
- -------------------------
Robert P. Restrepo, Jr.* Director and Vice President
- -------------------------
Eric A. Simonsen* Director and Vice President
- -------------------------
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- -------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-71054)
<PAGE>
EXHIBIT TABLE
Exhibit 8(e) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(a) Form of Amendment to Delaware Participation Agreement
Exhibit 15(b) Form of Amendment to AIM Participation Agreement
Exhibit 15(d) Form of Alliance Participation Agreement
Exhibit 15(e) Form of Franklin Templeton Participation Agreement
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
J. Kendall Huber, 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 Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by 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, and with any
other regulatory agency or state authority that may so require, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 4/2/2000
- ------------------------------------- Officer --------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/2/2000
- ------------------------------------- --------
Bruce C. Anderson
/s/ Mark R. Colborn Director and Vice President 4/2/2000
- ------------------------------------- --------
Mark R. Colborn
/s/ John P. Kavanaugh Director, Vice President and 4/2/2000
- ------------------------------------- Chief Investment Officer --------
John P. Kavanaugh
/s/ J. Kendall Huber Director, Vice President and 4/2/2000
- ------------------------------------- General Counsel --------
J. Kendall Huber
/s/ J. Barry May Director 4/2/2000
- ------------------------------------- --------
J. Barry May
/s/ James R. McAuliffe Director 4/2/2000
- ------------------------------------- --------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, and Chief Financial 4/2/2000
- ------------------------------------- Officer --------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/2/2000
- ------------------------------------- --------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/2/2000
- ------------------------------------- --------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/2/2000
- ------------------------------------- --------
Eric A. Simonsen
</TABLE>
<PAGE>
April 14, 2000
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT VA-K OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-71054 AND 811-8114
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 amendment
under 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
Prospectuses 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 and amendment under the
Investment Company Act of 1940.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
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. 12 to the Registration
Statement of Separate Account VA-K of First Allmerica Financial Life Insurance
Company on Form N-4 of our report dated February 1, 2000, relating to the
financial statements of First Allmerica Financial Life Insurance Company, and
our report dated April 3, 2000, relating to the financial statements of Separate
Account VA-K 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 24, 2000
<PAGE>
Amendment to the Participation Agreement
among
Delaware Group Premium Fund
Delaware Distributors, L.P.
Allmerica Financial Life Insurance and Annuity Company
And
First Allmerica Financial Life Insurance Company
WHEREAS, Delaware Group Premium Fund, Delaware Distributors, L.P.,
Allmerica Financial Life Insurance and Annuity Company (formerly SMA Life
Assurance Company) and First Allmerica Financial Life Insurance Company
(formerly State Mutual Life Assurance Company of America) entered into a
Participation Agreement on December 23, 1991 ("Participation Agreement"); and
WHEREAS, the Participation Agreement provides for the amendment of Schedules 1,
2 and 3 thereto by mutual written consent of the parties from time to time in
accordance with the provisions of Article XI thereof, and the parties now wish
to amend and restate in their entirety Schedules 1, 2 and 3; and
WHEREAS, the parties wish to amend Section 3.1 under Article III; and
NOW, THEREFORE, the parties do hereby agree:
1. To replace Schedules 1, 2 and 3 of the Participation Agreement and any
amendments thereto with the attached Schedules 1, 2 and 3 dated May 1,
2000.
2. To insert the following sentence after the last sentence of Section 3.1 of
the Participation Agreement: Notwithstanding the foregoing and solely with
respect to the Account assets supporting the Delaware ExecutiveSolutions
variable life contracts, the cost of printing the Fund Prospectuses shall
be borne by the Fund and the cost of printing the Contracts Prospectus
shall be borne by the Distributor or its affiliate.
3. All terms and conditions of the Participation Agreement and Schedules
thereto shall continue in full force and effect except as modified hereby.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representatives as of the
date specified below.
DELAWARE DISTRIBUTORS, L.P.
DELAWARE GROUP PREMIUM FUND By: DELAWARE DISTRIBUTORS, INC.
(General Partner)
By: ________________________ By: ________________________
Name: Name:
Title: Title:
Date: ________________________ Date: ________________________
ALLMERICA FINANCIAL LIFE INSURANCE FIRST ALLMERICA FINANCIAL LIFE
AND ANNUITY COMPANY INSURANCE COMPANY
By: ________________________ By: ________________________
Name: Richard M. Reilly Name: Richard M. Reilly
Title: President Title: Vice President
Date: ________________________ Date: ________________________
<PAGE>
SCHEDULE 1
SEPARATE ACCOUNTS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY ("AFLIAC") AND FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
("FAFLIC") INVESTING IN THE FUND
As of May 1, 2000
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
Of AFLIAC
Separate Account VA-P October 27, 1994
Of AFLIAC
Separate Account VEL June 3, 1987
Of AFLIAC
Separate Account VEL II January 21, 1993
Of AFLIAC
Separate Account VEL III June 13, 1996
Of AFLIAC
Separate Account Inheiritage September 15, 1993
Of AFLIAC
Fulcrum Separate Account June 13, 1996
Of AFLIAC
Fulcrum Variable Life Separate Account June 13, 1996
Of AFLIAC
Group VEL Separate Account May 1, 1995
Of AFLIAC
Separate Account SPL-D June 13, 1996
Of AFLIAC
Separate Account IMO June 13, 1996
Of AFLIAC
Separate Account VA-K August 20, 1991
Of FAFLIC
Separate Account VA-P August 20, 1991
Of FAFLIC
Separate Account VEL II August 20, 1991
Of FAFLIC
Separate Account Inheiritage August 20, 1991
Of FAFLIC
Fulcrum Separate Account June 13, 1996
Of FAFLIC
Group VEL Separate Account November 13, 1996
Of FAFLIC
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
And Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of May 1, 2000
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund.
Individual Delaware Golden Medallion Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund.
Individual Allmerica Advantage Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund.
Individual Allmerica Accumulator Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund.
Individual Pioneer Vision 1 & 2 Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-P and investing in shares of Delaware Group
Premium Fund.
Individual Pioneer C-Vision Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-P and investing in shares of Delaware Group Premium Fund.
Individual Pioneer Xtra Vision Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-P and investing in shares of Delaware Group Premium Fund.
Individual VEL Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL and investing in shares of the International Equity Series
of Delaware Group Premium Fund.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of Fulcrum
Separate Account and investing in shares of Delaware Group Premium Fund.
Individual Fulcrum Variable Life Insurance Policies funded by sub-accounts of
Fulcrum Variable Life Separate Account and investing in shares of Delaware Group
Premium Fund.
Group Variable Life Insurance Policies funded by sub-accounts of Group VEL
Account and investing in shares of Delaware Group Premium Fund.
Individual Variable Life Policies funded by sub-accounts of Separate Account
SPL-D and investing in shares of Delaware Group Premium Fund.
<PAGE>
Individual Variable Life Policies funded by sub-accounts of Separate Account IMO
and investing in shares of the International Equity Series of Delaware Group
Premium Fund.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund.
Individual Allmerica Advantage Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund.
Individual Allmerica Accumulator Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund.
Individual Pioneer Vision 1 & 2 Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-P and investing in shares of Delaware Group
Premium Fund.
