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File Nos. 33-71052
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. 11
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25
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 and Annuity Company
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Paragraph (b) of Rule 485
X on May 1, 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 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("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
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN PROSPECTUSES
- ----------------- -----------------------
<S> <C>
1...............................Cover Page
2...............................Special Terms
3...............................Prospectus A: Summary of Fees and Expenses; Summary of the Policy Features
Prospectus B: Summary of Fees and Expenses; Summary of the Contract Features
4...............................Condensed Financial Information; Performance Information
5...............................Prospectus A: Description of the Companies, the Separate Account, the Trust,
Fidelity VIP, Fidelity VIP II, T. Rowe Price International Series, Inc. and DPGF
Prospectus B: Description of the Companies, the Variable Accounts, the Trust,
Fidelity VIP, Fidelity VIP II, T. Rowe Price International Series, Inc. and DGPF.
6...............................Charges and Deductions
7...............................Prospectus A: The Variable Annuity Policies
................................Prospectus B: Description of the Contract
8...............................Prospectus A: The Variable Annuity Policies
Prospectus B: Electing the Form of Annuity and the Annuity Date; Description of
Variable Annuity Payout Options; Annuity Benefit Payments
9...............................Death Benefit
10..............................Prospectus A: Purchase Payments; Computation of Policy Values and Annuity
Payments Prospectus B: Payments; Computation of Values; Distribution
11..............................Prospectus A: Surrender; Partial Redemption
Prospectus B: Surrender; Withdrawals; Charge for Surrender and Withdrawal;
Withdrawal Without Surrender Charge; Texas Optional Retirement Program
12..............................Federal Tax Considerations
13..............................Legal Matters
14..............................Statement of Additional Information-Table of Contents
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<CAPTION>
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
<S> <C>
15..............................Cover Page
16..............................Table of Contents
17..............................General Information and History
18..............................Services
19..............................Underwriters
20..............................Underwriters
21..............................Performance Information
22..............................Annuity Benefit Payments
23..............................Financial Statements
</TABLE>
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SEPARATE ACCOUNT VA-K
(ALLMERICA EXECANNUITY PLUS)
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 "D. 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 first two
paragraphs of "D. 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 ExecAnnuity Plus '93
variable annuity policy issued by Allmerica Financial Life Insurance and Annuity
Company (Form A3021-93) and the ExecAnnuity Plus '91 variable annuity policy
issued by Allmerica Financial Life Insurance and Annuity Company (Form A3018-91)
and First Allmerica Financial Life Insurance Company (Form A3018-94). Neither of
these policies is currently being sold. PLEASE READ THIS PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Information specific to ExecAnnuity Plus '91 (A3018-91 and A3018-94) is set
forth in Appendix B. Owners of these policies should review this Appendix first.
The Separate 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 the following funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Growth Fund
Core Equity Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Equity Index Fund Asset Manager Portfolio
Select Growth and Income Fund
Select Investment Grade Income Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Government Bond Fund T. Rowe Price International Stock Portfolio
Money Market Fund
DELAWARE GROUP PREMIUM FUND
DGPF International Equity Series
</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.
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 calling Annuity Client Services at 1-800-533-7881 or
returning the attached request card. 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).
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
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 5
SUMMARY OF THE POLICY FEATURES.............................. 10
PERFORMANCE INFORMATION..................................... 13
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF...... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 20
WHAT IS AN ANNUITY?......................................... 22
CHARGES AND DEDUCTIONS...................................... 23
A. Surrender Charge..................................... 23
B. Premium Taxes........................................ 26
C. Policy Fee........................................... 26
D. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider Charge............................................ 26
E. Annual Charges Against Separate Account Assets....... 27
THE VARIABLE ANNUITY POLICIES............................... 29
A. Purchase Payments.................................... 29
B. Right to Cancel Individual Retirement Annuity........ 29
C. Right to Cancel All Other Policies................... 30
D. Transfer Privilege................................... 30
E. Surrender............................................ 31
F. Partial Redemption................................... 32
G. Death Benefit........................................ 32
H. The Spouse of the Owner as Beneficiary............... 34
I. Assignment........................................... 34
J. Electing the Form of Annuity and the Annuity Date.... 34
K. Description of Variable Annuity Payout Options....... 35
L. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider................................................... 36
M. NORRIS Decision....................................... 38
N. Computation of Policy Values and Annuity Benefit
Payments................................................ 38
FEDERAL TAX CONSIDERATIONS.................................. 40
A. General.............................................. 40
The Company......................................... 40
Diversification Requirements........................ 40
Investor Control.................................... 40
B. Qualified and Non-Qualified Policies................. 41
C. Taxation of the Policies in General.................. 41
Withdrawals Prior to Annuitization.................. 41
Annuity Payouts After Annuitization................. 41
Penalty on Distribution............................. 41
Assignments or Transfers............................ 42
Nonnatural Owners................................... 42
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations............ 42
D. Tax Withholding...................................... 42
E. Provisions Applicable to Qualified Employer Plans.... 43
Self-Employed Pension and Profit Sharing Plans...... 43
Individual Retirement Annuities..................... 43
Tax-Sheltered Annuities............................. 43
Texas Optional Retirement Program................... 44
LOANS (QUALIFIED POLICIES ONLY)............................. 44
STATEMENTS AND REPORTS...................................... 44
</TABLE>
2
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<TABLE>
<S> <C>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 44
VOTING RIGHTS............................................... 45
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 46
LEGAL MATTERS............................................... 46
FURTHER INFORMATION......................................... 46
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.... A-1
APPENDIX B -- POLICY NO. A3018-91 (AND STATE VARIATIONS
THEREOF) ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY POLICY NO. A3018-94 FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY.......................................... B-1
APPENDIX C -- CONDENSED FINANCIAL INFORMATION (ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY).............. C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION (FIRST
ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)................ D-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
PERFORMANCE INFORMATION..................................... 8
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
3
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SPECIAL TERMS
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 payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
ANNUITY DATE: the date on which annuity 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 Company and Annuity Company
for all ExecAnnuity Plus '93 policies (Form A3021-93) and for ExecAnnuity Plus
'91 policies (Form A3018-91) except for ExecAnnuity Plus '91 policies issued in
New York on Form A3018-94 on and after April 1, 1994. With regard to these New
York policies, any reference to "Company" refers exclusively to First Allmerica
Financial Life Insurance Company.
FIXED ANNUITY PAYOUT: an annuity payout option 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.
SEPARATE ACCOUNT: Separate Account VA-K of the Company. Separate Account VA-K
consists of assets segregated from other assets of the Company. The investment
performance of the assets of the Separate Account is determined separately from
the other assets of the Company and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
SUB-ACCOUNT: a subdivision of the Separate Account. Each Sub-Account available
under the Policy invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust ("Trust"); a corresponding portfolio of Fidelity
Variable Insurance Products Fund ("Fidelity VIP"), the Asset Manager Portfolio
of the Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), the T.
Rowe Price International Stock Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price"); or the DGPF International Equity Series of the
Delaware Group Premium Fund ("DGPF").
SURRENDER VALUE: the Accumulated Value of the Policy on full surrender after
deducting any applicable Policy fee, rider charge and surrender charge.
UNDERLYING FUND (FUNDS): an investment portfolio of the Trust, Fidelity VIP,
Fidelity VIP II, T. Rowe Price or DGPF 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, partial withdrawal, or surrender of a Policy 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
materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of the Core Equity Fund,
Money Market Fund, Equity Index Fund or Select Growth and Income Fund of
Allmerica Investment Trust.
4
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the ExecAnnuity
Plus Policy. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Policies, (2) annual expenses of the Sub-Accounts, and (3) annual expenses of
the Underlying Funds. In addition to the charges and expenses described below,
premium taxes may be applicable in some states and are deducted as described
under "B. Premium Taxes" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
POLICY YEAR AFTER
DATE OF
PURCHASE PAYMENT CHARGE
(1) CONTRACT CHARGES: ----------------- ------
<S> <C> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More than 9 0%
SURRENDER CHARGE:*
This charge may be assessed upon surrender, withdrawal or
annuitization under any period certain option. 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
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
A Policy fee equal to the lesser of $30 or 3% 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
with a ten-year waiting period: 0.25%
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider
with a fifteen-year waiting period: 0.15%
(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: 0.20%
------
Total Annual Expenses: 1.45%
</TABLE>
*From time to time the Company may allow a reduction of the surrender charge or
the period during which the charge applies, or both, when Policies are sold to
individuals or groups of individuals in a manner which
5
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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.
(3) ANNUAL UNDERLYING 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>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND
(AFTER ANY (AFTER ANY EXPENSES (AFTER ANY
FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ---- ------------------ --------------- -----------------------
<S> <C> <C> <C>
Select International Equity Fund........ 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity Series........ 0.83% 0.12% 0.95%(3)
Fidelity VIP Overseas Portfolio......... 0.73% 0.18% 0.91%(4)
T. Rowe Price International Stock
Portfolio.............................. 1.05% 0.00% 1.05%
Select Aggressive Growth Fund........... 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund........ 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund........... 0.90% 0.07% 0.97%(1)(2)
Select Growth Fund...................... 0.78% 0.05% 0.83%(1)(2)
Core Equity Fund........................ 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio........... 0.58% 0.08% 0.66%(4)
Equity Index Fund....................... 0.28% 0.07% 0.35%(1)
Select Growth and Income Fund........... 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP Equity-Income Portfolio.... 0.48% 0.09% 0.57%(4)
Fidelity VIP II Asset Manager
Portfolio.............................. 0.53% 0.10% 0.63%(4)
Fidelity VIP High Income Portfolio...... 0.58% 0.11% 0.69%
Select Investment Grade Income Fund..... 0.43% 0.07% 0.50%(1)
Government Bond Fund.................... 0.50% 0.12% 0.62%(1)
Money Market Fund....................... 0.24% 0.05% 0.29%(1)
</TABLE>
*Effective September 1, 1999, the management fee rates for the Select Aggressive
Growth Fund and Select Capital Appreciation Fund were revised. The Management
Fee and Total Fund Expense ratios shown in the table above have been adjusted to
assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income Fund
and Government Bond Fund, and 0.60% for Equity Index Fund and Money Market Fund.
The total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1999.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions to the operating expenses, total annual
fund operating expenses were 1.01% for Select International Equity Fund, 0.84%
for
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Select Aggressive Growth Fund, 0.88% for Select Value Opportunity Fund, 0.81%
for Select Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth
and Income Fund.
(3) The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
(4) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds', or
Fidelity Management & Research Company on behalf of certain funds', custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.65% for the Fidelity VIP Growth Portfolio; 0.56% for the
Fidelity VIP Equity-Income Portfolio and 0.62% for the Fidelity VIP II Asset
Manager Portfolio.
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 of ExecAnnuity '93 (A3021-93) 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 rules of the Securities and Exchange
Commission (the "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 0.05%, and the amount of the Policy fee is
assumed to be $0.50 in the examples. The Policy fee is deducted only when the
accumulated value is $50,000 or less. Lower costs apply to Policies 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. (Owners of ExecAnnuity
'91 (A3018-91 and A3018-94) should review the expense examples in Appendix B.)
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
7
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(1)(a) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under any period certain option, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
Rider:**
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $ 99 $146 $184 $286
DGPF International Equity Series........................... $ 99 $144 $181 $279
Fidelity VIP Overseas Portfolio............................ $ 98 $143 $179 $275
T. Rowe Price International Stock Portfolio................ $100 $147 $186 $289
Select Aggressive Growth Fund.............................. $ 98 $142 $177 $271
Select Capital Appreciation Fund........................... $ 99 $145 $182 $281
Select Value Opportunity Fund.............................. $ 99 $145 $182 $281
Select Growth Fund......................................... $ 98 $141 $175 $267
Core Equity Fund........................................... $ 94 $131 $157 $231
Fidelity VIP Growth Portfolio.............................. $ 96 $136 $166 $249
Equity Index Fund.......................................... $ 93 $127 $150 $217
Select Growth and Income Fund.............................. $ 97 $138 $170 $257
Fidelity Equity-Income Portfolio........................... $ 95 $134 $161 $240
Fidelity VIP II Asset Manager Portfolio.................... $ 96 $135 $164 $246
Fidelity VIP High Income Portfolio......................... $ 96 $137 $167 $252
Select Investment Grade Income Fund........................ $ 94 $132 $158 $233
Government Bond Fund....................................... $ 96 $135 $164 $245
Money Market Fund.......................................... $ 92 $126 $147 $211
</TABLE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under any period certain option, you would pay the following
expenses on a $1,000 investment, assuming 5% annual return on assets and
election of a Minimum Guaranteed Annuity Payout (M-GAP) Rider** with a ten-year
waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $102 $153 $196 $310
DGPF International Equity Series........................... $101 $151 $193 $303
Fidelity VIP Overseas Portfolio............................ $101 $150 $191 $299
T. Rowe Price International Stock Portfolio................ $102 $154 $198 $313
Select Aggressive Growth Fund.............................. $100 $149 $189 $295
Select Capital Appreciation Fund........................... $101 $152 $194 $305
Select Value Opportunity Fund.............................. $101 $152 $194 $305
Select Growth Fund......................................... $100 $148 $187 $291
Core Equity Fund........................................... $ 97 $138 $169 $256
Fidelity VIP Growth Portfolio.............................. $ 98 $143 $179 $275
Equity Index Fund.......................................... $ 95 $134 $163 $243
Select Growth and Income Fund.............................. $ 99 $145 $183 $283
Fidelity VIP Equity-Income Portfolio....................... $ 97 $141 $174 $266
Fidelity VIP II Asset Manager Portfolio.................... $ 98 $142 $177 $272
Fidelity VIP High Income Portfolio......................... $ 99 $144 $180 $278
Select Investment Grade Income Fund........................ $ 97 $139 $170 $258
Government Bond Fund....................................... $ 98 $142 $177 $271
Money Market Fund.......................................... $ 95 $133 $160 $237
</TABLE>
8
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or if you do NOT surrender or annuitize the Policy, you would pay the
following expenses on a $1,000 investment, assuming 5% annual return on assets
and no Rider:**
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $26 $78 $134 $286
DGPF International Equity Series........................... $25 $76 $131 $279
Fidelity VIP Overseas Portfolio............................ $24 $75 $129 $275
T. Rowe Price International Stock Portfolio................ $26 $79 $136 $289
Select Aggressive Growth Fund.............................. $24 $74 $127 $271
Select Capital Appreciation Fund........................... $25 $77 $132 $281
Select Value Opportunity Fund.............................. $25 $77 $132 $281
Select Growth Fund......................................... $24 $73 $125 $267
Core Equity Fund........................................... $20 $62 $107 $231
Fidelity VIP Growth Portfolio.............................. $22 $68 $116 $249
Equity Index Fund.......................................... $19 $58 $100 $217
Select Growth and Income Fund.............................. $23 $70 $120 $257
Fidelity Equity-Income Portfolio........................... $21 $65 $111 $240
Fidelity VIP II Asset Manager Portfolio.................... $22 $67 $114 $246
Fidelity VIP High Income Portfolio......................... $22 $69 $117 $252
Select Investment Grade Income Fund........................ $20 $63 $108 $233
Government Bond Fund....................................... $22 $66 $114 $245
Money Market Fund.......................................... $18 $56 $ 97 $211
</TABLE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or if you do NOT surrender or annuitize the 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>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $28 $86 $146 $310
DGPF International Equity Series........................... $27 $84 $143 $303
Fidelity VIP Overseas Portfolio............................ $27 $83 $141 $299
T. Rowe Price International Stock Portfolio................ $28 $87 $148 $313
Select Aggressive Growth Fund.............................. $27 $81 $139 $295
Select Capital Appreciation Fund........................... $28 $84 $144 $305
Select Value Opportunity Fund.............................. $28 $84 $144 $305
Select Growth Fund......................................... $26 $80 $137 $291
Core Equity Fund........................................... $23 $70 $119 $256
Fidelity VIP Growth Portfolio.............................. $24 $75 $129 $275
Equity Index Fund.......................................... $21 $66 $113 $243
Select Growth and Income Fund.............................. $25 $78 $133 $283
Fidelity VIP Equity-Income Portfolio....................... $24 $72 $124 $266
Fidelity VIP II Asset Manager Portfolio.................... $24 $74 $127 $272
Fidelity VIP High Income Portfolio......................... $25 $76 $130 $278
Select Investment Grade Income Fund........................ $23 $70 $120 $258
Government Bond Fund....................................... $24 $74 $127 $271
Money Market Fund.......................................... $21 $64 $110 $237
</TABLE>
*The Policy fee is not deducted after annuitization. No surrender charge is
assessed at the time of annuitization under any life contingency option.