Individual Pioneer C-Vision Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-P and investing in shares of Delaware Group Premium Fund.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of Fulcrum
Separate Account and investing in shares of Delaware Group Premium Fund.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of May 1, 2000
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Advantage"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Accumulator"
Individual Variable Annuity Contracts Marketed under the name "Pioneer
Vision 1 & 2"
Individual Variable Annuity Contracts Marketed under the name "Pioneer C-Vision"
Individual Variable Annuity Contracts Marketed under the name "Pioneer Xtra
Vision"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Individual Variable Life Insurance Policies Marketed under the name "Fulcrum
Variable Life (SPVUL)"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
Individual Variable Life Insurance Policies Marketed under the name "VUL 2001"
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Advantage"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Accumulator"
Individual Variable Annuity Contracts Marketed under the name "Pioneer
Vision 1 & 2"
Individual Variable Annuity Contracts Marketed under the name "Pioneer C-Vision"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
<PAGE>
AMENDMENT NO. 1
PARTICIPATION AGREEMENT
The Participation Agreement (the "Agreement"), dated July 27, 1998, by and
among AIM Variable Insurance Funds, Inc., a Maryland corporation, A I M
Distributors, Inc., a Delaware corporation, First Allmerica Financial Life
Insurance Company, a Delaware life insurance company and Allmerica Investments,
Inc., is hereby amended as follows:
Schedule A of the Agreement is hereby deleted in its entirety and replaced
with the following:
SCHEDULE A
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FUNDS AVAILABLE UNDER SEPARATE ACCOUNTS POLICIES FUNDED BY THE
THE POLICIES UTILIZING THE FUNDS SEPARATE ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund Fulcrum Account of Allmerica 3025-96
AIM V.I. Value Fund Financial Life Insurance
AIM V.I. Growth Fund Company
AIM V.I. International Equity Fund
AIM V.I. Value Equity Fund -------------------------------------------------------------------------------------
AIM V.I. High Yield Fund
AIM V.I. Dent Demographic Trends Fund Fulcrum Variable Life Account of 1030-96
AIM V.I. Aggressive Growth Fund Allmerica Financial Life Insurance
AIM V.I. Blue Chip Fund and Annuity Company
-------------------------------------------------------------------------------------
FUVUL Separate Account of 1036-99
Allmerica Financial Life Insurance
and Annuity Company
-------------------------------------------------------------------------------------
Separate Account VA-P of Allmerica Pioneer Vision; Pioneer C-Vision;
Financial Life Insurance and Annuity and Pioneer XtraVision; A3030-99
Company
-------------------------------------------------------------------------------------
Separate Account VA-K (Delaware) of Delaware Medallion; Delaware
Allmerica Financial Life Insurance Golden Medallion; A3030-99
Company
-------------------------------------------------------------------------------------
Separate Account VA-K of Allmerica A3030-99; Agency Replacement
Financial Life Insurance and Annuity
Company
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All other terms and provisions of the Agreement not amended herein shall
remain in full force and effect.
Effective Date:
-----------------
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: By:
----------------------------- ---------------------------------
Name: Nancy L. Martin Name: Robert H. Graham
Title: Assistant Secretary Title: President
(SEAL)
A I M DISTRIBUTORS, INC.
1 of 2
<PAGE>
Attest: By:
----------------------------- ---------------------------------
Name: Nancy L. Martin Name: Michael J. Cemo
Title: Assistant Secretary Title: President
(SEAL)
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
Attest: By:
----------------------------- ---------------------------------
Name: Name:
----------------------------- ---------------------------------
Title: Title:
----------------------------- ---------------------------------
(SEAL)
ALLMERICA INVESTMENTS, INC.
Attest: By:
----------------------------- ---------------------------------
Name: Name:
----------------------------- ---------------------------------
Title: Title:
----------------------------- ---------------------------------
(SEAL)
2 of 2
<PAGE>
PARTICIPATION AGREEMENT
AMONG
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY,
ALLMERICA INVESTMENTS, INC.
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
MAY 1, 2000
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the first day of May, 2000
("Agreement"), by and among First Allmerica Financial Life Insurance Company, a
New York life insurance company ("Insurer") (on behalf of itself and its
"Separate Account," defined below); Allmerica Investments, Inc., a Massachusetts
corporation ("Contracts Distributor"), the principal underwriter with respect to
the Contracts referred to below; Alliance Capital Management L.P., a Delaware
limited partnership ("Adviser"), the investment adviser of the Fund referred to
below; and Alliance Fund Distributors, Inc., a Delaware corporation
("Distributor"), the Fund's principal underwriter (collectively, the "Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desire that Class B shares of the Fund's Alliance Growth
Portfolio, Alliance Premier Growth Portfolio, Alliance Growth and Income
Portfolio, and Alliance Technology Portfolio (the "Portfolios"; reference herein
to the "Fund" includes reference to each Portfolio to the extent the context
requires) be made available by Distributor to serve as underlying investment
media for those combination fixed and variable annuity contracts of Insurer
known as _______________ that are the subject of Insurer's Form N-4 registration
statement filed with the Securities and Exchange Commission (the "SEC"), File
No. ___________________ (the "Contracts"), to be offered through Contracts
Distributor and other registered broker-dealer firms as agreed to by Insurer and
Contracts Distributor; and
WHEREAS the Contracts provide for the allocation of net amounts
received by Insurer to separate series (the "Divisions"; reference herein to the
"Separate Account" includes reference to
1
<PAGE>
each Division to the extent the context requires) of the Separate Account for
investment in Class B shares of corresponding Portfolios of the Fund that are
made available through the Separate Account to act as underlying investment
media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make Class B shares of the
Portfolios available to Insurer for this purpose at net asset value and with no
sales charges, all subject to the following provisions:
SECTION 1. ADDITIONAL PORTFOLIOS
The Fund has and may, from time to time, add additional Portfolios,
which will become subject to this Agreement, if, upon the written consent of
each of the Parties hereto, they are made available as investment media for the
Contracts.
SECTION 2. PROCESSING TRANSACTIONS
2.1 TIMELY PRICING AND ORDERS.
The Adviser or its designated agent will provide closing net asset
value, dividend and capital gain information for each Portfolio to Insurer at
the close of trading on each day (a "Business Day") on which (a) the New York
Stock Exchange is open for regular trading, (b) the Fund calculates the
Portfolio's net asset value and (c) Insurer is open for business. The Fund or
its designated agent will use its best efforts to provide this information by
6:00 p.m., Eastern time. Insurer will use these data to calculate unit values,
which in turn will be used to process transactions that receive that same
Business Day's Separate Account Division's unit values. Such Separate Account
processing will be done the same evening, and corresponding orders with
2
<PAGE>
respect to Fund shares will be placed the morning of the following Business
Day. Insurer will use its best efforts to place such orders with the Fund by
10:00 a.m., Eastern time.
2.2 TIMELY PAYMENTS.
Insurer will transmit orders for purchases and redemptions of Fund
shares to Distributor, and will wire payment for net purchases to a custodial
account designated by the Fund on the day the order for Fund shares is placed,
to the extent practicable. Payment for net redemptions will be wired by the Fund
to an account designated by Insurer on the same day as the order is placed, to
the extent practicable, and in any event be made within six calendar days after
the date the order is placed in order to enable Insurer to pay redemption
proceeds within the time specified in Section 22(e) of the Investment Company
Act of 1940, as amended (the "1940 Act").
2.3 REDEMPTION IN KIND.
The Fund reserves the right to pay any portion of a redemption in kind
of portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
2.4 APPLICABLE PRICE.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
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agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
Except as otherwise specifically provided herein, each Party will bear
all expenses incident to its performance under this Agreement.
3.2 REGISTRATION.
The Fund will bear the cost of its registering as a management
investment company under the 1940 Act and registering its shares under the
Securities Act of 1933, as amended (the "1933 Act"), and keeping such
registrations current and effective; including, without limitation, the
preparation of and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices
respecting the Fund and its shares and payment of all applicable registration or
filing fees with respect to any of the foregoing. Insurer will bear the cost of
registering the Separate Account as a unit investment trust under the 1940 Act
and registering units of interest under the Contracts under the 1933 Act and
keeping such registrations current and effective; including, without limitation,
the preparation and filing with the SEC of Forms
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N-SAR and Rule 24f-2 Notices respecting the Separate Account and its units of
interest and payment of all applicable registration or filing fees with
respect to any of the foregoing.