**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 annuity option rates listed under the Annuity Option
Tables in your Policy.
9
<PAGE>
SUMMARY OF THE POLICY FEATURES
INVESTMENT OPTIONS
Purchase payments may be allocated among the variable Sub-Accounts available
under the Policies and a fixed account ("General Account") of the Company
(together "investment options"). The Sub-Accounts are subdivisions of Separate
Account VA-K (the "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 or management of investment practices or policies by the
Securities and Exchange Commission ("SEC"). For information about the Separate
Account and the Company, see DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF. For more
information about the General Account see APPENDIX A -- MORE INFORMATION ABOUT
THE GENERAL ACCOUNT.
INVESTMENT IN THE SUB-ACCOUNT
Each Sub-Account available under the Policies invests its assets without sales
charge in a corresponding investment series of the Allmerica Investment Trust
(the "Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"),
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund
("DGPF"). The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are
open-end, diversified series investment companies. Eleven different funds of the
Allmerica Investment Trust are available under the Policies: the Core Equity
Fund, Select Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund and Select Value Opportunity Value Fund. Four of the portfolios of
Fidelity VIP are available under the Policies: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio
and Fidelity VIP Overseas Portfolio. One of the portfolios of Fidelity VIP II is
available under the Policies: the Fidelity VIP II Asset Manager Portfolio. One
of the portfolios of T. Rowe Price is available under the Policies: the T. Rowe
Price International Stock Portfolio. One of the series of DGPF is available
under the Policies: the International Equity Series. Each of the Funds,
Portfolios and Series available under the Policies (together, the "Underlying
Funds") operates pursuant to different investment objectives, discussed below.
There can be no assurance that the investment objectives of the Underlying Funds
can be achieved or that the value of a Policy will equal or exceed the aggregate
amount of the purchase payments made under the Policy. For more information
about the investments of the Underlying Funds, see DESCRIPTION OF THE COMPANY,
THE SEPARATE ACCOUNT, THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE
AND DGPF. The accompanying prospectuses of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF describe 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 BETWEEN INVESTMENT OPTIONS
Prior to the Annuity Date, amounts may be transferred among the Sub-Accounts and
between the Sub-Accounts and the General Account subject to certain limitations
described under "D. 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 the Policy Owner's designated
percentage allocation mix are also available at no additional charge.
10
<PAGE>
ANNUITY PAYMENTS
The owner of a Policy ("Owner") may select variable annuity benefit payments
based on one or more 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 Rider will occur at the Company's guaranteed
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 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 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 "L. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider" under THE VARIABLE ANNUITY POLICIES.
CANCELLATION RIGHTS
The Owner may cancel the Policy at any time between the date of the application
and the date 10 days after receipt of the Policy. For more information about
cancellation rights, see "B. Right to Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Policies" under THE VARIABLE ANNUITY POLICIES.
PAYMENT MINIMUMS AND MAXIMUMS
Under the Policies, purchase payments are not limited as to frequency, 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. However, 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, 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.
11
<PAGE>
A. SURRENDER CHARGE
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 nine full years.
B. ANNUAL POLICY FEE
A Policy Fee equal to the lesser of $30 or 3% of Accumulated Value will be
deducted on a Policy Anniversary or upon full surrender when the Accumulated
Value is $50,000 or less. The Policy Fee is waived for policies issued to and
maintained by the 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."
D. SEPARATE ACCOUNT ASSET CHARGES
The Company will deduct a daily charge, equivalent to 1.25% annually, of the
average daily net assets of each Sub-Account at each Valuation Date. The charge
is retained for the mortality and expense risks the Company assumes. In
addition, to cover administrative expenses, the Company deducts a daily charge
of 0.20% per annum of the value of the average 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 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.
F. CHARGES OF THE UNDERLYING FUND
In addition to the charges described above, each Underlying Fund incurs certain
management fees and expenses which are more fully described in "Other Charges"
under "E. Annual Charges Against Separate Account Assets" 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 the Rider is elected, 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
12
<PAGE>
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 "D. Optional Minimum Guaranteed Annuity
Payout (M-GAP) Rider Charge" under CHARGES AND DEDUCTIONS, and "L. 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 less any applicable tax withholding 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
"E. Surrender" and "F. Partial Redemption" under THE VARIABLE ANNUITY POLICIES
and "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
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 "G. 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.
PERFORMANCE INFORMATION
Allmerica Financial Life Insurance and Annuity Company first offered ExecAnnuity
Plus '91 to the public in 1991 and ExecAnnuity Plus '93 in 1993. 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 and also assume that the Policy is surrendered at the end of
the applicable period. Performance 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. 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. (Performance numbers for
the ExecAnnuity '91 policies issued by First Allmerica Financial Life Insurance
Company (A3018-94) are shown in Appendix B).
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.
13
<PAGE>
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 Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
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 1.45%, the $30
annual Policy 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
the optional 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 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.
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
14
<PAGE>
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.
15
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
EXECANNUITY PLUS '91 AND '93
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>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 21.61% 16.17% 13.29%
DGPF International Equity Series..... 5/6/93 5.96% 10.85% 10.46%
Fidelity VIP Overseas Portfolio...... 9/5/91 32.44% 15.01% 11.74%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 23.29% N/A 13.12%
Select Aggressive Growth Fund........ 9/16/92 28.38% 20.92% 18.16%
Select Capital Appreciation Fund..... 4/30/95 15.41% N/A 19.01%
Select Value Opportunity Fund........ 5/2/93 -13.01% 11.14% 9.62%
Select Growth Fund................... 9/16/92 19.73% 26.74% 18.13%
Core Equity Fund..................... 9/4/91 19.18% 22.83% 16.00%
Fidelity VIP Growth Portfolio........ 9/5/91 27.14% 27.28% 20.66%
Equity Index Fund.................... 9/4/91 10.48% 25.46% 17.52%
Select Growth and Income Fund........ 9/16/92 8.54% 19.36% 14.05%
Fidelity VIP Equity-Income Portfolio... 9/5/91 -3.07% 16.13% 14.97%
Fidelity VIP II Asset Manager
Portfolio........................... 5/4/94 1.53% 13.33% 11.31%
Fidelity VIP High Income Portfolio... 9/24/91 -1.23% 8.44% 10.34%
Select Investment Grade Income Fund... 9/5/91 -9.53% 4.94% 5.55%
Government Bond Fund................. 9/8/91 -8.37% 3.83% 4.45%
Money Market Fund.................... 9/9/91 -3.84% 3.05% 3.15%
</TABLE>
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>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 29.81% 16.86% 13.84%
DGPF International Equity Series..... 5/6/93 14.08% 11.61% 10.81%
Fidelity VIP Overseas Portfolio...... 9/5/91 40.56% 15.69% 11.91%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 31.39% N/A 13.88%
Select Aggressive Growth Fund........ 9/16/92 36.65% 21.57% 18.44%
Select Capital Appreciation Fund..... 4/30/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 5/2/93 -6.08% 11.91% 10.01%
Select Growth Fund................... 9/16/92 27.92% 27.23% 18.36%
Core Equity Fund..................... 9/4/91 27.46% 23.46% 16.25%
Fidelity VIP Growth Portfolio........ 9/5/91 35.45% 27.89% 20.92%
Equity Index Fund.................... 9/4/91 18.67% 25.96% 17.67%
Select Growth and Income Fund........ 9/16/92 16.71% 19.96% 14.30%
Fidelity VIP Equity-Income Portfolio... 9/5/91 4.79% 16.92% 15.24%
Fidelity VIP II Asset Manager
Portfolio........................... 5/4/94 9.48% 13.98% 11.79%
Fidelity VIP High Income Portfolio... 9/24/91 6.59% 9.28% 10.50%
Select Investment Grade Income Fund... 9/5/91 -2.41% 5.85% 5.73%
Government Bond Fund................. 9/8/91 -1.22% 4.71% 4.58%
Money Market Fund.................... 9/9/91 3.66% 3.96% 3.29%
</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>
UNDERLYING FOR YEAR 10 YEARS OR
FUND ENDED SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 21.61% 16.17% 13.28%
DGPF International Equity Series..... 10/29/92 5.96% 10.85% 9.91%
Fidelity VIP Overseas Portfolio...... 1/28/87 32.44% 15.01% 9.72%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 23.29% 12.88% 11.33%
Select Aggressive Growth Fund........ 8/21/92 28.38% 20.92% 18.71%
Select Capital Appreciation Fund..... 4/28/95 15.41% N/A 19.01%
Select Value Opportunity Fund........ 4/30/93 -13.01% 11.14% 9.61%
Select Growth Fund................... 8/21/92 19.73% 26.74% 18.62%
Core Equity Fund..................... 4/29/85 19.18% 22.83% 15.50%
Fidelity VIP Growth Portfolio........ 10/9/86 27.14% 27.28% 18.00%
Equity Index Fund.................... 9/28/90 10.48% 25.46% 18.85%
Select Growth and Income Fund........ 8/21/92 8.54% 19.36% 14.01%
Fidelity VIP Equity-Income Portfolio... 10/9/86 -3.07% 16.13% 12.61%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 1.53% 13.33% 11.49%
Fidelity VIP High Income Portfolio... 9/19/85 -1.23% 8.44% 10.74%
Select Investment Grade Income Fund... 4/29/85 -9.53% 4.94% 6.06%
Government Bond Fund................. 8/26/91 -8.37% 3.83% 4.27%
Money Market Fund.................... 4/29/85 -3.84% 3.05% 3.70%
</TABLE>
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>
UNDERLYING FOR YEAR 10 YEARS OR
FUND ENDED SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 29.81% 16.86% 13.83%
DGPF International Equity Series..... 10/29/92 14.08% 11.61% 10.17%
Fidelity VIP Overseas Portfolio...... 1/28/87 40.56% 15.69% 9.84%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 31.39% 13.56% 11.82%
Select Aggressive Growth Fund........ 8/21/92 36.65% 21.57% 18.98%
Select Capital Appreciation Fund..... 4/28/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/30/93 -6.08% 11.91% 10.00%
Select Growth Fund................... 8/21/92 27.92% 27.23% 18.84%
Core Equity Fund..................... 4/29/85 27.46% 23.46% 15.68%
Fidelity VIP Growth Portfolio........ 10/9/86 35.45% 27.89% 18.24%
Equity Index Fund.................... 9/28/90 18.67% 25.96% 18.95%
Select Growth and Income Fund........ 8/21/92 16.71% 19.96% 14.26%
Fidelity VIP Equity-Income Portfolio... 10/9/86 4.79% 16.92% 12.86%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 9.48% 13.98% 11.53%
Fidelity VIP High Income Portfolio... 9/19/85 6.59% 9.28% 10.83%
Select Investment Grade Income Fund... 4/29/85 -2.41% 5.85% 6.15%
Government Bond Fund................. 8/26/91 -1.22% 4.71% 4.40%
Money Market Fund.................... 4/29/85 3.66% 3.96% 3.73%
</TABLE>
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF
THE COMPANY. Allmerica Financial Life Insurance and Annuity Company (the
"Company") is a life insurance company organized under the laws of Delaware in
July, 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone 508-855-1000. The Company is subject to the laws
of the state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate. As of December 31, 1999, the Company had over $17
billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is 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 on October 16, 1995, and adopted its
present name. 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. The Separate Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Policy are set aside in the Sub-Accounts of the
Separate Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Policy. Each Sub-Account
is administered and accounted for as part of the general business of the
Company, but the income, capital gains, or capital losses of each Sub-Account
are allocated to such Sub-Account, without regard to other income, capital
gains, or capital losses of the Company. Under Delaware law, the assets of the
Separate Account may not be charged with any liabilities arising out of any
other business of the Company.
The Board of Directors of the Company authorized the Separate Account on
November 1, 1990. The Variable 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 Variable
Account or the Company by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, to serve as an investment medium for assets of various
separate accounts established by the Company or other insurance companies.
Eleven investment portfolios of the Trust are currently available under the
Policy, each issuing a series of shares: the Core Equity Fund, Select Investment
Grade Income Fund, Money Market Fund, Equity Index Fund, Government Bond Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and Select
Value Opportunity Fund. The assets of each Fund are held separate from the
assets of the other Funds. Each Fund operates as a separate investment vehicle
and the
18
<PAGE>
income or losses of one Fund have no effect on the investment performance of
another Fund. Shares of the Trust are not offered to the general public but
solely to such variable accounts.
The trustees have overall responsibility for the supervision of the affairs of
the Trust. The Trustees have entered into a management agreement ("Management
Agreement") with Allmerica Financial Investment Management Services, Inc.,
("AFIMS") a wholly owned subsidiary of Allmerica Financial, to handle the day-
to-day affairs of the Trust. AFIMS, subject to Trustee review, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
AFIMS has entered into agreements with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds of the Trust. Under each Sub-Adviser agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to AFIMS and the Trustees instructions. AFIMS is solely
responsible for the payment of all fees for investment management services to
the Sub-Advisers. The Sub-Advisers, other than Allmerica Asset
Management, Inc., are not affiliated with the Company or the Trust.
Other than expenses specifically assumed by AFIMS under the Management
Agreement, the Trust bears all expenses incurred in its operation including fees
and expenses associated with the registration and qualification of the Trust's
shares under the Securities Act of 1933, other fees payable to the SEC,
independent public accountant fees, legal and custodian fees, association
membership dues, taxes, interest, insurance premiums, brokerage commissions,
fees and expenses of the Trustees who are not affiliated with AFIMS, expenses
for proxies, prospectuses, reports to shareholders and other expenses.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND. Fidelity Variable Insurance Products
Fund ("Fidelity VIP") managed by Fidelity Management & Research Company ("FMR"),
is an open-end, diversified management investment company organized as a
Massachusetts business trust on November 13, 1981, and registered with the SEC
under the 1940 Act. Four of its investment portfolios are available under the
Policy: Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services. As part of their
operating expenses, the portfolios of Fidelity VIP pay a monthly investment
management fee to FMR for managing investment and business affairs. The
prospectus of Fidelity VIP contains additional information concerning the
portfolios, including information about additional expenses paid by the
portfolios, and should be read in conjunction with this Prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II. Fidelity Variable Insurance
Products Fund II ("Fidelity VIP II"), managed by FMR (see discussion above) is
an open-end, diversified management investment company organized as a
Massachusetts business trust on March 21, 1988, and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Policy: Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International
Series, Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming
International, Inc. ("Price-Fleming"), is an open-end, diversified management
investment company organized as a Maryland corporation in 1994 and registered
with the SEC under the 1940 Act. Price-Fleming, founded in 1979 as a joint
venture between T. Rowe Price Associates, Inc. and Robert Fleming Holdings,
Limited, is one the largest no-load international mutual fund asset managers
with
19
<PAGE>
approximately $42.5 billion (as of December 31, 1999) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. One
of its investment portfolios is available under the Policies: the T. Rowe Price
International Stock Portfolio. One of its affiliates, T. Rowe Price
Associates, Inc., serves as the Sub-Adviser to the Select Capital Appreciation
Fund.
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. DGPF was established to provide a vehicle for the investment
of assets of various separate accounts supporting variable insurance contracts.
One investment portfolio ("Series") is available under the Policy, the
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International").
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 THEIR
RESPECTIVE PROSPECTUSES, 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 the
purchase payments made under the Policy.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
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.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital. Realization of income is not a
significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
seeks long-term growth by investing principally in a diversified portfolio of
common stocks of small and mid-size companies whose securities at the time of
purchase are considered by the Sub-Adviser to be undervalued.
20
<PAGE>
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
CORE EQUITY FUND -- The Core Equity Fund of the Trust is invested in common
stocks and securities convertible into common stocks that are believed to
represent significant underlying value in relation to current market prices. The
objective of the Core Equity Fund is to achieve long-term growth of capital.
Realization of current investment income, if any, is incidental to this
objective. This Fund was formerly known as the Growth Fund.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund of the Trust
seeks a combination of long-term growth of capital and current income. The Fund
will invest primarily in dividend-paying common stocks and securities
convertible into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See the Fidelity VIP
prospectus.
SELECT INVESTMENT GRADE INCOME FUND -- The Select Investment Grade Income Fund
of the Trust is invested in a diversified portfolio of fixed income securities
with the objective of seeking as high a level of total return (including both
income and capital appreciation) as is consistent with prudent investment
management. This Fund was formerly known as the Investment Grade Income Fund.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
21
<PAGE>
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET INDIVIDUAL NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH
THIS PROSPECTUS.
If there is a material change in the investment policy of an Underlying Fund,
the Owner will be notified of the change. If the Owner has accumulated Value
allocated to that Fund, he or she may have the Accumulated Value reallocated
without charge to another Fund or to the Fixed Account, where available, on
written request received by the Company 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 the Owner's right to transfer.
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide retirement income in the
form of periodic annuity payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
"annuity payments" and the individual receiving the payments is called the
"Annuitant." Annuity payments may begin immediately after a lump sum purchase is
made or may begin after an investment period during which the amount necessary
to provide the desired amount of retirement income is accumulated.
Under an annuity policy, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity payments will continue for the life of the Annuitant, regardless of
how long the Annuitant lives or how long all Annuitants as a group live. The
expense risk arises from the insurance company's guarantee that charges will not
be increased beyond the limits specified in the policy, regardless of actual
costs of operations.
The Policy Owner's purchase payments, less any applicable deductions, are
invested by the insurance company. After retirement, annuity payments are paid
to the Annuitant for life or for such other period chosen by the Policy Owner.
In the case of a "fixed" payout annuity, the value of these annuity payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed payout annuities see APPENDIX A -- MORE INFORMATION ABOUT THE
GENERAL ACCOUNT. With a variable annuity payout, the value of the Policy and the
annuity payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Policy and in the annuity benefit payments. If the
portfolio increases in value, the value of the Policy increases. If the
portfolio decreases in value, the value of the Policy decreases.
22
<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Policy 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 Statements of Additional
Information of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF.
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 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 nine years preceding the date of the surrender; (2) Old
Payments - purchase payments invested in the Policy for more than nine 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 31, 1992, where the Policy Owner and
Annuitant as of the date of application are both within the following class of
individuals: All employees of the Company located at the Company's home office
(or at off-site locations if such employees are on the Company's home office
payroll); all directors of the Company; all retired employees; all spouses and
immediate family members of such employees, directors and retirees, who reside
in the same household; and beneficiaries who receive a death benefit under a
deceased employee's or retiree's progress sharing plan.
For purposes of the above class of individuals, "the Company" includes its
affiliates and subsidiaries; "immediate family members" means children,
siblings, parents and grandparents; "retirement date" means an employee's early,
normal or late retirement date, as defined in the First Allmerica's Companies
Pension Plan or any successor plan; and "progress sharing plan" means the First
Allmerica Financial Life Insurance Company Incentive and Profit Sharing Plan or
any successor plan.
Any elimination of or reduction in the amount of 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.
CHARGE 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. 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
first-in-first-out ("FIFO") method of accounting. (See FEDERAL TAX
CONSIDERATIONS for a discussion of how withdrawals are treated for income tax
purposes.)
23
<PAGE>
The Surrender Charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PAYMENTS
WITHDRAWAL WITHDRAWN
- ------------------ -----------------------
<S> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
more than 9 0%
</TABLE>
The amount redeemed equals the amount requested by the Policy Owner plus the
charge, if any. 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.
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.
24
<PAGE>
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under policies
issued in Hawaii and 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.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one) and the denominator of
the fraction is the remaining life expectancy of the Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. Under the Company's LED option, the
amount withdrawn from the Policy changes each year, because life expectancy
changes each year that a person lives. For example, actuarial tables indicate
that a person age 70 has a life expectancy of 16 years, but a person who attains
age 86 has a life expectancy of another 6.5 years. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Policy and be subject to a 10% federal tax
penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see FEDERAL TAX
CONSIDERATIONS, "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.)
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the Surrender Value less any applicable tax withholding.
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 "E. Surrender" and "F.
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 6% of purchase
payments, to entities which sell the Policies. To the extent permitted by NASD
rules, expense reimbursement allowances and
25
<PAGE>
additional payments for other services not directly related to the sale of the
Policies, including the recruitment and training of personnel, production of
promotional literature, and similar services may also be made.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated surrender charges, described above, and the
investment earnings on amounts allocated to accumulate on a fixed basis in
excess of the interest credited on fixed accumulations by the Company which may
include amounts derived from mortality and expense risk charges. There is no
additional charge to Owners or to the Separate Account. Any surrender charges
assessed on a Policy will be retained by the Company. Alternative commission
schedules are available with lower initial commission amounts based on purchase
payments, plus ongoing annual compensation of up to 1% of policy value.
B. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
policies. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, to the extent permitted in the Policy the premium tax charge is
deducted on a pro-rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity benefit payments begin (the
Company reserves the right instead to deduct the premium tax charge for
these Policies at the time the purchase payments are received); or
(2) the premium tax charge is deducted in total when annuity benefit
payments begin.
If no amount for premium tax was deducted at the time the purchase payment was
received, but subsequently tax is determined to be due prior to the Annuity
Date, the Company reserves the right to deduct the premium tax from the Policy
value at the time such determination is made.
C. POLICY FEE
A $30 Policy fee currently is deducted on the Policy anniversary date and upon
full surrender of the Policy 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 and maintained by 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 account represents of the total
Accumulated Value under the Policy. The deduction of the Policy fee will result
in cancellation of a number of Accumulation Units equal in value to the
percentage of the charge deducted from that investment option.
D. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE
The Company 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 Fixed Account (based on the
relative value that the Accumulation Units of the Sub-Accounts and the dollar
amounts in the Fixed Account bear to the total Accumulated Value).
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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 "L. 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 daily charge against
the assets of each Sub-Account to compensate for certain mortality and expense
risks which it has assumed. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
guarantee that it will make annuity 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 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 with a
daily charge at an annual rate of 0.20% 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. However, there is no
direct relationship 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 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.
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<PAGE>
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 a transfer charge. For each subsequent transfer, it reserves the right to
assess a charge, guaranteed never to exceed $25, to reimburse it for the costs
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 sale to individuals. Participants under such plans, as well
as Policy Owners, Annuitants, 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.
Policy Owners may direct any inquiries to Annuity Client Services, Allmerica
Financial Life Insurance and Annuity Company, 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone 1-800-533-7881.
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.
Purchase payments are not limited as to frequency and number, but there are
certain limitations as to amount. Generally, the initial payment must be at
least $600. Under a salary deduction or a monthly automatic payment plan, the
minimum initial payment is $50. In all cases, each subsequent payment must be at
least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Policy on the employee, if the plan's average
annual contribution per eligible plan participant is at least $600. Total
payments may not exceed the maximum limit specified in the Policy. If the
payments are divided among two or more accounts, a net amount of at least $10 of
each payment must be allocated to each account.
Generally, 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. The Policy Owner may change allocation instructions for new
payments pursuant to written or telephone request. If telephone requests are
elected by the Policy Owner, a properly completed authorization form must be on
file before telephone requests will be honored. The policy of the Company and
its agents and affiliates is that they will not be responsible for losses
resulting from acting upon telephone requests reasonably believed to be genuine.
The Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses due to 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.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Policy intended to qualify as an IRA may cancel the
Policy at any time within ten days after receipt of the Policy and receive a
refund. In order to cancel the Policy, the Owner must mail or deliver the Policy
to the agent through whom the Policy was purchased, to the Principal Office at
440 Lincoln Street, Worcester, MA 01653, or to an authorized representative.
Mailing or delivery must occur within ten days after receipt of the Policy for
cancellation to be effective.
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<PAGE>
Within seven days, the Company will provide a refund equal to gross payments
received. In some states, however, the refund may equal the greater of
(1) gross payments, or (2) the difference between the payment received and any
amount allocated to the Separate Account plus the Accumulated Value of the
Sub-Accounts plus any amounts deducted under the Policy or by the Underlying
Funds for taxes, charges or fees. The "Right to Examine" provision on the cover
of the Policy will specifically indicate whether the refund will be equal to
gross payments or equal to the greater of (1) or (2) as set forth above.
The liability of the Separate 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 POLICIES
An Owner may cancel the Policy at any time within ten days after receipt of the
Policy (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 Separate Account, and (2) the Accumulated Value of amounts
allocated to the Separate Account as of the date the request is received. If the
Policy 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 Policy is issued, the "Right to Examine" provision on the
cover of the Policy will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel.
D. 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 from the
Sub-Account to the General Account, where available. Transfer values will be
effected at the Accumulation Value next computed after receipt of the transfer
order. The Company will make transfers pursuant to written request or, if a
properly completed authorization is on file, pursuant to a telephone request.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Policy year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Policy year, the Company reserves the right to assess a
charge, guaranteed not to exceed $25, to reimburse it for the expense of
processing 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
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<PAGE>
$100, on a periodic basis (monthly, bi-monthly, quarterly, semi-annually or
annually) from the Sub-Account investing in the Money Market Fund or the
Government Bond Fund ("source account") to one or more of the Sub-Accounts.
Automatic transfers may not be made into the General Account or, if applicable,
the Sub-Account being used as the source account. If an automatic transfer would
reduce the balance in the source account to less than $100, the entire balance
will be transferred proportionately to the chosen Sub-Accounts. Automatic
transfers will continue until the amount in the source account on a transfer
date is zero or the Owner's request to terminate the option is received by the
Company. If additional amounts are allocated to the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
The General Account may be used as the source account from which automatic
transfers can be made provided that (1) the amount of each monthly transfer
cannot exceed 10% of the value in the General Account as of the date of the
first transfer; (2) the amount of each bi-monthly transfer cannot exceed 20% of
the value of the General Account as of the date of the first transfer and
(3) each quarterly transfer cannot exceed 25% of the value in the General
Account as of the date of the first transfer.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as requested by the Owner, the
Company will review the percentage allocations in the Sub-Accounts and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue until the Owner's request to terminate or change the option is
received by the Company. As such, subsequent payments allocated in a manner
different from the percentage allocation mix in effect on the date the payment
is received will be allocated in accordance with the existing mix on the next
scheduled date unless the Owner's timely request to change the allocation 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, 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.
E. 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 nine
full Policy years. See CHARGES AND DEDUCTIONS. The Policy fee and rider charge,
if applicable, will be deducted upon surrender of the Policy.