3.3 OTHER (NON-SALES-RELATED) EXPENSES.
The Fund will bear the costs of preparing, filing with the SEC and
setting for printing the Fund's prospectus, statement of additional information
and any amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity and delivering to existing
Participants the documents as to which it bears the cost of preparation as set
forth above in this Section 3.3, it being understood that reasonable cost
allocations will be made in cases where any such Fund and Insurer documents are
printed or mailed on a combined or coordinated basis. If REQUESTED by Insurer,
the Fund will provide annual Prospectus text to Insurer on diskette for printing
and binding with the Separate Account Prospectus.
3.4 OTHER SALES-RELATED EXPENSES.
Expenses of distributing the Portfolio's shares and the Contracts will
be paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
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3.5 PARTIES TO COOPERATE.
The Adviser, Insurer, Contracts Distributor, and Distributor each
agrees to cooperate with the others, as applicable, in arranging to print, mail
and/or deliver combined or coordinated prospectuses or other materials of the
Fund and Separate Account.
SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
(b) Insurer represents that it believes, in good faith, that the
Contracts will be treated as [annuity] contracts under applicable provisions of
the Code and that it will make every effort to maintain such treatment. Insurer
will notify the Fund and Distributor immediately upon having a reasonable basis
for believing that any of the Contracts have ceased to be so treated or that
they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
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(d) Insurer represents that it believes, in good faith, that the
Separate Account is a "segregated asset account" and that interests in the
Separate Account are offered exclusively through the purchase of or transfer
into a "variable contract," within the meaning of such terms under Section
817(h) of the Code and the regulations thereunder. Insurer will make every
effort to continue to meet such definitional requirements, and it will notify
the Fund and Distributor immediately upon having a reasonable basis for
believing that such requirements have ceased to be met or that they might not be
met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with
Subchapter M of the Code and will use its best efforts to comply with Section
817(h) of the Code and regulations thereunder. The Fund has adopted and will
maintain procedures for ensuring that the Fund is managed in compliance with
Subchapter M and Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of
Fund, or any of its Portfolios, to comply with Subchapter M of the Code or
Section 817(h) of the Code and regulations thereunder, they represent and agree
that they will immediately notify Insurer of such in writing.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) The Adviser will use its best efforts to cause the Fund to comply
with any applicable state insurance laws or regulations, to the extent
specifically requested in writing by Insurer. If it cannot comply, it will so
notify Insurer in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of New York and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its
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obligations under this Agreement, (ii) it has legally and validly established
and maintains the Separate Account as a segregated asset account under New
York law, and (iii) the Contracts comply in all material respects with all
other applicable federal and state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that
Contracts Distributor is a business corporation duly organized, validly
existing, and in good standing under the laws of the State of Massachusetts and
has full corporate power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
(d) Distributor represents and warrants that it is a business
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has full corporate power, authority and legal
right to execute, deliver, and perform its duties and comply with its
obligations under this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Maryland and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
(f) Adviser represents and warrants that it is a limited partnership,
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
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4.3 SECURITIES LAWS.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with Delaware law, (ii) the Separate Account is
and will remain registered under the 1940 Act to the extent required by the 1940
Act, (iii) the Separate Account does and will comply in all material respects
with the requirements of the 1940 Act and the rules thereunder, (iv) the
Separate Account's 1933 Act registration statement relating to the Contracts,
together with any amendments thereto, will, at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder, and (v)
the Separate Account Prospectus will at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund
shares sold pursuant to this Agreement will be registered under the 1933 Act to
the extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
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(c) The Fund will register and qualify its shares for sale in
accordance with the laws of any state or other jurisdiction only if and to the
extent reasonably deemed advisable by the Fund, Insurer or any other life
insurance company utilizing the Fund.
(d) Distributor and Contracts Distributor each represents and warrants
that it is registered as a broker-dealer with the SEC under the Securities
Exchange Act of 1934, as amended, and is a member in good standing of the
National Association of Securities Dealers Inc. (the "NASD").
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares, or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund
of (i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
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Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or Separate Account Prospectus, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. Insurer and Contracts Distributor will make every reasonable effort
to prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting thereof at
the earliest possible time.
4.5 INSURER TO PROVIDE DOCUMENTS.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 FUND TO PROVIDE DOCUMENTS.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
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SECTION 5. MIXED AND SHARED FUNDING
5.1 GENERAL.
The Fund has obtained an order exempting it from certain provisions of
the 1940 Act and rules thereunder so that the Fund is available for investment
by certain other entities, including, without limitation, separate accounts
funding variable life insurance policies and separate accounts of insurance
companies unaffiliated with Insurer ("Mixed and Shared Funding Order"). The
Parties recognize that the SEC has imposed terms and conditions for such orders
that are substantially identical to many of the provisions of this Section 5.
5.2 DISINTERESTED DIRECTORS.
The Fund agrees that its Board of Directors shall at all times consist
of directors a majority of whom (the "Disinterested Directors") are not
interested persons of Adviser or Distributor within the meaning of Section
2(a)(19) of the 1940 Act.
5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
The Fund agrees that its Board of Directors will monitor for the
existence of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
(a) an action by any state insurance or other regulatory
authority;
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(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant
proceeding;
(d) the manner in which the investments of any Portfolio are
being managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract participants or by participants of
different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to
disregard the voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 CONFLICT REMEDIES.
(a) It is agreed that if it is determined by a majority of the members
of the Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life insurance
companies utilizing the Fund will, at their own expense and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Directors), take
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whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict, which steps may include, but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such
assets in a different investment medium, including another
Portfolio of the Fund, or submitting the question whether such
segregation should be implemented to a vote of all affected
participants and, as appropriate, segregating the assets of any
particular group (e.g., annuity contract owners or participants,
life insurance contract owners or all contract owners and
participants of one or more life insurance companies utilizing
the Fund) that votes in favor of such segregation, or offering
to the affected contract owners or participants the option of
making such a change; and
(ii) establishing a new registered investment company of the type
defined as a "Management Company" in Section 4(3) of the 1940
Act or a new separate account that is operated as a Management
Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer may be
required, at the Fund's election, to withdraw the Separate Account's investment
in the Fund. No charge or penalty will be imposed as a result of such
withdrawal. Any such withdrawal must take place within six months after the Fund
gives notice to Insurer that this provision is being implemented, and until such
withdrawal Distributor and the Fund shall continue to accept and implement
orders by Insurer for the purchase and redemption of shares of the Fund.
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(c) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board of
Directors informs Insurer that it has determined that such decision has created
a material irreconcilable conflict, and until such withdrawal Distributor and
Fund shall continue to accept and implement orders by Insurer for the purchase
and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving
any material irreconcilable conflict will be carried out at its expense and with
a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any material
irreconcilable conflict. In no event, however, will the Fund or Distributor be
required to establish a new funding medium for any Contracts. Insurer will not
be required by the terms hereof to establish a new funding medium for any
Contracts if an offer to do so has been declined by vote of a majority of
Participants materially adversely affected by the material irreconcilable
conflict.
5.5 NOTICE TO INSURER.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
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5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 COMPLIANCE WITH SEC RULES.
If, at any time during which the Fund is serving an investment medium
for variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable,
6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with
respect to mixed and shared funding, the Parties agree that they will comply
with the terms and conditions thereof and that the terms of this Section 5 shall
be deemed modified if and only to the extent required in order also to comply
with the terms and conditions of such exemptive relief that is afforded by any
of said rules that are applicable.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
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(a) at the option of Insurer or Distributor upon at least six months
advance written notice to the other Parties, or
(b) at the option of the Fund upon (i) at least sixty days advance
written notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon a finding that a continuation of this Contract is
contrary to the best interests of the Fund, or (y) a majority vote of the shares
of the affected Portfolio in the corresponding Division of the Separate Account
(pursuant to the procedures set forth in Section 11 of this Agreement for voting
Trust shares in accordance with Participant instructions).