After the Annuity Date, only Policies annuitized under a commutable period
certain option (as specified 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
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<PAGE>
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.
F. PARTIAL REDEMPTION
At any time prior to the Annuity Date, an Owner may redeem a portion of the
Accumulated Value of his or her Policy, subject to the limits stated below. The
Owner must file a signed, written request for redemption, satisfactory to the
Company, at the Principal Office. The written request must indicate the dollar
amount the Owner wishes to receive and the account from which such amount is to
be redeemed. The amount redeemed equals the amount requested by the Owner plus
any applicable surrender charge, as described under CHARGES AND DEDUCTIONS.
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 a minimum 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 above under "E. Surrender."
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 partial redemptions, see
FEDERAL TAX CONSIDERATIONS.
G. DEATH BENEFIT
If the Annuitant dies (or an Owner predeceases the Annuitant) prior to the
Annuity Date while the Policy is in force, a death benefit will be paid to the
beneficiary, except where the Policy continues as provided below in "H. 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, (2) the total amount of gross payments
made under the Policy reduced proportionately 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
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<PAGE>
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. Upon death of an Owner
who is not the Annuitant, the death benefit is equal to the Accumulated Value of
the Policy next determined following receipt of due proof of death received at
the Principal Office.
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 received at the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum. The
beneficiary may, however, by written request, elect one of the following
options:
(1) The payment of the one sum may be delayed for a period not to exceed
five years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin
within one year from the date of death and are payable over a period
certain not extended beyond the life expectancy of the beneficiary.
(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from the
date of death and are payable over a period not extended beyond the life
expectancy of the beneficiary. Any annuity benefits will be provided in
accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy shall
be based on the unit values next computed after due proof of death has been
received at the Principal Office. If the beneficiary elects to receive the death
benefit in one sum, the death benefit will be paid within seven business days.
If the beneficiary (other than a spousal beneficiary under an IRA) has not
elected an annuity option within one year from the date notice of death is
received by the Company, the Company will pay the death benefit in one sum. The
death benefit will reflect any earnings or losses experienced during the period
and any withdrawals.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly annuity benefit payments, any unpaid
amounts or installments will be paid to the beneficiary. The Company must pay
the remaining payments at least as rapidly as under the payment option in effect
on the date of the Annuitant's death. If there is more than one beneficiary, the
commuted value of the payments, computed on the basis of the assumed interest
rate incorporated in the annuity option table on which such payments are based,
shall be paid to the beneficiaries in one sum.
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<PAGE>
H. 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.
I. ASSIGNMENT
The Policy may be assigned by the Owner at any time prior to the Annuity Date
and while the Annuitant is alive. Policies sold in connection with IRA plans and
certain other qualified plans, however, are not assignable. For more information
about these plans, see FEDERAL TAX CONSIDERATIONS.
The Company will not be deemed to have knowledge of an assignment unless it is
made in writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Policy is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Policy to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Owner in full settlement of all liability
under the Policy. The interest of the Owner and of any beneficiary will be
subject to any assignment.
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. 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 Policy, by the annuity option selected,
and by the investment performance of the investment options selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the General Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made each month. Since the value of an
Annuity Unit in a Sub-Account will reflect the investment performance of the
Sub-Account, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $50. If
a combination of fixed and variable payments is selected, the initial payment on
each basis must be at least $50. The Company reserves the right to increase
these minimum amounts. If the annuity option selected does not produce initial
payments which meet these minimums, the Company will pay the Accumulated Value
in one sum. Once the Company begins making annuity payments, the Annuitant
cannot make partial redemptions or surrender the annuity benefit, except in the
case where a commutable period certain option (Option V or a comparable fixed
option) has been chosen. Beneficiaries entitled to receive remaining payments
for a "period certain" may elect to instead receive a lump sum settlement.
The 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 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
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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 annuity option rates listed under the Annuity Option Tables in the
Policy.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company currently provides the variable annuity payout options described
below. Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Equity Index
Fund, the Core Equity Fund and the Money Market Fund.
The Company also provides fixed annuity payout 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 payout options or the
fixed-payout 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 only during the
lifetime of the Annuitant. It would be possible under this option for the payee
to receive only one annuity benefit payment if the Annuitant dies prior to the
due date of the second annuity benefit payment, two annuity benefit payments if
the Annuitant dies before the due date of the third annuity benefit payment, and
so on. Payments will continue, however, during the Annuitant's lifetime, 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 benefit payments will continue to
the beneficiary until the number of such payments equals the number determined
in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by
the dollar amount of the first monthly payment (which
determines the greatest number of payments payable to the
beneficiary), and
(2) is the number of monthly payments paid prior to the death
of the 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
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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 monthly 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 option is automatically commutable.
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.
L. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER
An optional Minimum Guaranteed Annuity Payout (M-GAP) Rider is currently
available in most jurisdictions for a separate monthly charge. The M-GAP Rider
provides a guaranteed minimum amount of fixed annuity 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 (less any applicable premium taxes) is
determined. The Minimum Guaranteed Annuity Payout Benefit Base 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
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 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 Policy anniversary since the Rider
effective date, as determined after being increased for subsequent
payments 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
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CONDITIONS ON ELECTION OF 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 or her 78th birthday. The
Owner may not elect a Rider with a fifteen-year waiting period if at the
time of election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE 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 "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 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
occurs (1) 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 "H. The
Spouse of the Owner as Beneficiary" (see THE VARIABLE ANNUITY POLICIES).
From time to time the Company may illustrate minimum guaranteed income amounts
under the 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 Annuitant 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
120 Monthly Payments Guaranteed. The values below have been computed based on a
5% net rate of return and are the guaranteed minimums that would be received
under the M-GAP Rider. The minimum guaranteed benefit base
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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 120 Monthly Payments Guaranteed 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 Riders issued
prior to the termination date, but, as noted above, Owners would not be able to
purchase a new Rider under the repurchase feature. (See above, "TERMINATING THE
M-GAP RIDER.")
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
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.
N. 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 "M. 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.
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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 the dollar amount is determined by multiplying
(1) the Accumulated Value applied under that option (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 all period certain options the dollar amount is determined by
multiplying (1) the Surrender Value less premium taxes, if any, applied
under that option (less premium tax, if any) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of
value.
- For a death benefit annuity, the annuity value will be the amount of the
death benefit.
The first periodic annuity benefit payment is based upon the Accumulated Value
as of a date not more than four weeks preceding the date that the first annuity
benefit payment is due. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Policy.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected 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 (calculated 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 "L. Optional Minimum
Guaranteed Annuity Payout (M-GAP) Rider," above.
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<PAGE>
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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<PAGE>
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 "C. Right to Cancel
Individual Retirement Annuity."
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.
43
<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.
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 investment options. The maximum loan amount
is the amount determined under the Company's maximum loan formula for qualified
plans. The minimum loan amount is $1,000. Loans will be secured by a security
interest in the Policy. Loans are subject to applicable retirement legislation
and their taxation is determined under the federal income tax laws. The amount
borrowed will be transferred to a fixed, minimum guarantee loan assets account
in the Company's General Account, where it will accrue interest at a specified
rate below the then current loan interest rate. Generally, loans must be repaid
within five years and must be made at least quarterly in substantially equal
amounts. When repayments are received, they will be allocated pro-rata in
accordance with the Owner's most recent allocation instructions.
The amount of the death benefit, the amount payable on a full surrender and the
amount applied to provide an annuity on the Annuity Date will be reduced to
reflect any outstanding loan balance (plus accrued interest thereon). Partial
withdrawals may be restricted by the maximum loan limitation.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Series. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her policy, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting Policy Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Policy. The Company will assume that all transactions are accurately reported on
confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer 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 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
44
<PAGE>
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 neither the Company nor
any of the underlying investment companies currently foresees any such
disadvantages to either variable life insurance owners or variable annuity
owners, the Company and the respective trustees intend to monitor events in
order to identify any material conflicts and to determine what action, if any,
should be taken in response thereto.
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.
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.
45
<PAGE>
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying 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
Policy 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 of 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.
46
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation under
the provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity policy and the General 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 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 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. 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 a 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 nine full policy years
A-1
<PAGE>
APPENDIX B
POLICY NO. A3018-91 (AND STATE VARIATIONS THEREOF)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
POLICY NO. A3018-94
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
If your Policy is issued on Form No. A3018-91 or Form No. A3018-94, your Policy
is substantially similar to the Policy described in this Prospectus (A3018-93),
except as follows:
1. (For Owners of A3018-94 only, the following is added:) 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. The Owner, if a natural person, and the Annuitant must be the same under Form
A3018-94 and joint Owners are not permitted. Under A3018-91 and A3018-93 the
Owner and the Annuitant may be different and joint Owners are permitted if one
of the two joint Owners is also the Annuitant.
3. The minimum interest rate credited to amounts allocated to the General
Account respecting A3018-93 and A3018-94 is 3% compounded annually. For A3018-91
the minimum interest rate guarantees are 5% compounded annually for the first
five Policy years, 4% for the next five Policy years and 3.5% thereafter.
4. The stepped-up death benefit under A3018-91 and A3018-94 applies to the most
recent fifth year Policy anniversary and gross payments are simply reduced by
subsequent withdrawals by subtracting the amount of the withdrawal from the
total gross payments. The stepped-up death benefit under A3018-93 applies to the
most recent fifth year Policy anniversary and the guaranteed death benefit is
reduced proportionately to reflect partial withdrawals (in the same proportion
that the Accumulated Value was reduced by the withdrawals).
5. Under A3018-91 and A3018-94, the Free Withdrawal Amount is equal to the
greater of (1) 10% of the Accumulated Value as of December 31 of the previous
calendar year, or (2) the life expectancy distribution, if applicable. The Free
Withdrawal Amount is deducted first from Old Payments, then from the earliest
New Payments and so on until all New Payments have been exhausted pursuant to
the first-in-first-out ("FIFO") method of accounting (LIFO or last-in-first-out
method in New Jersey).
6. The transfer provisions of A3018-91 are identical to those of A3018-93. Under
A3018-94, the General Account restrictions described in the third paragraph of
"D. Transfer Privilege" are deleted and replaced with the following:
Except for General Account transfers made under the automatic transfer option
(Dollar Cost Averaging), transfers from the General Account will only be
permitted if there has been a least a ninety (90) day period since the last
transfer from the General Account and the amount transferred from the General
Account in each transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value under the Policy.
B-1
<PAGE>
7. Because of the differences in the amount of the Free Withdrawal (see 4.
above), the following expense examples apply to Owners of A3018-91 and A3018-94
and should be referred to rather than examples (1)(a) and (1)(b) on page 8 of
this Prospectus:
(1)(a) If, at the end of the applicable period, you surrender your Policy or
annuitize under any period certain option, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets and no rider:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $98 $141 $179 $286
DGPF International Equity Series........................... $97 $139 $175 $279
Fidelity VIP Overseas Portfolio............................ $96 $138 $173 $275
T. Rowe Price International Stock Portfolio................ $98 $142 $180 $289
Select Aggressive Growth Fund.............................. $96 $137 $171 $271
Select Capital Appreciation Fund........................... $97 $140 $176 $281
Select Value Opportunity Fund.............................. $97 $140 $176 $281
Select Growth Fund......................................... $96 $135 $169 $267
Core Equity Fund........................................... $92 $125 $151 $231
Fidelity VIP Growth Portfolio.............................. $94 $130 $160 $249
Equity Index Fund.......................................... $91 $121 $144 $217
Select Growth and Income Fund.............................. $95 $133 $164 $257
Fidelity VIP Equity-Income Portfolio....................... $93 $127 $156 $240
Fidelity VIP II Asset Manager Portfolio.................... $94 $129 $159 $246
Fidelity VIP High Income Portfolio......................... $94 $131 $162 $252
Select Investment Grade Income Fund........................ $92 $125 $152 $233
Government Bond Fund....................................... $94 $129 $158 $245
Money Market Fund.......................................... $90 $119 $141 $211
</TABLE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize under any period certain option, you would pay the following
expenses on a $1,000 investment, assuming 5% annual return on assets and
election of a Minimum Guaranteed Annuity Payout (M-GAP) Rider with a ten-year
waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $100 $149 $191 $310
DGPF International Equity Series........................... $ 99 $147 $188 $303
Fidelity VIP Overseas Portfolio............................ $ 99 $145 $186 $299
T. Rowe Price International Stock Portfolio................ $100 $149 $192 $313
Select Aggressive Growth Fund.............................. $ 99 $144 $184 $295
Select Capital Appreciation Fund........................... $100 $147 $188 $305
Select Value Opportunity Fund.............................. $100 $147 $188 $305
Select Growth Fund......................................... $ 98 $143 $182 $291
Core Equity Fund........................................... $ 95 $132 $164 $256
Fidelity VIP Growth Portfolio.............................. $ 96 $138 $173 $275
Equity Index Fund.......................................... $ 93 $128 $157 $243
Select Growth and Income Fund.............................. $ 97 $140 $177 $283
Fidelity VIP Equity-Income Portfolio....................... $ 96 $135 $168 $266
Fidelity VIP II Asset Manager Portfolio.................... $ 96 $137 $171 $272
Fidelity VIP High Income Portfolio......................... $ 97 $139 $175 $278
Select Investment Grade Income Fund........................ $ 95 $133 $165 $258
Government Bond Fund....................................... $ 96 $137 $171 $271
Money Market Fund.......................................... $ 93 $127 $154 $237
</TABLE>
8. First Allmerica Financial Life Insurance Company first offered ExecAnnuity
Plus to the public in 1994.
B-2
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
EXECANNUITY PLUS '91 (ISSUED ON FORM A3018-94)
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>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 21.61% 16.17% 13.29%
DGPF International Equity Series..... 4/20/94 5.97% 10.87% 9.44%
Fidelity VIP Overseas Portfolio...... 4/20/94 32.45% 15.02% 12.70%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 23.26% N/A 13.09%
Select Aggressive Growth Fund........ 4/20/94 28.37% 20.91% 18.65%
Select Capital Appreciation Fund..... 4/30/95 15.40% N/A 18.99%
Select Value Opportunity Fund........ 4/20/94 -13.03% 11.13% 9.30%
Select Growth Fund................... 4/20/94 19.70% 26.72% 24.36%
Core Equity Fund..................... 4/20/94 19.24% 22.88% 20.66%
Fidelity VIP Growth Portfolio........ 4/20/94 27.14% 27.27% 25.15%
Equity Index Fund.................... 4/21/94 10.48% 25.47% 22.83%
Select Growth and Income Fund........ 4/20/94 8.55% 19.36% 17.48%
Fidelity VIP Equity-Income Portfolio... 4/20/94 -3.05% 16.14% 15.54%
Fidelity VIP II Asset Manager
Portfolio........................... 5/11/94 1.54% 13.32% 11.53%
Fidelity VIP High Income Portfolio... 4/20/94 -1.27% 8.41% 7.35%
Select Investment Grade Income Fund... 4/21/94 -9.49% 4.99% 4.31%
Government Bond Fund................. 4/20/94 -8.36% 3.84% 3.48%
Money Market Fund.................... 4/10/94 -3.85% 3.03% 3.15%
</TABLE>
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 FEES)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 29.81% 16.86% 13.84%
DGPF International Equity Series..... 4/20/94 14.08% 11.61% 9.99%
Fidelity VIP Overseas Portfolio...... 4/20/94 40.56% 15.69% 13.21%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 31.39% N/A 13.87%
Select Aggressive Growth Fund........ 4/20/94 36.65% 21.57% 19.18%
Select Capital Appreciation Fund..... 4/30/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/20/94 -6.08% 11.91% 9.90%
Select Growth Fund................... 4/20/94 27.92% 27.23% 24.74%
Core Equity Fund..................... 4/20/94 27.46% 23.46% 21.10%
Fidelity VIP Growth Portfolio........ 4/20/94 35.45% 27.89% 25.65%
Equity Index Fund.................... 4/21/94 18.67% 25.96% 23.20%
Select Growth and Income Fund........ 4/20/94 16.71% 19.96% 17.93%
Fidelity VIP Equity-Income Portfolio... 4/20/94 4.79% 16.92% 16.13%
Fidelity VIP II Asset Manager
Portfolio........................... 5/11/94 9.48% 13.98% 12.01%
Fidelity VIP High Income Portfolio... 4/20/94 6.59% 9.28% 8.01%
Select Investment Grade Income Fund... 4/21/94 -2.41% 5.85% 4.94%
Government Bond Fund................. 4/20/94 -1.22% 4.71% 4.10%
Money Market Fund.................... 4/10/94 3.66% 3.96% 3.81%
</TABLE>
B-3
<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>
UNDERLYING FOR YEAR 10 YEARS OR
FUND ENDED SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 21.61% 16.17% 13.28%
DGPF International Equity Series..... 10/29/92 5.97% 10.87% 10.26%
Fidelity VIP Overseas Portfolio...... 1/28/87 32.45% 15.02% 9.73%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 23.26% 12.85% 11.30%
Select Aggressive Growth Fund........ 8/21/92 28.37% 20.91% 18.69%
Select Capital Appreciation Fund..... 4/28/95 15.40% N/A 18.99%
Select Value Opportunity Fund........ 4/30/93 -13.03% 11.13% 9.58%
Select Growth Fund................... 8/21/92 19.70% 26.72% 18.60%
Core Equity Fund..................... 4/29/85 19.24% 22.88% 15.50%
Fidelity VIP Growth Portfolio........ 10/9/86 27.14% 27.27% 17.98%
Equity Index Fund.................... 9/28/90 10.48% 25.47% 18.85%
Select Growth and Income Fund........ 8/21/92 8.55% 19.36% 14.01%
Fidelity VIP Equity-Income Portfolio... 10/9/86 -3.05% 16.14% 12.71%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 1.54% 13.32% 11.48%
Fidelity VIP High Income Portfolio... 9/19/85 -1.27% 8.41% 10.71%
Select Investment Grade Income Fund... 4/29/85 -9.49% 4.99% 6.10%
Government Bond Fund................. 8/26/91 -8.36% 3.84% 4.58%
Money Market Fund.................... 4/29/85 -3.85% 3.03% 3.67%
</TABLE>
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 FEES)
<TABLE>
<CAPTION>
UNDERLYING FOR YEAR 10 YEARS OR
FUND ENDED SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 29.81% 16.86% 13.83%
DGPF International Equity Series..... 10/29/92 14.08% 11.61% 10.50%
Fidelity VIP Overseas Portfolio...... 1/28/87 40.56% 15.69% 9.84%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 31.39% 13.56% 11.82%
Select Aggressive Growth Fund........ 8/21/92 36.65% 21.57% 18.97%
Select Capital Appreciation Fund..... 4/28/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/30/93 -6.08% 11.91% 9.98%
Select Growth Fund................... 8/21/92 27.92% 27.23% 18.83%
Core Equity Fund..................... 4/29/85 27.46% 23.46% 15.64%
Fidelity VIP Growth Portfolio........ 10/9/86 35.45% 27.89% 18.23%
Equity Index Fund.................... 9/28/90 18.67% 25.96% 18.94%
Select Growth and Income Fund........ 8/21/92 16.71% 19.96% 14.25%
Fidelity VIP Equity-Income Portfolio... 10/9/86 4.79% 16.92% 12.95%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 9.48% 13.98% 11.53%
Fidelity VIP High Income Portfolio... 9/19/85 6.59% 9.28% 10.83%
Select Investment Grade Income Fund... 4/29/85 -2.41% 5.85% 6.15%
Government Bond Fund................. 8/26/91 -1.22% 4.71% 4.69%
Money Market Fund.................... 4/29/85 3.66% 3.96% 3.73%
</TABLE>
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,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period................... 1.605 1.398 1.355 1.127 0.956 1.000 N/A N/A
End of Period......................... 2.084 1.605 1.398 1.355 1.127 0.956 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 129,946 130,011 115,585 77,485 37,680 12,530 N/A N/A
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.736 1.596 1.519 1.284 1.143 1.129 1.000 N/A
End of Period......................... 1.980 1.736 1.596 1.519 1.284 1.143 1.129 N/A
Units Outstanding at End of Period (in
thousands).......................... 63,396 68,279 62,134 44,416 34,692 26,924 6,681 N/A
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period................... 1.814 1.632 1.484 1.330 1.230 1.226 0.906 1.030
End of Period......................... 2.550 1.814 1.632 1.484 1.330 1.230 1.226 0.906
Units Outstanding at End of Period (in
thousands).......................... 58,821 59,052 56,689 63,050 65,256 59,774 25,395 6,728
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO
Unit Value:
Beginning of Period................... 1.396 1.222 1.203 1.064 1.000 N/A N/A N/A
End of Period......................... 1.834 1.396 1.222 1.203 1.064 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 68,032 68,367 59,832 35,915 10,882 N/A N/A N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period................... 2.513 2.305 1.970 1.686 1.292 1.342 1.139 1.000
End of Period......................... 3.433 2.513 2.305 1.970 1.686 1.292 1.342 1.139
Units Outstanding at End of Period (in
thousands).......................... 123,337 125,758 106,790 89,974 70,349 54,288 26,158 2,019
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period................... 1.875 1.670 1.482 1.383 1.000 N/A N/A N/A
End of Period......................... 2.316 1.875 1.670 1.482 1.383 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 81,133 80,048 70,932 52,927 16,096 N/A N/A N/A
SELECT VALUE OPPORTUNITY FUND
Unit Value:
Beginning of Period................... 2.011 1.945 1.580 1.249 1.075 1.167 1.000 N/A
End of Period......................... 1.889 2.011 1.945 1.580 1.249 1.075 1.167 N/A
Units Outstanding at End of Period (in
thousands).......................... 103,456 99,750 85,126 60,145 43,433 33,049 9,902 N/A
</TABLE>
C-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>
SELECT GROWTH FUND
Unit Value:
Beginning of Period................... 2.671 2.001 1.514 1.259 1.024 1.055 1.058 1.000
End of Period......................... 3.417 2.671 2.001 1.514 1.259 1.024 1.055 1.058
Units Outstanding at End of Period (in
thousands).......................... 136,939 121,005 96,643 62,633 47,078 38,415 26,064 3,039
CORE EQUITY FUND
Unit Value:
Beginning of Period................... 2.748 2.336 1.894 1.599 1.221 1.236 1.175 1.111
End of Period......................... 3.503 2.748 2.336 1.894 1.599 1.221 1.236 1.175
Units Outstanding at End of Period (in
thousands).......................... 167,814 164,914 156,173 135,573 116,008 102,399 72,609 34,373
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period................... 3.586 2.608 2.143 1.895 1.419 1.440 1.224 1.135
End of Period......................... 4.857 3.586 2.608 2.143 1.895 1.419 1.440 1.224
Units Outstanding at End of Period (in
thousands).......................... 160,262 149,009 148,211 142,450 116,485 90,717 49,136 18,253
EQUITY INDEX FUND
Unit Value:
Beginning of Period................... 3.265 2.581 1.977 1.640 1.221 1.266 1.135 1.074
End of Period......................... 3.874 3.265 2.581 1.977 1.640 1.221 1.226 1.135
Units Outstanding at End of Period (in
thousands).......................... 131,644 107,625 85,344 57,428 39,534 29,176 22,466 9,535
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period................... 2.270 1.978 1.638 1.370 1.066 1.074 0.987 1.000
End of Period......................... 2.650 2.270 1.978 1.638 1.370 1.066 1.074 0.987
Units Outstanding at End of Period (in
thousands).......................... 132,428 119,107 103,543 82,434 63,841 51,098 31,846 4,711
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 3.107 2.824 2.236 1.185 1.490 1.412 1.211 1.051
End of Period......................... 3.256 3.107 2.824 2.236 1.185 1.490 1.412 1.211
Units Outstanding at End of Period (in
thousands).......................... 188,374 187,989 180,001 167,000 139,145 104,356 61,264 17,855
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period................... 1.717 1.514 1.273 1.127 0.977 1.000 N/A N/A
End of Period......................... 1.879 1.717 1.514 1.273 1.127 0.977 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 78,861 69,704 55,551 42415 33444 20720 N/A N/A
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 2.142 2.272 1.958 1.743 1.465 1.510 1.270 1.047
End of Period......................... 2.284 2.142 2.272 1.958 1.743 1.465 1.510 1.270
Units Outstanding at End of Period (in
thousands).......................... 97,498 97,829 76,343 53,956 38,042 27,041 13,583 3,625
</TABLE>
C-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>
SELECT INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period................... 1.629 1.530 1.418 1.390 1.073 1.250 1.145 1.073
End of Period......................... 1.590 1.629 1.530 1.418 1.390 1.196 1.250 1.145
Units Outstanding at End of Period (in
thousands).......................... 106,780 102,088 86,816 79,054 69,168 57,454 48,488 15,428
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period................... 1.469 1.384 1.311 1.285 1.152 1.179 1.112 1.075
End of Period......................... 1.451 1.469 1.384 1.311 1.285 1.152 1.179 1.112
Units Outstanding at End of Period (in
thousands).......................... 51,711 48,930 35,261 30,921 31,710 32,519 60,265 29,844
MONEY MARKET FUND
Unit Value:
Beginning of Period................... 1.262 1.214 1.167 1.124 1.077 1.051 1.035 1.013
End of Period......................... 1.308 1.262 1.214 1.167 1.124 1.077 1.051 1.035
Units Outstanding at End of Period (in
thousands).......................... 205,622 128,730 91,676 92,354 69,311 37,668 30,815 30,778
</TABLE>
C-3
<PAGE>
APPENDIX D
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>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period................... 1.605 1.398 1.355 1.128 0.956 1.000
End of Period......................... 2.084 1.605 1.398 1.355 1.128 0.956
Number of Units Outstanding at End of
Period (in thousands)............... 10,841 9,713 8,076 5,068 2,093 446
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.508 1.387 1.319 1.115 0.993 1.000
End of Period......................... 1.720 1.508 1.387 1.319 1.115 0.993
Number of Units Outstanding at End of
Period (in thousands)............... 4,560 4,148 3,266 2,023 1,304 667
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period................... 1.443 1.298 1.180 1.058 0.978 1.000
End of Period......................... 2.028 1.443 1.298 1.180 1.058 0.978
Number of Units Outstanding at End of
Period (in thousands)............... 4,796 4,358 3,601 3,114 2,804 1,697
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO
Unit Value:
Beginning of Period................... 1.396 1.222 1.203 1.064 1.000 N/A
End of Period......................... 1.834 1.396 1.222 1.203 1.064 N/A
Number of Units Outstanding at End of
Period (in thousands)............... 5,937 5,670 4,536 2,506 542 N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period................... 1.989 1.825 1.560 1.335 1.023 1.000
End of Period......................... 2.718 1.989 1.825 1.560 1.335 1.023
Number of Units Outstanding at End of
Period (in thousands)............... 11,108 10,282 7,947 5,681 2,907 1,211
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period................... 1.875 1.670 1.482 1.115 1.000 N/A
End of Period......................... 2.316 1.875 1.670 1.482 1.115 N/A
Number of Units Outstanding at End of
Period (in thousands)............... 6,678 5,947 5,197 3,849 1,069 N/A
SMALL-MID CAP VALUE FUND
Unit Value:
Beginning of Period................... 1.823 1.764 1.433 1.131 0.975 1.000
End of Period......................... 1.712 1.823 1.764 1.433 1.131 0.975
Number of Units Outstanding at End of
Period (in thousands)............... 8,309 7,243 5,466 3,037 1,614 795
SELECT GROWTH FUND
Unit Value:
Beginning of Period................... 2.756 2.064 1.562 1.229 1.057 1.000
End of Period......................... 3.525 2.756 2.064 1.562 1.229 1.057
Number of Units Outstanding at End of
Period (in thousands)............... 11,455 8,389 5,589 2,645 1,278 406
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CORE EQUITY FUND
Unit Value:
Beginning of Period................... 2.336 1.986 1.610 1.359 1.037 1.000
End of Period......................... 2.977 2.336 1.986 1.610 1.359 1.037
Number of Units Outstanding at End of
Period (in thousands)............... 10,700 9,224 7,404 4,652 2,436 947
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period................... 2.712 1.972 1.620 1.433 1.073 1.073
End of Period......................... 3.673 2.712 1.972 1.620 1.433 1.073
Number of Units Outstanding at End of
Period (in thousands)............... 16,528 13,035 11,575 9,342 4,952 1,944
EQUITY INDEX FUND
Unit Value:
Beginning of Period................... 2.766 2.187 1.675 1.390 1.035 1.000
End of Period......................... 3.282 2.766 2.187 1.675 1.390 1.035
Number of Units Outstanding at End of
Period (in thousands)............... 11,440 8,479 5,712 2,417 947 189
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period................... 2.193 1.911 1.582 1.324 1.030 1.000
End of Period......................... 2.559 2.193 1.911 1.582 1.324 1.030
Number of Units Outstanding at End of
Period (in thousands)............... 8,958 7,519 6,124 3,759 2,173 832
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 2.238 2.034 1.610 1.430 1.073 1.000
End of Period......................... 2.345 2.238 2.034 1.610 1.430 1.073
Number of Units Outstanding at End of
Period (in thousands)............... 17,836 16,111 12,959 9,957 5,738 2,214
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period................... 1.732 1.527 1.284 1.137 0.985 1.000
End of Period......................... 1.896 1.732 1.527 1.284 1.137 0.985
Number of Units Outstanding at End of
Period (in thousands)............... 4,614 3,514 3,125 2,735 2,025 1,240
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 1.455 1.543 1.330 1.184 0.995 1.000
End of Period......................... 1.551 1.455 1.543 1.330 1.184 0.995
Number of Units Outstanding at End of
Period (in thousands)............... 15,020 14,203 9,794 5,635 2,530 985
SELECT INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period................... 1.348 1.267 1.174 1.151 0.990 1.000
End of Period......................... 1.316 1.348 1.267 1.174 1.151 0.990
Number of Units Outstanding at End of
Period (in thousands)............... 5,686 5,160 3,889 2,854 1,677 1,677
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period................... 1.273 1.199 1.136 1.113 0.998 1.000
End of Period......................... 1.257 1.273 1.199 1.136 1.113 0.998
Number of Units Outstanding at End of
Period (in thousands)............... 4,118 2,605 1,694 1,629 1,098 363
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Unit Value:
Beginning of Period................... 1.195 1.149 1.105 1.064 1.020 1.000
End of Period......................... 1.239 1.195 1.149 1.105 1.064 1.020
Number of Units Outstanding at End of
Period (in thousands)............... 10,044 8,683 8,628 7,379 4,194 1,837
</TABLE>
D-3
<PAGE>
SEPARATE ACCOUNT VA-K
(ALLMERICA ADVANTAGE)
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 Allmerica Advantage
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company (in all jurisdictions except Hawaii and New York) or by First
Allmerica Financial Life Insurance Company in Hawaii and New York. The contract
is a flexible payment tax-deferred combination variable and fixed annuity
offered on both a group and individual basis. PLEASE READ THIS PROSPECTUS
CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE
RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
The 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 the following funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Growth Fund
Core Equity Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Equity Index Fund Asset Manager Portfolio
Select Growth and Income Fund
Select Investment Grade Income Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Government Bond Fund T. Rowe Price International Stock Portfolio
Money Market Fund
DELAWARE GROUP PREMIUM FUND
International Equity Series
</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 are held in the Company's Separate Account GPA (except in
California where they are allocated to the General Account).