(c) at the option of the Fund upon institution of formal proceedings
against Insurer or Contracts Distributor by the NASD, the SEC, any state
insurance regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation of
the Separate Account, or the purchase of the Fund shares, if, in each case, the
Fund reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on the Portfolio to be terminated; or
(d) at the option of Insurer upon institution of formal proceedings
against the Fund, Adviser, or Distributor by the NASD, the SEC, or any state
insurance regulator or any other regulatory body regarding the Fund's, Adviser's
or Distributor's obligations under this Agreement or related to the operation or
management of the Fund or the purchase of Fund shares, if, in each case, Insurer
reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on Insurer, Contracts Distributor or the Division
corresponding to the Portfolio to be terminated; or
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(e) at the option of any Party in the event that (i) the Portfolio's
shares are not registered and, in all material respects, issued and sold in
accordance with any applicable state and federal law or (ii) such law precludes
the use of such shares as an underlying investment medium of the Contracts
issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a
RIC under Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with
Section 817(h) of the Code or with successor or similar provisions; or
(i) at the option of Insurer if Insurer reasonably believes that any
change in a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 FUNDS TO REMAIN AVAILABLE.
Except (i) as necessary to implement Participant-initiated
transactions, (ii) as required by state insurance laws or regulations, (iii) as
required pursuant to Section 5 of this Agreement, or (iv) with respect to any
Portfolio as to which this Agreement has terminated, Insurer shall not (x)
redeem Fund shares attributable to the Contracts, or (y) prevent Participants
from allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 60 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
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6.3 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination of
this Agreement.
6.4 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
Notwithstanding any termination of this Agreement, the Distributor
shall continue, at the option of the Insurer, to make available shares of the
Portfolios pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement (the
"Existing Contracts"), except as otherwise provided under Section 5 of this
Agreement. Specifically, and without limitation, the Distributor shall, at the
option of the Insurer, facilitate the sale and purchase of shares of the
Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any Party, except with the
written consent of each other Party.
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SECTION 9. CLASS B DISTRIBUTION PAYMENTS
From time to time during the term of this Agreement the Distributor may
make payments to the Contracts Distributor pursuant to a distribution plan
adopted by the Fund with respect to the Class B shares of the Portfolios
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan) in
consideration of the Contracts Distributor's furnishing distribution services
relating to the Class B shares of the Portfolios and providing administrative,
accounting and other services, including personal service and/or the maintenance
of Participant accounts, with respect to such shares. The Distributor has no
obligation to make any such payments, and the Contracts Distributor waives any
such payment, until the Distributor receives monies therefor from the Fund. Any
such payments made pursuant to this Section 9 shall be subject to the following
terms and conditions:
(a) Any such payments shall be in such amounts as the Distributor may
from time to time advise the Contracts Distributor in writing but in any event
not in excess of the amounts permitted by the Rule 12b-1 Plan. Such payments may
include a service fee in the amount of .25 of 1% per annum of the average daily
net assets of the Fund attributable to the Class B shares of a Portfolio held by
clients of the Contracts Distributor. Any such service fee shall be paid solely
for personal service and/or the maintenance of Participant accounts.
(b) The provisions of this Section 9 relate to a plan adopted by the
Fund pursuant to Rule 12b-1. In accordance with Rule 12b-1, any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to this Section 9 shall provide the Fund's Board of Directors, and the
Directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
(c) The provisions of this Section 9 shall remain in effect for not
more than a year and thereafter for successive annual periods only so long as
such continuance is specifically approved
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at least annually in conformity with Rule 12b-1 and the 1940 Act. The
provisions of this Section 9 shall automatically terminate in the event of
the assignment (as defined by the 1940 Act) of this Agreement, in the event
the Rule 12b-1 Plan terminates or is not continued or in the event this
Agreement terminates or ceases to remain in effect. In addition, the
provisions of this Section 9 may be terminated at any time, without penalty,
by either the Distributor or the Contracts Distributor with respect to any
Portfolio on not more than 60 days' nor less than 30 days' written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
SECTION 10. NOTICES
Notices and communications required or permitted by Section 2 hereof
will be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
If to Insurer
First Allmerica Financial Life Insurance
Company
440 Lincoln Street
Worcester, MA 01653
Attn: Richard M. Reilly, Vice President
If to Contracts Distributor
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: William F. Monroe, Jr., President
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If to Distributor
Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York NY 10105
Attn.: Edmund P. Bergan
FAX: (212) 969-2290
If to Advisor or the Fund
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
SECTION 11. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3
hereof, Insurer will distribute all proxy material furnished by the Fund to
Participants and will vote Fund shares in accordance with instructions received
from Participants. Insurer will vote Fund shares that are (a) not attributable
to Participants or (b) attributable to Participants, but for which no
instructions have been received, in the same proportion as Fund shares for which
said instructions have been received from Participants. Insurer agrees that it
will disregard Participant voting instructions only to the extent it would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 11.
22
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SECTION 12. FOREIGN TAX CREDITS
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
SECTION 13. INDEMNIFICATION
13.1 INDEMNIFICATION OF FUND, DISTRIBUTOR AND ADVISER BY INSURER.
(a) Except to the extent provided in Sections 13.1(b) and 13.1(c),
below, Insurer agrees to indemnify and hold harmless the Fund, Distributor and
Adviser, each of their directors and officers, and each person, if any, who
controls the Fund, Distributor or Adviser within the meaning of Section 15 of
the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 13. 1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Insurer) or
actions in respect thereof (including, to the extent reasonable, legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or actions are related to the sale, acquisition, or holding
of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
Separate Account's 1933 Act registration statement, the Separate
Account Prospectus, the Contracts or, to the extent prepared by
Insurer or Contracts Distributor, sales literature or advertising
for the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact
23
<PAGE>
required to be stated therein or necessary to make the statements
therein not misleading; provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933
Act registration statement, the Separate Account Prospectus, the
Contracts, or sales literature or advertising (or any amendment
or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in the Fund's 1933 Act registration statement,
Fund Prospectus, sales literature or advertising of the Fund,
or any amendment or supplement to any of the foregoing, not
supplied for use therein by or on behalf of Insurer or Contracts
Distributor) or the negligent, illegal or fraudulent conduct of
Insurer or Contracts Distributor or persons under their control
(including, without limitation, their employees and "Associated
Persons," as that term is defined in paragraph (m) of Article I
of the NASD's By-Laws), in connection with the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Fund's
1933 Act registration statement, Fund Prospectus, sales
literature or advertising of the Fund, or any amendment or
supplement to any of the foregoing, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the
24
<PAGE>
statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund, Adviser or Distributor
by or on behalf of Insurer or Contracts Distributor for use in
the Fund's 1933 Act registration statement, Fund Prospectus,
sales literature or advertising of the Fund, or any amendment
or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts
Distributor to perform the obligations, provide the services
and furnish the materials required of them under the terms of
this Agreement.
(b) Insurer shall not be liable under this Section 13.1 with respect to
any losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of that Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to Distributor or to the Fund.
(c) Insurer shall not be liable under this Section 13.1 with respect to
any action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Insurer of any such action shall not relieve
Insurer from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13. 1. In
case any such action is brought against an Indemnified Party, Insurer shall be
entitled to participate, at its own expense, in the defense of such action.
Insurer also shall be entitled to assume the defense thereof,
25
<PAGE>
with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably withheld. After notice from Insurer to
such Indemnified Party of Insurer's election to assume the defense thereof,
the Indemnified Party will cooperate fully with Insurer and shall bear the
fees and expenses of any additional counsel retained by it, and Insurer will
not be liable to such Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such Indemnified Party independently
in connection with the defense thereof, other than reasonable costs of
investigation.
13.2 INDEMNIFICATION OF INSURER AND CONTRACTS DISTRIBUTOR BY
ADVISER.
(a) Except to the extent provided in Sections 13.2(d) and 13.2(e),
below, Adviser agrees to indemnify and hold harmless Insurer and Contracts
Distributor, each of their directors and officers, and each person, if any,
who controls Insurer or Contracts Distributor within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Adviser) or
actions in respect thereof (including, to the extent reasonable, legal and
other expenses) to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions are related to the sale, acquisition, or holding of
the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Fund's
1933 Act registration statement, Fund Prospectus, sales
literature or advertising of the Fund or, to the extent not
prepared by Insurer or Contracts Distributor, sales literature
or advertising for the Contracts (or any amendment or supplement
to any of the foregoing), or arise out of or are based
26
<PAGE>
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with
information furnished to Distributor, Adviser or the Fund by or
on behalf of Insurer or Contracts Distributor for use in the
Fund's 1933 Act registration statement, Fund Prospectus, or in
sales literature or advertising (or any amendment or supplement
to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in the Separate Account's 1933 Act registration
statement, Separate Account Prospectus, sales literature or
advertising for the Contracts, or any amendment or supplement
to any of the foregoing, not supplied for use therein by or on
behalf of Distributor, Adviser, or the Fund) or the negligent,
illegal or fraudulent conduct of the Fund, Distributor, Adviser
or persons under their control (including, without limitation,
their employees and Associated Persons), in connection with the
sale or distribution of the Contracts or Fund shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising covering the
Contracts, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, if such statement
or omission was made
27
<PAGE>
in reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933
Act registration statement, Separate Account Prospectus, sales
literature or advertising covering the Contracts, or any
amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or
Distributor to perform the obligations, provide the services
and furnish the materials required of them under the terms of
this Agreement;
(b) Except to the extent provided in Sections 13.2(d) and 13.2(e)
hereof, Adviser agrees to indemnify and hold harmless the Indemnified Parties
from and against any and all losses, claims, damages, liabilities (including
amounts paid in settlement thereof with, except as set forth in Section 13.2(c)
below, the written consent of Adviser) or actions in respect thereof (including,
to the extent reasonable, legal and other expenses) to which the Indemnified
Parties may become subject directly or indirectly under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
actions directly or indirectly result from or arise out of the failure of any
Portfolio to operate as a regulated investment company in compliance with (i)
Subchapter M of the Code and regulations thereunder and (ii) Section 817(h) of
the Code and regulations thereunder (except to the extent that such failure is
caused by Insurer), including, without limitation, any income taxes and related
penalties, rescission charges, liability under state law to Contract owners or
Participants asserting liability against Insurer or Contracts Distributor
pursuant to the Contracts, the costs of any ruling and closing agreement or
other settlement with the Internal Revenue Service, and the cost of any
substitution by Insurer of shares of another investment company or portfolio for
those of any
28
<PAGE>
adversely affected Portfolio as a funding medium for the Separate
Account that Insurer deems necessary or appropriate as a result of the
noncompliance.
(c) The written consent of Adviser referred to in Section 13.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 13.2 with respect to
any losses, claims; damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or the Separate
Account.
(e) Adviser shall not be liable under this Section 13.2 with respect to
any action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Adviser of any such action shall not relieve
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13.2. In
case any such action is brought against an Indemnified Party, Adviser will be
entitled to participate, at its own expense, in the defense of such action.
Adviser also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the Internal Revenue Service),
with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably
29
<PAGE>
withheld. After notice from Adviser to such Indemnified Party of Adviser's
election to assume the defense thereof, the Indemnified Party will cooperate
fully with Adviser and shall bear the fees and expenses of any additional
counsel retained by it, and Adviser will not be liable to such Indemnified
Party under this Agreement for any legal or other expenses subsequently
incurred by such Indemnified Party independently in connection with the
defense thereof, other than reasonable costs of investigation.
13.3 EFFECT OF NOTICE.
Any notice given by the indemnifying Party to an Indemnified Party
referred to in Section 13.1(c) or 13.2(e) above of participation in or control
of any action by the indemnifying Party will in no event be deemed to be an
admission by the indemnifying Party of liability, culpability or responsibility,
and the indemnifying Party will remain free to contest liability with respect to
the claim among the Parties or otherwise.
SECTION 13. APPLICABLE LAW
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
30
<PAGE>
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
SECTION 17. RESTRICTIONS ON SALES OF FUND SHARES
Insurer agrees that the Fund will be permitted (subject to the other
terms of this
Agreement) to make its shares available to separate accounts of other
life insurance companies.
SECTION 18. HEADINGS
The Table of Contents and headings used in this Agreement are for
purposes of reference only and shall not limit or define the meaning of the
provisions of this Agreement.
31
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers signing below.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
By:
Name:
Title:
ALLMERICA INVESTMENTS, INC.
By:
Name:
Title:
ALLIANCE CAPITAL MANAGEMENT LP
By: Alliance Capital Management Corporation,
its General Partner
By:
Name:
Title:
ALLIANCE FUND DISTRIBUTORS, INC.
By:
Name:
Title:
32
<PAGE>
PARTICIPATION AGREEMENT
as of [ , ] 2000
Franklin Templeton Variable Insurance Products Trust
Franklin Templeton Distributors, Inc.
[Company]
CONTENTS
PARAGRAPH SUBJECT MATTER
1. Parties and Purpose
2. Representations and Warranties
3. Purchase and Redemption of Trust Portfolio Shares
4. Fees, Expenses, Prospectuses, Proxy Materials and Reports
5. Voting
6. Sales Material, Information and Trademarks
7. Indemnification
8. Notices
9. Termination
10. Miscellaneous
SCHEDULES TO THIS AGREEMENT
A. The Company
B. Accounts of the Company
C. Available Portfolios and Classes of Shares of the Trust;
Investment Advisers
D. Contracts of the Company
E. Other Portfolios Available under the Contracts
F. [REDACTED]
G. Addresses for Notices
H. Shared Funding Order
1. PARTIES AND PURPOSE
This agreement (the "Agreement") is between Franklin Templeton Variable
Insurance Products Trust, an open-end management investment company organized as
a business trust under Massachusetts law (the "Trust"), Franklin Templeton
Distributors, Inc., a California corporation which is the principal underwriter
for the Trust (the "Underwriter," and together with the Trust, "we" or "us") and
the insurance company identified on Schedule A ("you"), on your own behalf and
on behalf of each segregated asset account maintained by you that is listed on
Schedule B, as that schedule may be amended from time to time ("Account" or
"Accounts").
<PAGE>
The purpose of this Agreement is to entitle you, on behalf of the Accounts,
to purchase the shares, and classes of shares, of portfolios of the Trust
("Portfolios") that are identified on Schedule C, solely for the purpose of
funding benefits of your variable life insurance policies or variable annuity
contracts ("Contracts") that are identified on Schedule D. This Agreement does
not authorize any other purchases or redemptions of shares of the Trust.
2. REPRESENTATIONS AND WARRANTIES
(a) REPRESENTATIONS AND WARRANTIES BY YOU
You represent and warrant that:
1. You are an insurance company duly organized and in good standing
under the laws of your state of incorporation.
2. All of your directors, officers, employees, and other
individuals or entities dealing with the money and/or securities of the Trust
are and shall be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust, in an amount not less than $5 million.
Such bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company. You agree to make all reasonable efforts
to see that this bond or another bond containing such provisions is always in
effect, and you agree to notify us in the event that such coverage no longer
applies.