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 calling Allmerica Investments, Inc. at
1-800-533-7881. 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).
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................................ 11
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND
DGPF....................................................... 17
INVESTMENT OBJECTIVES AND POLICIES.......................... 19
PERFORMANCE INFORMATION..................................... 21
DESCRIPTION OF THE CONTRACT................................. 23
A. Payments............................................... 23
B. Right to Cancel Individual Retirement Annuity.......... 24
C. Right to Cancel All Other Contracts.................... 24
D. Transfer Privilege..................................... 24
Automatic Transfers and Automatic Account
Rebalancing Options................................. 25
E. Surrender.............................................. 25
F. Withdrawals........................................... 26
Systematic Withdrawals.............................. 26
Life Expectancy Distributions....................... 27
G. Death Benefit.......................................... 27
Death of the Annuitant Prior to the Annuity Date.... 27
Death of an Owner Who is Not Also the Annuitant
Prior to the Annuity Date........................... 28
Payment of the Death Benefit Prior to the Annuity
Date................................................ 28
Death of the Annuitant On or After the Annuity
Date................................................ 28
H. The Spouse of the Owner as Beneficiary................. 28
I. Assignment............................................ 29
J. Electing the Form of Annuity and the Annuity Date..... 29
K. Description of Variable Annuity Payout Options......... 30
L. Annuity Benefit Payments............................... 31
Determination of the First Variable Annuity Benefit
Payment............................................. 31
The Annuity Unit.................................... 32
Determination of the Number of Annuity Units........ 32
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 32
M. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider................................................... 32
N. NORRIS Decision........................................ 34
O. Computation of Values.................................. 35
The Accumulation Unit............................... 35
Net Investment Factor............................... 35
CHARGES AND DEDUCTIONS...................................... 36
A. Variable Account Deductions............................ 36
Mortality and Expense Risk Charge................... 36
Administrative Expense Charge....................... 36
Other Charges....................................... 36
B. Contract Fee........................................... 37
C. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider Charge............................................ 37
D. Premium Taxes.......................................... 37
E. Surrender Charge....................................... 38
Charges for Surrender and Withdrawal................ 38
Reduction or Elimination of Surrender Charge and
Additional Amounts Credited......................... 39
Withdrawal Without Surrender Charge................. 40
Surrenders.......................................... 40
Charge at the Time Annuity Benefit Payments Begin... 41
F. Transfer Charge....................................... 41
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS................................... 42
FEDERAL TAX CONSIDERATIONS.................................. 44
A. General................................................ 44
The Company......................................... 44
Diversification Requirements........................ 44
Investor Control.................................... 44
B. Qualified and Non-Qualified Contracts.................. 45
C. Taxation of the Contracts in General................... 45
Withdrawals Prior to Annuitization.................. 45
Annuity Payouts After Annuitization................. 45
Penalty on Distribution............................. 45
Assignments or Transfers............................ 46
Nonnatural Owners................................... 46
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations............. 46
D. Tax Withholding........................................ 46
E. Provisions Applicable to Qualified Employer Plans...... 47
Self-Employed Pension and Profit Sharing Plans...... 47
Individual Retirement Annuities..................... 47
Tax-Sheltered Annuities............................. 47
Texas Optional Retirement Program................... 48
STATEMENTS AND REPORTS...................................... 48
LOANS (QUALIFIED CONTRACTS ONLY)............................ 48
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 48
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 49
VOTING RIGHTS............................................... 50
DISTRIBUTION................................................ 50
LEGAL MATTERS............................................... 51
FURTHER INFORMATION......................................... 51
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- PERFORMANCE TABLES (Allmerica Financial Life
Insurance and Annuity Company)............................. B-1
APPENDIX C -- PERFORMANCE TABLES (First Allmerica Financial
Life Insurance Company).................................... C-1
APPENDIX D -- SURRENDER CHARGES AND THE MARKET VALUE
ADJUSTMENT................................................. D-1
APPENDIX E -- THE DEATH BENEFIT............................. E-1
APPENDIX F -- CONDENSED FINANCIAL INFORMATION............... F-1
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
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 minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option 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 this 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 fund of Allmerica Investment Trust ("Trust"), a
corresponding portfolio of the Fidelity Variable Insurance Products Fund
("Fidelity VIP"), the Fidelity Variable Insurance Products Fund II ("Fidelity
VIP II"), the T. Rowe Price International Stock Portfolio of T. Rowe Price
International Series, Inc. ("T. Rowe Price"), or a corresponding series of the
Delaware Group Premium Fund ("DGPF").
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 FUND (FUNDS): a subdivision of the Variable Account Each Sub-Account
available under the Policy invests exclusively in the shares of a corresponding
fund of Allmerica Investment Trust ("Trust"); a corresponding portfolio of
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), the Asset Manager
Portfolio of the Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II"), the T. Rowe Price International Stock Portfolio of T. Rowe Price
International Series, Inc. ("T. Rowe Price"); or the DGPF International Equity
Series of the Delaware Group Premium Fund ("DGPF").
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, as well as each day otherwise required.
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 payout option providing for payments varying
in amount in accordance with the investment experience of certain Funds.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Allmerica
Advantage 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 Underlying Funds. In addition to the charges and expenses described below,
premium taxes are applicable in some states and 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>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More than 9 0%
SURRENDER CHARGE:*
This charge may be assessed upon surrender, withdrawal or
annuitization under any commutable period certain option
or a noncommutable fixed 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 on an annual basis as a percentage of 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: 0.20%
------
Total Annual Expenses: 1.45%
</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
6
<PAGE>
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 CHARGES AND
DEDUCTIONS.
(3) ANNUAL UNDERLYING FUND EXPENSES: Total expenses of the Underlying Funds are
not fixed or specified under the terms of the Contract and will vary from year
to year. The levels of fees and expenses also vary among the Underlying Funds.
The following table shows the expenses of the Underlying Funds as a percentage
of average net assets for the year ended December 31, 1999, as adjusted for any
material changes.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND
(AFTER ANY (AFTER ANY EXPENSES (AFTER ANY
FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ---- ------------------ --------------- -----------------------
<S> <C> <C> <C>
Select International Equity Fund 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity Series 0.83% 0.12% 0.95%(3)
Fidelity VIP Overseas Portfolio 0.73% 0.18% 0.91%(4)
T. Rowe Price International Stock
Portfolio 1.05% 0.00% 1.05%
Select Aggressive Growth Fund 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund 0.90% 0.07% 0.97%(1)(2)
Select Growth Fund 0.78% 0.05% 0.83%(1)(2)
Core Equity Fund 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio 0.58% 0.08% 0.66%(4)
Equity Index Fund 0.28% 0.07% 0.35%(1)
Select Growth and Income Fund 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP Equity-Income Portfolio 0.48% 0.09% 0.57%(4)
Fidelity VIP II Asset Manager Portfolio 0.53% 0.10% 0.63%(4)
Fidelity VIP High Income Portfolio 0.58% 0.11% 0.69%
Select Investment Grade Income Fund 0.43% 0.07% 0.50%(1)
Government Bond Fund 0.50% 0.12% 0.62%(1)
Money Market Fund 0.24% 0.05% 0.29%(1)
</TABLE>
*Effective September 1, 1999, the management fee rates for the Select Aggressive
Growth Fund and Select Capital Appreciation Fund were revised. The Management
Fee and Total Fund Expense ratios shown in the table above have been adjusted to
assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income Fund
and Government Bond Fund, and 0.60% for Equity Index Fund and Money Market Fund.
The total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1999.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions to the operating expenses, total annual
fund operating expenses were 1.01% for Select International Equity Fund, 0.84%
for
7
<PAGE>
Select Aggressive Growth Fund, 0.88% for Select Value Opportunity Fund, 0.81%
for Select Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth
and Income Fund.
(3) The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
(4) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds', or
Fidelity Management & Research Company on behalf of certain funds', custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.65% for the Fidelity VIP Growth Portfolio; 0.56% for the
Fidelity VIP Equity-Income Portfolio and 0.62% for the Fidelity VIP II Asset
Manager Portfolio.
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 rules of the Securities and Exchange Commission (the "SEC"), the
Contract fee is 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 0.05% and the amount of the Contract fee is assumed to be $0.50 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 OR LESS THAN THOSE SHOWN.
8
<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>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $ 99 $146 $184 $286
DGPF International Equity Series........................... $ 99 $144 $181 $279
Fidelity VIP Overseas Portfolio............................ $ 98 $143 $179 $275
T. Rowe Price International Stock Portfolio................ $100 $147 $186 $289
Select Aggressive Growth Fund.............................. $ 98 $142 $177 $271
Select Capital Appreciation Fund........................... $ 99 $145 $182 $281
Select Value Opportunity Fund.............................. $ 99 $145 $182 $281
Select Growth Fund......................................... $ 98 $141 $175 $267
Core Equity Fund........................................... $ 94 $131 $157 $231
Fidelity VIP Growth Portfolio.............................. $ 96 $136 $166 $249
Equity Index Fund.......................................... $ 93 $127 $150 $217
Select Growth and Income Fund.............................. $ 97 $138 $170 $257
Fidelity Equity-Income Portfolio........................... $ 95 $134 $161 $240
Fidelity VIP II Asset Manager Portfolio.................... $ 96 $135 $164 $246
Fidelity VIP High Income Portfolio......................... $ 96 $137 $167 $252
Select Investment Grade Income Fund........................ $ 94 $132 $158 $233
Government Bond Fund....................................... $ 96 $135 $164 $245
Money Market Fund.......................................... $ 92 $126 $147 $211
</TABLE>
(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 5% annual return on assets and
election of a Minimum Guaranteed Annuity Payout (M-GAP) Rider** with a ten-year
waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $102 $153 $196 $310
DGPF International Equity Series........................... $101 $151 $193 $303
Fidelity VIP Overseas Portfolio............................ $101 $150 $191 $299
T. Rowe Price International Stock Portfolio................ $102 $154 $198 $313
Select Aggressive Growth Fund.............................. $100 $149 $189 $295
Select Capital Appreciation Fund........................... $101 $152 $194 $305
Select Value Opportunity Fund.............................. $101 $152 $194 $305
Select Growth Fund......................................... $100 $148 $187 $291
Core Equity Fund........................................... $ 97 $138 $169 $256
Fidelity VIP Growth Portfolio.............................. $ 98 $143 $179 $275
Equity Index Fund.......................................... $ 95 $134 $163 $243
Select Growth and Income Fund.............................. $ 99 $145 $183 $283
Fidelity VIP Equity-Income Portfolio....................... $ 97 $141 $174 $266
Fidelity VIP II Asset Manager Portfolio.................... $ 98 $142 $177 $272
Fidelity VIP High Income Portfolio......................... $ 99 $144 $180 $278
Select Investment Grade Income Fund........................ $ 97 $139 $170 $258
Government Bond Fund....................................... $ 98 $142 $177 $271
Money Market Fund.......................................... $ 95 $133 $160 $237
</TABLE>
9
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any 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 a 5% annual return on assets and no
Rider:**
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $26 $78 $134 $286
DGPF International Equity Series........................... $25 $76 $131 $279
Fidelity VIP Overseas Portfolio............................ $24 $75 $129 $275
T. Rowe Price International Stock Portfolio................ $26 $79 $136 $289
Select Aggressive Growth Fund.............................. $24 $74 $127 $271
Select Capital Appreciation Fund........................... $25 $77 $132 $281
Select Value Opportunity Fund.............................. $25 $77 $132 $281
Select Growth Fund......................................... $24 $73 $125 $267
Core Equity Fund........................................... $20 $62 $107 $231
Fidelity VIP Growth Portfolio.............................. $22 $68 $116 $249
Equity Index Fund.......................................... $19 $58 $100 $217
Select Growth and Income Fund.............................. $23 $70 $120 $257
Fidelity Equity-Income Portfolio........................... $21 $65 $111 $240
Fidelity VIP II Asset Manager Portfolio.................... $22 $67 $114 $246
Fidelity VIP High Income Portfolio......................... $22 $69 $117 $252
Select Investment Grade Income Fund........................ $20 $63 $108 $233
Government Bond Fund....................................... $22 $66 $114 $245
Money Market Fund.......................................... $18 $56 $ 97 $211
</TABLE>
(2)(b) If at the end of the applicable time period, you annuitize* under a life
option or any 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 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>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select International Equity Fund........................... $28 $86 $146 $310
DGPF International Equity Series........................... $27 $84 $143 $303
Fidelity VIP Overseas Portfolio............................ $27 $83 $141 $299
T. Rowe Price International Stock Portfolio................ $28 $87 $148 $313
Select Aggressive Growth Fund.............................. $27 $81 $139 $295
Select Capital Appreciation Fund........................... $28 $84 $144 $305
Select Value Opportunity Fund.............................. $28 $84 $144 $305
Select Growth Fund......................................... $26 $80 $137 $291
Core Equity Fund........................................... $23 $70 $119 $256
Fidelity VIP Growth Portfolio.............................. $24 $75 $129 $275
Equity Index Fund.......................................... $21 $66 $113 $243
Select Growth and Income Fund.............................. $25 $78 $133 $283
Fidelity VIP Equity-Income Portfolio....................... $24 $72 $124 $266
Fidelity VIP II Asset Manager Portfolio.................... $24 $74 $127 $272
Fidelity VIP High Income Portfolio......................... $25 $76 $130 $278
Select Investment Grade Income Fund........................ $23 $70 $120 $258
Government Bond Fund....................................... $24 $74 $127 $271
Money Market Fund.......................................... $21 $64 $110 $237
</TABLE>
*The Contract fee is not deducted after annuitization. A surrender charge is
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 any life contingency option or any
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.