3. Each Account is a duly organized, validly existing segregated
asset account under applicable insurance law and interests in each Account are
offered exclusively through the purchase of or transfer into a "variable
contract" within the meaning of such terms under Section 817 of the Internal
Revenue Code of 1986, as amended ("Code") and the regulations thereunder. You
will use your best efforts to continue to meet such definitional requirements,
and will notify us immediately upon having a reasonable basis for believing that
such requirements have ceased to be met or that they might not be met in the
future.
4. Each Account either: (i) has been registered or, prior to any
issuance or sale of the Contracts, will be registered as a unit investment
trust under the Investment Company Act of 1940 ("1940 Act"); or (ii) has not
been so registered in proper reliance upon an exemption from registration under
Section 3(c) of the 1940 Act; if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, you will make every
effort to maintain such exemption and will notify us immediately upon having a
reasonable basis for believing that such exemption no longer applies or might
not apply in the future.
5. The Contracts or interests in the Accounts: (i) are or, prior to
any issuance or sale will be, registered as securities under the Securities Act
of 1933, as amended (the "1933 Act"); or (ii) are not registered because they
are properly exempt from registration under Section 3(a)(2) of the 1933 Act or
will be offered exclusively in transactions that are properly exempt from
registration under Section 4(2) or Regulation D of the 1933 Act, in which case
you will make every effort to maintain such exemption and will notify us
immediately upon having a
2
<PAGE>
reasonable basis for believing that such exemption no longer applies or might
not apply in the future.
6. The Contracts: (i) will be sold by broker-dealers, or their
registered representatives, who are registered with the Securities and Exchange
Commission ("SEC") under the Securities and Exchange Act of 1934, as amended
(the "1934 Act") and who are members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"); (ii) will be issued and
sold in compliance in all material respects with all applicable federal and
state laws; and (iii) will be sold in compliance in all material respects with
state insurance suitability requirements and NASD suitability guidelines.
7. The Contracts currently are and will be treated as annuity
contracts or life insurance contracts under applicable provisions of the Code
and you will use your best efforts to maintain such treatment; you will notify
us immediately upon having a reasonable basis for believing that any of the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
8. The fees and charges deducted under each Contract, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by you.
9. You will use shares of the Trust only for the purpose of funding
benefits of the Contracts through the Accounts.
10. Contracts will not be sold outside of the United States.
11. With respect to any Accounts which are exempt from registration
under the 1940 Act in reliance on 3(c)(1) or Section 3(c)(7) thereof:
a. the principal underwriter for each such Account and any
subaccounts thereof is a registered broker-dealer with the
SEC under the 1934 Act;
b. the shares of the Portfolios of the Trust are and will
continue to be the only investment securities held by the
corresponding subaccounts; and
c. with regard to each Portfolio, you, on behalf of the
corresponding subaccount; will:
(i) vote such shares held by it in the same proportion as
the vote of all other holders of such shares; and
(ii) refrain from substituting shares of another security
for such shares unless the SEC has approved such
substitution in the manner provided in Section 26 of
the 1940 Act.
3
<PAGE>
(b) REPRESENTATIONS AND WARRANTIES BY THE TRUST
The Trust represents and warrants that:
1. It is duly organized and in good standing under the laws of the
State of Massachusetts.
2. All of its directors, officers, employees and others dealing
with the money and/or securities of a Portfolio are and shall be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Trust in an amount not less that the minimum coverage required by Rule 17g-1 or
other regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3. It is registered as an open-end management investment company
under the 1940 Act.
4. Each class of shares of the Portfolios of the Trust is
registered under the 1933 Act.
5. It will amend its registration statement under the 1933 Act and
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares.
6. It will comply, in all material respects, with the 1933 and
1940 Acts and the rules and regulations thereunder.
7. It is currently qualified as a "regulated investment company"
under Subchapter M of the Code, it will make every effort to maintain such
qualification, and will notify you immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
8. The investments of each Portfolio will comply with the
diversification requirements for variable annuity, endowment or life insurance
contracts set forth in Section 817(h) of the Code, and the rules and regulations
thereunder, including without limitation Treasury Regulation 1.817-5. Upon
having a reasonable basis for believing any Portfolio has ceased to comply and
will not be able to comply within the grace period afforded by Regulation
1.817-5, the Trust will notify you immediately and will take all reasonable
steps to adequately diversify the Portfolio to achieve compliance.
9. [REDACTED]
(c) REPRESENTATIONS AND WARRANTIES BY THE UNDERWRITER
The Underwriter represents and warrants that:
1. It is registered as a broker dealer with the SEC under the 1934
Act, and is a member in good standing of the NASD.
4
<PAGE>
2. Each investment adviser listed on Schedule C (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and any applicable state securities law.
(d) WARRANTY AND AGREEMENT BY BOTH YOU AND US
We received an order from the SEC dated November 16, 1993 (file no.
812-8546), which was amended by a notice and an order we received on September
17, 1999 and October 13, 1999, respectively (file no. 812-11698) (collectively,
the "Shared Funding Order," attached to this Agreement as Schedule H). The
Shared Funding Order grants exemptions from certain provisions of the 1940 Act
and the regulations thereunder to the extent necessary to permit shares of the
Trust to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
and qualified pension and retirement plans outside the separate account context.
You and we both warrant and agree that both you and we will comply with the
"Applicants' Conditions" prescribed in the Shared Funding Order as though such
conditions were set forth verbatim in this Agreement, including, without
limitation, the provisions regarding potential conflicts of interest between the
separate accounts which invest in the Trust and regarding contract owner voting
privileges.
3. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
(a) We will make shares of the Portfolios available to the Accounts for
the benefit of the Contracts. The shares will be available for purchase at the
net asset value per share next computed after we (or our agent) receive a
purchase order, as established in accordance with the provisions of the then
current prospectus of the Trust. Notwithstanding the foregoing, the Trust's
Board of Trustees ("Trustees") may refuse to sell shares of any Portfolio to any
person, or may suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or if, in the sole discretion of the Trustees, they deem such action to be in
the best interests of the shareholders of such Portfolio. Without limiting the
foregoing, the Trustees have determined that there is a significant risk that
the Trust and its shareholders may be adversely affected by investors whose
purchase and redemption activity follows a market timing pattern, and have
authorized the Trust, the Underwriter and the Trust's transfer agent to adopt
procedures and take other action (including, without limitation, rejecting
specific purchase orders) as they deem necessary to reduce, discourage or
eliminate market timing activity. You agree to cooperate with us to assist us in
implementing the Trust's restrictions on purchase and redemption activity that
follows a market timing pattern.
(b) We agree that shares of the Trust will be sold only to life
insurance companies which have entered into fund participation agreements with
the Trust ("Participating Insurance Companies") and their separate accounts or
to qualified pension and retirement plans in accordance with the terms of the
Shared Funding Order. No shares of any Portfolio will be sold to the general
public.
(c) [REDACTED]
5
<PAGE>
(d) [REDACTED]
(e) [REDACTED]
(f) [REDACTED]
(g) We will redeem any full or fractional shares of any Portfolio, when
requested by you on behalf of an Account, at the net asset value next computed
after receipt by us (or our agent) of the request for redemption, as established
in accordance with the provisions of the then current prospectus of the Trust.
We shall make payment for such shares in the manner we establish from time to
time, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act. Payments for the purchase or redemption of shares by
you may be netted against one another on any Business Day for the purpose of
determining the amount of any wire transfer on that Business Day.
(h) Issuance and transfer of the Portfolio shares will be by book entry
only. Stock certificates will not be issued to you or the Accounts. Portfolio
shares purchased from the Trust will be recorded in the appropriate title for
each Account or the appropriate subaccount of each Account.