10
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA ADVANTAGE VARIABLE ANNUITY?
The Allmerica Advantage 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 beneficiaries 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 the Sub-Accounts investing in the Underlying Funds, the Guarantee Period
Accounts and 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, your 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 annuity benefit payments with payment amounts guaranteed
by the Company, or a combination of fixed and variable annuity benefit payments.
Among the payout options available during the annuity payout phase are:
- periodic payments for 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 ten 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.
11
<PAGE>
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 a 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 (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;
(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 also 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 to receive 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 your payments are flexible, subject only to a $600
minimum for your 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 investing in the Funds, the
Guarantee Period Accounts, and the Fixed Account.
12
<PAGE>
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
18 Underlying Funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Growth Fund
Core Equity Fund FIDELITY VIP II
Equity Index Fund Asset Manager Portfolio
Select Growth and Income Fund
Select Investment Grade Income Fund T. ROWE PRICE
Government Bond Fund T. Rowe Price International Stock Portfolio
Money Market Fund DGPF
International Equity Series
</TABLE>
Each Underlying Fund operates pursuant to different investment objectives and
this range of investment options enables you to allocate your money among the
Underlying Funds to meet your particular investment needs. 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 may offer up to nine Guarantee Periods ranging from two to ten years
in duration. Once declared, the Guaranteed Interest Rate will not change during
the duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity 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 GPA after application of the Market
Value Adjustment will not be less than an effective annual rate of 3%. For more
information about the Guarantee Period Accounts and the Market Value Adjustment,
see GUARANTEE PERIOD ACCOUNTS.
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 is
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES.
CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed
Account. 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
13
<PAGE>
the right to assess a processing charge guaranteed never to exceed $25. See "D.
Transfer Privilege" under DESCRIPTION OF THE CONTRACT.
You also may 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 THE ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before the annuity
payout phase begins. Each calendar year you can take without a surrender charge
the greatest of 100% of cumulative earnings, 10% 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 nonnatural person.) A 10% federal tax penalty may apply to amounts deemed
to be income 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
nine years may be subject to a surrender charge. (A Market Value Adjustment may
apply to any withdrawal made from a Guarantee Period Account prior to the
expiration of the Guarantee Period.)
In addition, you may withdraw all or a portion of your money without a surrender
charge if, after the Contract is issued and before age 65, you become disabled.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the Contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited" under "E. Surrender Charge."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
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 compounded daily at the effective annual yield of 5%,
starting on the date each payment was applied (5% compounding not
available in Hawaii and New York), decreased proportionately to reflect
withdrawals; or
- The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the 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 the 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.
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At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Contract's Accumulated Value on the
Valuation Date that 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" under DESCRIPTION OF THE CONTRACT.)
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary or at surrender is less than
$50,000, the Company will deduct a $30 Contract fee from the Contract. The
Contract fee is currently waived for a Contract 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 options, you may be subject to a surrender
charge. If applicable, this charge will be between 1% and 8% of payments
withdrawn, based on when the payments were originally made.
Depending upon the state in which you live, a deduction for state and/or local
premium taxes may be made as described under "D. Premium Taxes" under CHARGES
AND DEDUCTIONS.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.20%, respectively,
of the average daily net assets invested in each. The Funds will incur certain
management fees and expenses which are 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 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. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your 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
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receive the greater of the amount described above or your entire payment. 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 MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change the beneficiary, unless you have designated 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).
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DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999,
Allmerica Financial had over $17 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company 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 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 account called
Separate Account VA-K (the "Variable Account"). The Variable Account of
Allmerica Financial was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account of First Allmerica was
authorized by vote of the Board of Directors of the Company 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 or the
Company by the SEC.
Separate Account VA-K is a separate investment account of the Company. The
assets used to fund the variable portions of the Contracts are set aside in the
Sub-Accounts of the Variable Account, and are kept separate and apart from the
general assets of the Company. There are currently 18 Sub-Accounts available
under the Contracts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company.
Obligations under the Contracts are obligations of the Company. Under Delaware
and Massachusetts law, the assets of the Variable Account may not be charged
with any liabilities arising out of any other business of the Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing
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in the Variable Account which are not discussed in this Prospectus. In addition
the Variable Account may invest in other underlying funds which are not
available to the Contracts described in this Prospectus.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, to serve as an investment medium for assets of various
separate accounts established by the Company or other insurance companies.
Eleven investment portfolios of the Trust are currently available under the
Contract, each issuing a series of shares: the Core Equity Fund, Select
Investment Grade Income Fund, Money Market Fund, Equity Index Fund, Government
Bond Fund, Select International Equity Fund, Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Growth Fund, Select Growth and Income
Fund and Select Value Opportunity Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
The trustees have overall responsibility for the supervision of the affairs of
the Trust. The Trustees have entered into a management agreement ("Management
Agreement") with Allmerica Financial Investment Management Services, Inc.,
("AFIMS") a wholly owned subsidiary of Allmerica Financial, to handle the day-
to-day affairs of the Trust. AFIMS, subject to Trustee review, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
AFIMS has entered into agreements with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds of the Trust. Under each Sub-Adviser agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to AFIMS and the Trustees instructions. AFIMS is solely
responsible for the payment of all fees for investment management services to
the Sub-Advisers. The Sub-Advisers, other than Allmerica Asset
Management, Inc., are not affiliated with the Company or the Trust.
Other than expenses specifically assumed by AFIMS under the Management
Agreement, the Trust bears all expenses incurred in its operation including fees
and expenses associated with the registration and qualification of the Trust's
shares under the Securities Act of 1933, other fees payable to the SEC,
independent public accountant fees, legal and custodian fees, association
membership dues, taxes, interest, insurance premiums, brokerage commissions,
fees and expenses of the Trustees who are not affiliated with AFIMS, expenses
for proxies, prospectuses, reports to shareholders and other expenses.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND. Fidelity Variable Insurance Products
Fund ("Fidelity VIP") managed by Fidelity Management & Research Company ("FMR"),
is an open-end, diversified management investment company organized as a
Massachusetts business trust on November 13, 1981, and registered with the SEC
under the 1940 Act. Four of its investment portfolios are available under the
Policy: Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services. As part of their
operating expenses, the portfolios of Fidelity VIP pay a monthly investment
management fee to FMR for managing investment and business affairs. The
prospectus of Fidelity VIP contains additional information concerning the
portfolios, including information about additional expenses paid by the
portfolios, and should be read in conjunction with this Prospectus.
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<PAGE>
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II. Fidelity Variable Insurance
Products Fund II ("Fidelity VIP II"), managed by FMR (see discussion above) is
an open-end, diversified management investment company organized as a
Massachusetts business trust on March 21, 1988, and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Contract: Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International
Series, Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming
International, Inc. ("Price-Fleming"), is an open-end, diversified management
investment company organized as a Maryland corporation in 1994 and registered
with the SEC under the 1940 Act. Price-Fleming, founded in 1979 as a joint
venture between T. Rowe Price Associates, Inc. and Robert Fleming Holdings,
Limited, is one the largest no-load international mutual fund asset managers
with approximately $42.5 billion (as of December 31, 1999) under management in
its offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
One of its investment portfolios is available under the Contracts: the T. Rowe
Price International Stock Portfolio. One of its affiliates, T. Rowe Price
Associates, Inc., serves as the Sub-Adviser to the Select Capital Appreciation
Fund.
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. DGPF was established to provide a vehicle for the investment
of assets of various separate accounts supporting variable insurance contracts.
One investment portfolio ("Series") is available under the Contract, the DGPF
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International").
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. 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 THEIR
RESPECTIVE PROSPECTUSES, 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 the purchase
payments made under the Contract.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund seeks
maximum long-term total return (capital appreciation and income) primarily by
investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
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.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund seeks
above-average capital appreciation by investing primarily in common stocks of
companies which are believed to have significant potential for capital
appreciation.
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SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund seeks
long-term growth of capital. Realization of income is not a significant
investment consideration and any income realized on the Fund's investments will
be incidental to its primary objective. The Fund invests primarily in common
stock of industries and companies which are believed to be experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund seeks
long-term growth by investing principally in a diversified portfolio of common
stocks of small and mid-size companies whose securities at the time of purchase
are considered by the Sub-Adviser to be undervalued.
SELECT GROWTH FUND -- The Select Growth Fund seeks to achieve long-term growth
of capital by investing in a diversified portfolio consisting primarily of
common stocks selected on the basis of their long-term growth potential.
CORE EQUITY FUND -- The Core Equity Fund is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Core Equity Fund is to achieve long-term growth of capital. Realization
of current investment income, if any, is incidental to this objective. This Fund
was formerly known as the Growth Fund.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund seeks to provide investment results
that correspond to the aggregate price and yield performance of a representative
selection of United States publicly traded common stocks. The Equity Index Fund
seeks to achieve its objective by attempting to replicate the aggregate price
and yield performance of the Standard & Poor's Composite Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund seeks a
combination of long-term growth of capital and current income. The Fund will
invest primarily in dividend-paying common stocks and securities convertible
into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See the Fidelity VIP
prospectus.
SELECT INVESTMENT GRADE INCOME FUND -- The Select Investment Grade Income Fund
is invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management. This
fund was formerly known as the Investment Grade Income Fund.
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<PAGE>
GOVERNMENT BOND FUND -- The Government Bond Fund has the investment objectives
of seeking high income, preservation of capital and maintenance of liquidity,
primarily through investments in debt instruments issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, and in related options,
futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund is invested in a diversified
portfolio of high-quality, short-term money market instruments with the
objective of obtaining maximum current income consistent with the preservation
of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET INDIVIDUAL NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH
THIS PROSPECTUS.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account, where available, on written request
received by the Company 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 the Owner's right to transfer.
PERFORMANCE INFORMATION
The Contract was first offered to the public by Allmerica Financial Life
Insurance and Annuity Company in 1996 and by First Allmerica Financial Life
Insurance Company in 1997. The Company, however, may advertise "total return"
and "average annual total return" performance information based on (1) the
periods that the Sub-Accounts have been in existence and (2) the periods that
the Underlying Funds have been in existence. Performance results in Tables 1A
and 2A are calculated with all charges assumed to be those applicable to the
Contract, the Sub-Accounts and the Underlying Funds and also assume that the
Contract is surrendered at the end of the applicable period. Performance results
in Tables 1B and 2B do not include the Contract fee and assume that the Contract
is not surrendered at the end of the applicable period. Both the total return
and yield figures are based on historical earnings and are not intended to
indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
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.
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<PAGE>
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 1.45%, 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
the optional 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 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 of Appendix B and C 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.
Performance Tables for Contracts issued by Allmerica Financial Life Insurance
and Annuity Company can be found in Appendix B. Performance Tables for Contracts
issued by First Allmerica Financial Life Insurance Company can be found in
Appendix C. For more detailed information about these performance calculations,
including actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
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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 and/or signature for certain
classes of annuity Contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment is credited to the Contract and allocated among the requested investment
options as of the date that all issue requirements are properly met. If all
issue requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the applicant authorizes the Company to retain it pending completion of all
issue requirements. 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 a 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 Money Market Fund.
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. To the extent permitted by law, however, if the Contract is issued
as an IRA or is issued in certain states, any portion of the initial net payment
and additional net payments received during the Contract's first 15 days
measured from the issue date, allocated to any Sub-Account and/or any Guarantee
Period Account, will be held in the Money Market Fund until the end of the
15-day period. Thereafter, these amounts will be allocated as requested.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If 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 an authorized
representative. 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 the gross
payment(s) received. In some states, however, the refund may equal the greater
of (1) gross payments, or (2) gross payments allocated to the Fixed Account and
the Guarantee Period Accounts plus the Accumulated Value of any amounts
allocated to the Variable Account plus any amounts deducted under the Contract
or by the Underlying Funds for taxes, charges or fees. At the time the Contract
is issued, the "Right to Examine" provision on the cover of the Contract will
specifically indicate whether the refund will be equal to gross payments or
equal to the greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was purchased as an IRA or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used. At the time the Contract is issued, the "Right to Examine"
provision on the cover of the Contract will specifically indicate what the
refund will be and the time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, the Owner may transfer amounts among
available investment options at any time upon written or telephone request to
the Company. As discussed in "A. Payments" above, a properly completed
authorization form must be on file before telephone requests will be honored.