(i) We shall furnish, on or before the ex-dividend date, notice to you
of any income dividends or capital gain distributions payable on the shares of
any Portfolio. You hereby elect to receive all such income dividends and capital
gain distributions as are payable on shares of a Portfolio in additional shares
of that Portfolio, and you reserve the right to change this election in the
future. We will notify you of the number of shares so issued as payment of such
dividends and distributions.
4. FEES, EXPENSES, PROSPECTUSES, PROXY MATERIALS AND REPORTS
(a) [REDACTED]
(b) We shall prepare and be responsible for filing with the SEC, and
any state regulators requiring such filing, all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
We shall bear the costs of preparation and filing of the documents listed in the
preceding sentence, registration and qualification of the Trust's shares of the
Portfolios.
(c) We shall use reasonable efforts to provide you, on a timely basis,
with such information about the Trust, the Portfolios and each Adviser, in such
form as you may reasonably require, as you shall reasonably request in
connection with the preparation of disclosure documents and annual and
semi-annual reports pertaining to the Contracts.
(d) [REDACTED]
(e) [REDACTED]
6
<PAGE>
(f) You assume sole responsibility for ensuring that the Trust's
prospectuses, shareholder reports and communications, and proxy materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.
5. VOTING
(a) All Participating Insurance Companies shall have the obligations
and responsibilities regarding pass-through voting and conflicts of interest
corresponding to those contained in the Shared Funding Order.
(b) If and to the extent required by law, you shall: (i) solicit voting
instructions from Contract owners; (ii) vote the Trust shares in accordance with
the instructions received from Contract owners; and (iii) vote Trust shares for
which no instructions have been received in the same proportion as Trust shares
of such Portfolio for which instructions have been received; so long as and to
the extent that the SEC continues to interpret the 1940 Act to require
pass-through voting privileges for variable contract owners. You reserve the
right to vote Trust shares held in any Account in your own right, to the extent
permitted by law.
(c) So long as, and to the extent that, the SEC interprets the 1940 Act
to require pass-through voting privileges for Contract owners, you shall provide
pass-through voting privileges to Contract owners whose Contract values are
invested, through the Accounts, in shares of one or more Portfolios of the
Trust. We shall require all Participating Insurance Companies to calculate
voting privileges in the same manner and you shall be responsible for assuring
that the Accounts calculate voting privileges in the manner established by us.
With respect to each Account, you will vote shares of each Portfolio of the
Trust held by an Account and for which no timely voting instructions from
Contract owners are received in the same proportion as those shares held by that
Account for which voting instructions are received. You and your agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without our prior written consent,
which consent may be withheld in our sole discretion.
6. SALES MATERIAL, INFORMATION AND TRADEMARKS
(a) [REDACTED]
(b) [REDACTED]
(c) You and your agents shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust,
the Underwriter or an Adviser, other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Trust shares (as such registration statement and prospectus
may be amended or supplemented from time to time), annual and semi-annual
reports of the Trust, Trust-sponsored proxy statements, or in Sales literature
or other Promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the written
permission of the Trust or its designee.
7
<PAGE>
(d) We shall not give any information or make any representations or
statements on behalf of you or concerning you, the Accounts or the Contracts
other than information or representations contained in and accurately derived
from disclosure documents for the Contracts (as such disclosure documents may be
amended or supplemented from time to time), or in materials approved by you for
distribution, including Sales literature or other Promotional materials, except
as required by legal process or regulatory authorities or with your written
permission. We may use the names of you, the Accounts and the Contracts in our
sales literature and disclosure documents.
(e) Except as provided in Section 6(b), you shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any logo or other trademark relating to the Trust or the
Underwriter without prior written consent, and upon termination of this
Agreement for any reason, you shall cease all use of any such name or mark as
soon as reasonably practicable.
7. INDEMNIFICATION
(a) INDEMNIFICATION BY YOU
1. You agree to indemnify and hold harmless the Underwriter,
the Trust and each of its Trustees, officers, employees and agents and each
person, if any, who controls the Trust within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Section 7) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with your
written consent, which consent shall not be unreasonably withheld) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses are related to the sale or acquisition of
shares of the Trust or the Contracts and
a. arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a disclosure
document for the Contracts or in the Contracts themselves or in sales
literature generated or approved by you on behalf of the Contracts or
Accounts (or any amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes of this Section 7),
or arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made in reliance
upon and was accurately derived from written information furnished to you
by or on behalf of the Trust for use in Company Documents or otherwise
for use in connection with the sale of the Contracts or Trust shares; or
8
<PAGE>
b. arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Trust Documents as defined below in Section 7(b)) or
wrongful conduct of you or persons under your control, with respect to
the sale or acquisition of the Contracts or Trust shares; or
c. arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust Documents as
defined below in Section 7(b) or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from written
information furnished to the Trust by or on behalf of you; or
d. arise out of or result from any failure by you to provide
the services or furnish the materials required under the terms of this
Agreement;
e. arise out of or result from any material breach of any
representation and/or warranty made by you in this Agreement or arise out
of or result from any other material breach of this Agreement by you; or
f. arise out of or result from a Contract failing to be
considered a life insurance policy or an annuity Contract, whichever is
appropriate, under applicable provisions of the Code thereby depriving
the Trust of its compliance with Section 817(h) of the Code.
2. You shall not be liable under this indemnification provision
with respect to any Losses to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Trust or Underwriter, whichever is applicable.
You shall also not be liable under this indemnification provision with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified you in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent), but failure
to notify you of any such claim shall not relieve you from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, you shall be entitled to
participate, at your own expense, in the defense of such action. Unless the
Indemnified Party releases you from any further obligations under this Section
7(a), you also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from you to such
party of the your election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
you will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
9
<PAGE>
3. The Indemnified Parties will promptly notify you of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Trust shares or the Contracts or the operation of
the Trust.
(b) INDEMNIFICATION BY THE UNDERWRITER
1. The Underwriter agrees to indemnify and hold harmless you, and
each of your directors and officers and each person, if any, who controls you
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this Section
7(b)) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Underwriter, which
consent shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in connection
therewith) (collectively, "Losses") to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such Losses
are related to the sale or acquisition of the shares of the Trust or the
Contracts and:
a. arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement, prospectus or sales literature of the Trust (or
any amendment or supplement to any of the foregoing) (collectively, the
"Trust Documents") or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission of such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to us by or on behalf of you for use in the Registration
Statement or prospectus for the Trust or in sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
b. arise out of or as a result of statements or
representations (other than statements or representations contained in
the disclosure documents or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or wrongful
conduct of the Trust, Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or
Trust shares; or
c. arise out of any untrue statement or alleged untrue
statement of a material fact contained in a disclosure document or sales
literature covering the Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or omission was made
in reliance upon information furnished to you by or on behalf of the
Trust; or
d. arise as a result of any failure by us to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the qualification
10
<PAGE>
representation specified above in Section 2(b)(7) and the diversification
requirements specified above in Section 2(b)(8); or
e. arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Underwriter; as limited by and in accordance with the
provisions of Sections 7(b)(2) and 7(b)(3) hereof.
2. The Underwriter shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful misfeasance,
bad faith, or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement or to you or the Accounts, whichever
is applicable.
3. The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. Unless the Indemnified
Party releases the Underwriter from any further obligations under this Section
7(b), the Underwriter also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Underwriter to such party of the Underwriter's election to assume the defense
thereof, the Indemnified Party shall bear the expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
4. You agree promptly to notify the Underwriter of the commencement
of any litigation or proceedings against you or the Indemnified Parties in
connection with the issuance or sale of the Contracts or the operation of each
Account.
11
<PAGE>
(c) INDEMNIFICATION BY THE TRUST
1. The Trust agrees to indemnify and hold harmless you, and each of
your directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
for purposes of this Section 7(c)) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements result from the gross negligence, bad faith or willful misconduct of
the Board or any member thereof, are related to the operations of the Trust, and
arise out of or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result from any
other material breach of this Agreement by the Trust; as limited by and in
accordance with the provisions of Sections 7(c)(2) and 7(c)(3) hereof. It is
understood and expressly stipulated that neither the holders of shares of the
Trust nor any Trustee, officer, agent or employee of the Trust shall be
personally liable hereunder, nor shall any resort be had to other private
property for the satisfaction of any claim or obligation hereunder, but the
Trust only shall be liable.
2. The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against any Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
you, the Trust, the Underwriter or each Account, whichever is applicable.
3. The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Trust in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Trust of any
such claim shall not relieve the Trust from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party releases
the Trust from any further obligations under this Section 7(c), the Trust also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Trust to such party of the
Trust's election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the Trust
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
12
<PAGE>
4. You agree promptly to notify the Trust of the commencement of
any litigation or proceedings against you or the Indemnified Parties in
connection with this Agreement, the issuance or sale of the Contracts, with
respect to the operation of the Account, or the sale or acquisition of shares of
the Trust.
8. NOTICES
Any notice shall be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth in Schedule G below or
at such other address as such party may from time to time specify in writing to
the other party.
9. TERMINATION
(a) This Agreement may be terminated by any party in its entirety or with
respect to one, some or all Portfolios for any reason by sixty (60) days advance
written notice delivered to the other parties, and shall terminate immediately
in the event of its assignment, as that term is used in the 1940 Act.
(b) This Agreement may be terminated immediately by us upon written
notice to you if:
1. you notify the Trust or the Underwriter that the exemption from
registration under Section 3(c) of the 1940 Act no longer applies, or
might not apply in the future, to the unregistered Accounts, or that the
exemption from registration under Section 4(2) or Regulation D promulgated
under the 1933 Act no longer applies or might not apply in the future, to
interests under the unregistered Contracts; or
2. either one or both of the Trust or the Underwriter respectively,
shall determine, in their sole judgment exercised in good faith, that you
have suffered a material adverse change in your business, operations,
financial condition or prospects since the date of this Agreement or are
the subject of material adverse publicity; or
3. you give us the written notice specified above in Section 3(c)
and at the same time you give us such notice there was no notice of
termination outstanding under any other provision of this Agreement;
provided, however, that any termination under this Section 9(b)(3) shall
be effective forty-five (45) days after the notice specified in Section
3(c) was given; or
4. upon your assignment of this Agreement without our prior written
approval.
(c) If this Agreement is terminated for any reason, except as required by
the Shared Funding Order or pursuant to Section 9(b)(1), above, we shall, at
your option, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of
13
<PAGE>
termination of this Agreement. If this Agreement is terminated as required by
the Shared Funding Order, its provisions shall govern.
(d) The provisions of Sections 2 (Representations and Warranties) and 7
(Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 9(c), except that we shall have no further obligation
to sell Trust shares with respect to Contracts issued after termination.
(e) You shall not redeem Trust shares attributable to the Contracts (as
opposed to Trust shares attributable to your assets held in the Account) except:
(i) as necessary to implement Contract owner initiated or approved transactions;
(ii) as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to as a
"Legally Required Redemption"); or (iii) as permitted by an order of the SEC
pursuant to Section 26(b) of the 1940 Act. Upon request, you shall promptly
furnish to us the opinion of your counsel (which counsel shall be reasonably
satisfactory to us) to the effect that any redemption pursuant to clause (ii)
above is a Legally Required Redemption. Furthermore, except in cases where
permitted under the terms of the Contracts, you shall not prevent Contract
owners from allocating payments to a Portfolio that was otherwise available
under the Contracts without first giving us ninety (90) days notice of your
intention to do so.
10. MISCELLANEOUS
(a) The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions of this
Agreement or otherwise affect their construction or effect.
(b) This Agreement may be executed simultaneously in two or more
counterparts, all of which taken together shall constitute one and the same
instrument.
(c) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
(d) This Agreement shall be construed and its provisions interpreted
under and in accordance with the laws of the State of California. It shall also
be subject to the provisions of the federal securities laws and the rules and
regulations thereunder, to any orders of the SEC on behalf of the Trust granting
it exemptive relief, and to the conditions of such orders. We shall promptly
forward copies of any such orders to you.
(e) The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
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<PAGE>
(f) Each party to this Agreement shall cooperate with each other party
and all appropriate governmental authorities (including without limitation the
SEC, the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
(g) Each party to this Agreement shall treat as confidential all
information reasonably identified as confidential in writing by any other party
to this Agreement, and, except as permitted by this Agreement or as required by
legal process or regulatory authorities, shall not disclose, disseminate, or use
such names and addresses and other confidential information until such time as
they may come into the public domain, without the express written consent of the
affected party. Without limiting the foregoing, no party to this Agreement shall
disclose any information that such party has been advised is proprietary, except
such information that such party is required to disclose by any appropriate
governmental authority (including, without limitation, the SEC, the NASD, and
state securities and insurance regulators).
(h) The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties to this Agreement are entitled to under
state and federal laws.
(i) The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided above in
Section 3(c).
(j) Neither this Agreement nor any rights or obligations created by it
may be assigned by any party without the prior written approval of the other
parties.
(k) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
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IN WITNESS WHEREOF, each of the parties have caused their duly authorized
officers to execute this Agreement.
The Company:
-------------------------------------------------------
By:
----------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
The Trust: FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
By:
------------------------------------------------
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter: FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By:
------------------------------------------------
Name: [ ]
Title: [ ]
16
<PAGE>
SCHEDULE A
THE COMPANY
[name]
[address]
[state of incorporation]
[name]
[address]
[state of incorporation]
17
<PAGE>
SCHEDULE B
ACCOUNTS OF THE COMPANY
1. Name: [name]
Date Established: [date]
SEC Registration Number: 811-____
2. Name: [name]
Date Established: [date]
SEC Registration Number: 811-____
...
18
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SCHEDULE C
AVAILABLE PORTFOLIOS AND CLASSES OF SHARES OF THE TRUST; INVESTMENT ADVISERS
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST INVESTMENT ADVISER
19
<PAGE>
SCHEDULE D
CONTRACTS OF THE COMPANY
- --------------------------------------------------------------------------------
CONTRACT 1 CONTRACT 2 CONTRACT 3
- --------------------------------------------------------------------------------
CONTRACT/PRODUCT
NAME
- --------------------------------------------------------------------------------
REGISTERED (Y/N)
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
REPRESENTATIVE FORM
NUMBERS
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT
NAME/DATE
ESTABLISHED
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
PORTFOLIOS AND
CLASSES - ADVISER
- --------------------------------------------------------------------------------
20
<PAGE>
SCHEDULE D CONT.
CONTRACTS OF THE COMPANY
- --------------------------------------------------------------------------------
CONTRACT 4 CONTRACT 5 CONTRACT 6
- --------------------------------------------------------------------------------
CONTRACT/PRODUCT
NAME
- --------------------------------------------------------------------------------
REGISTERED (Y/N)
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
REPRESENTATIVE FORM
NUMBERS
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT
NAME/DATE
ESTABLISHED
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
PORTFOLIOS AND
CLASSES - ADVISER
- --------------------------------------------------------------------------------
21
<PAGE>
SCHEDULE E
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
[names of other portfolios]
22
<PAGE>
SCHEDULE F
[REDACTED]
23
<PAGE>
SCHEDULE G
ADDRESSES FOR NOTICES
To the Company: [ ] Insurance Company
[address]
[address]
Attention: [name, title]
To the Trust: Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Boulevard
San Mateo, California 94404
Attention: Karen L. Skidmore
[title]
To the Underwriter: Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
Attention: [name, title]
24
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SCHEDULE H
SHARED FUNDING ORDER
25