Transfer values will be based on the Accumulated Value next computed after
receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Money Market Fund. Transfers from a Guarantee
Period Account prior to the expiration of the Guarantee Period will be subject
to a Market Value Adjustment.
The first 12 transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing these additional transfers. If you
authorize periodic
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transfers under an Automatic Transfer option (Dollar Cost Averaging) or
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 Contract 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
the Contract year.
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 Money Market Fund or the Sub-Account investing in the
Government Bond Fund (the "source accounts") to one or more available
Sub-Accounts. Automatic transfers may not be made into the Fixed Account, the
Guarantee Period Accounts or, if applicable, the Underlying 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.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be allocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the allocation mix is received by
the Company.
The Company reserves the right to limit the number of Sub-Accounts that may 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, the Owner may surrender the Contract and
receive its Surrender Value, less any tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
Before the Annuity Date, a surrender charge may be deducted when a Contract is
surrendered if payments have been credited to the Contract during the last nine
full Contract years. See CHARGES AND DEDUCTIONS. The Contract fee will be
deducted upon surrender of the Contract.
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 is normally 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
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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 a separate account is
not reasonably practicable.
The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
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, the 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 such 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 in a minimum amount 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" above.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see FEDERAL
TAX CONSIDERATIONS.
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first
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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, "C. Taxation of the
Contracts in General" under FEDERAL TAX CONSIDERATIONS In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided below in "H. The Spouse of
the Owner as Beneficiary." The amount of the death benefit and the time
requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first, and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the death benefit is equal to
the greatest of (a) the Contract's Accumulated Value on the Valuation Date that
the Company receives proof of death, increased by any positive Market Value
Adjustment; (b) gross payments compounded daily at the effective annual yield of
5% starting on the date each payment is applied, decreased proportionately to
reflect withdrawals (except in Hawaii and New York where (b) equals gross
payments decreased proportionately to reflect withdrawals) or (c) the death
benefit that
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would have been payable on the most recent contract anniversary, increased for
subsequent payments and decreased proportionately for subsequent withdrawals.
For each withdrawal under (a) or (b) above, 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 on the Valuation Date that the Company
receives proof of death (increased by any positive Market Value Adjustment) or
(b) gross payments compounded daily at the 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 the 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 E -- THE DEATH BENEFIT for specific examples
of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning 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 Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Money Market Fund. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
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. Upon
such election, the spouse will become the Owner and
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Annuitant subject to the following: (1) any value in the Guarantee Period
Accounts will be transferred to the Money Market Fund; (2) the excess, if any,
of the death benefit over the Contract's Accumulated Value also will be added to
the Money Market Fund. The resulting value never will be subject to a surrender
charge when withdrawn. The new Owner may also make additonal 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 nine 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 those 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 liability 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 Internal Revenue Code (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
payee with the right to request a lump sum payment of any remaining balance
after annuity payments have commenced. Under a noncommutable option, the payee
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 Sub-Accounts selected. See "Annuity
Benefit Payments" in the SAI.
To the extent a fixed annuity payout 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.
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The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity options selected does not produce
an initial payment which meet this minimum, a single payment may be made. Once
the Company begins making annuity benefit payments, the Annuitant cannot make
withdrawals or surrender the annuity benefit, except where a commutable period
certain option has been elected. Beneficiaries entitled to receive remaining
payments under either a commutable or non-commutable "period certain" option may
elect instead to receive a lump sum settlement. See "K. Description of Variable
Annuity Options."
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout (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 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 payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Equity Index
Fund, the Core Equity Fund and the Money Market Fund.
The Company also provides these same options funded through the Fixed Account
(fixed annuity payout). Regardless of how payments were allocated during the
accumulation period, any of the variable payout options or the fixed payout
options may be selected, or any of the variable payout options may be selected
in combination with any of the fixed annuity payout options. The Company may
offer other annuity options. IRS regulations may not permit certain of the
available annuity options when used in connection with certain qualified
Contracts.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the Annuitant with the
guarantee that if the Annuitant should die before all payments have been made,
the remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the payee's life. It would be
possible under this option for the Annuitant to receive only one annuity benefit
payment if the Annuitant dies prior to the due date of the second annuity
benefit payment, two annuity benefit payments if the Annuitant dies before the
due date of the third annuity benefit payment, and so on. Payments will
continue, however, during the lifetime of the Annuitant, no matter how long he
or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an 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
(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 continues thereafter during the lifetime of the survivor. The amount of
each payment to the survivor is based on the same number of Annuity Units which
applied during the joint lifetime of the two payees. One of the payees must be
either the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
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JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to the Annuitant and another individual during their joint
lifetime, and then continues 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
Contract or the beneficiary. There is no minimum number of payments under this
option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to thirty. If the Annuitant
dies before the end of the period, remaining payments will continue to be made.
A fixed period certain annuity may be either commutable or noncommutable. A
variable period certain annuity is automatically commutable.
It should be noted that the period certain option does not involve a life
contingency. In 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 a period certain option
to elect to convert to a variable annuity involving a life contingency. The
Company may discontinue or change this practice at any time, but not with
respect to election of the option made prior to the date of any change in this
practice.
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 all commutable fixed 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.
- 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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<PAGE>
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 Minimum Guaranteed Annuity Payout (M-GAP) Rider, at
annuitization the annuity benefit payments provided under the Rider (calculated
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 Minimum Guaranteed Annuity Payout (M-GAP) Rider is currently
available in most jurisdictions for a separate monthly charge. The M-GAP Rider
provides a guaranteed minimum amount of fixed annuity 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 at the Company's guaranteed
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
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<PAGE>
(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 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 ELECTION OF 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 or her 78th birthday. The
Owner may not elect a Rider with a fifteen-year waiting period if at the
time of election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE 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 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
occurs (1) 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.
- Other than in the event of a repurchase, once terminated the Rider may not
be purchased again.
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<PAGE>
- 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-GAPRider waiting periods. Any assumed rates of return are for purposes of
illustration only and are not intended as a representation of past or future
investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of 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% net rate of return and are the guaranteed minimums that would be received
under the 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 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 Riders issued
prior to the termination date, but, as noted above, Owners would not be able to
purchase a new Rider under the repurchase feature. (See above, "TERMINATING THE
M-GAP RIDER.")
N. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
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<PAGE>
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 the Guarantee Period Accounts and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company. See 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 and Guarantee
Period Accounts, 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 0.20% on an annual basis of the
daily value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of an Accumulation Unit calculation using a hypothetical
example see the SAI.
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<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and SAIs of the Trust,
Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other payee) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company 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 equal to an annual rate of 0.20% 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 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 SAI's of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price and DGPF contain additional information concerning expenses of the
Underlying Funds.
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<PAGE>
B. CONTRACT FEE
A $30 Contract fee currently 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 Contracts
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 date of issue, 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" under "E. Surrender Charge" below.
C. 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. 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 annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or
2. the premium tax charge is deducted in total when annuity benefit
payments begin.
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<PAGE>
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 in
the case of surrender and/or a withdrawal 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 nine years preceding the date of the surrender; (2) Old
Payments - accumulated payments invested in the Contract for more than nine
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 surrender charge, surrenders will be deemed to
be taken first from amounts available as a Withdrawal Without Surrender Charge,
if any, then from Old Payments, and then from New Payments. Amounts available as
a Withdrawal Without Surrender Charge, followed by Old Payments, may be
withdrawn from the Contract at any time without the imposition of a surrender
charge. If a withdrawal is attributable all or in part to New Payments, a
surrender charge may apply.
CHARGES 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. For the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the oldest New Payment and then from the next
oldest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See FEDERAL
TAX CONSIDERATIONS for a discussion of how withdrawals are treated for income
tax purposes.)
The surrender charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -----------------------
<S> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More than 9 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
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 8.0% of total gross New Payments. Such total charge equals the
aggregate of all applicable surrender charges for surrender, withdrawals and
annuitization.
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<PAGE>
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by 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 charges apply,
or both, and/or credit additional amounts on Contracts, when Contracts are 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 Contracts are 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 registered representatives,
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 surrender
charge, and/or credit additional amounts on contracts, where either the Owner or
the Annuitant on the date of issue is within the following classes of
individuals ("eligible persons"): (1) any employee of the Company located at its
home office or at off-site locations if such employees are on the Company's home
office payroll; (2) any director of the Company; (3) any retiree who elected to
retire on his/her retirement date; (4) the immediate family members of those
persons identified in (1) through (3) above residing in the same household; and
(5) any beneficiary who receives a death benefit under a deceased employees or
retiree's progress sharing plan. For purposes of the above class of individuals,
"the Company" includes affiliates and subsidiaries; "immediate family members"
means children, siblings, parents and grandparents; "retirement date" means an
employee's early, normal or late retirement date as defined in the Company's
pension plan or any successor plan, and "progress sharing" means the First
Allmerica Financial Life Insurance Company Employee's Matched Savings Plan or
any successor plan.
Finally, if permitted under state law, surrender charges will be waived under a
Section 403(b) Contract 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.
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<PAGE>
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 this charge where prohibited by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the surrender
charge is modified to effect certain exchanges of existing annuity contracts
issued by the Company for the Contract. See "Exchange Offer" in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the surrender charge, if any, on an amount ("Withdrawal Without Surrender
Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: 100% of Cumulative Earnings (calculated as the
Accumulated Value as of the Valuation Date the Company
receives the withdrawal request, or the following day,
reduced by total gross payments not previously
withdrawn);
Where (2) is: 10% of the Accumulated Value as of the Valuation Date the
Company receives the withdrawal request, or the following
day, 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 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 Withdrawal Without Surrender Charge first will be deducted 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 last-in first-out ("LIFO") 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 Surrender Value net of any applicable tax withholding.
Subject to the same rules applicable to withdrawals, the Company will not assess
a surrender charge on an amount equal to the Withdrawal Without Surrender Charge
Amount, described above.
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
unit values for the Sub-Accounts as of the Valuation Date on which a written,
signed request is received at the Principal Office.
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For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under DESCRIPTION OF THE CONTRACT, and see FEDERAL TAX
CONSIDERATIONS.
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses any
commutable period certain option or a noncommutable 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 a surrender charge would still apply
had the Contract been surrendered on the Annuity Date.
No surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable fixed
period certain option for ten years or more (six or more years under New York
contracts). A Market Value Adjustment, however, may apply. See GUARANTEE PERIOD
ACCOUNTS. If the Owner of a 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 a 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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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 the Contract or any fixed
benefits offered under these accounts may be subject to the provisions of the
1933 Act relating to the accuracy and completeness of statements made in the
Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account, except
in California where it is accounted for in the Company's General Account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of 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 a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date. Transfers from a
Guarantee Period Account, on any date other than on the day following the
expiration of that Guarantee Period, will be subject to a Market Value
Adjustment. The Company establishes a separate investment account each time the
Owner allocates or transfers amounts to a Guarantee Period except that amounts
allocated to the same Guarantee Period on the same day will be treated as one
Guarantee Period Account. The minimum that may be allocated to establish a
Guarantee Period Account is $1,000. If less than $1,000 is allocated, the
Company reserves the right to apply that amount to the Money Market Fund. 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 Money Market Fund.
Where amounts have been renewed automatically 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.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit." All
other transfers, withdrawals, or a surrender prior to the end of a Guarantee
Period will be subject to a Market Value Adjustment, which may increase or
decrease the account value. Amounts applied under an annuity option are treated
as withdrawals when calculating the Market Value
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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 is also affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX D -- SURRENDER CHARGES
AND THE MARKET VALUE ADJUSTMENT.
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a surrender charge applies to
the withdrawal, it will be calculated as set forth under "E. 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 the Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Contract, the Variable Account or the
Sub-Accounts may have upon its tax. The Variable Account presently is not
subject to tax, but the Company reserves the right to assess a charge for taxes
should the Variable Account at any time become subject to tax. Any charge for
taxes will be assessed on a fair and equitable basis in order to preserve equity
among classes of Owners and with respect to each separate account as though that
separate account 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 Contracts described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered annuity
contracts 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 Contract 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 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 the investment in
the Contract is recovered, the entire payment is taxable. If the annuitant dies
before cost basis is recovered, a deduction for the difference is allowed on the
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 addition to the exceptions above, the penalty tax will not
apply to withdrawals from a qualified Contract made to an employee who has
terminated employment after reaching age 55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy, and the
option could be changed or terminated at any time, the distributions failed to
qualify as part of a "series of substantially equal payments" within the meaning
of Section 72 of the Code. The distributions, therefore, were subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to an Owner
who receives distributions under any LED-type option prior to age 59 1/2.
Subsequent Private Letter Rulings, however, have treated LED-type withdrawal
programs as effectively avoiding the 10% penalty tax. The position of the IRS on
this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. 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; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. 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.
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The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
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.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to owners of non-qualified
Contracts. Individuals purchasing a qualified Contract should carefully review
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
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 Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs and may be deductible to the
employer.
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
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income of such employees to the extent that total annual payments do not exceed
the maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after
December 31, 1988, may not begin before the employee attains age 59 1/2,
separates from service, dies or becomes disabled. In the case of hardship, an
Owner may withdraw amounts contributed by salary reduction, but not the earnings
on such amounts. Even though a distribution may be permitted under these
rules (e.g., for hardship or after separation from service), it may be subject
to a 10% penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners 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 Money Market Fund.
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 Funds no longer are available for investment or if, in the Company's
judgment, further
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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
withdraw the shares of that Underlying Fund and substitute shares of another
registered open-end management company. The Company will not substitute any
shares attributable to the Contract interest in a Sub-Account without notice to
the Owner and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Variable Account
may, to the extent permitted by law, purchase other securities for other
contracts or permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
underlying fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Funds also are issued to other unaffiliated insurance
companies ("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 neither the Company nor any of the underlying
investment companies currently foresee any such disadvantages to either variable
life owners or variable annuity owners, the Company and the respective trustees
intend to monitor events in order to identify any material conflicts between
such owners, and to determine what action, if any, should be taken in response
thereto. If the trustees were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the attendant expenses.
The Company reserves the right, subject to compliance with applicable law, to:
(1) transfer assets from the Variable Account or 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
49
<PAGE>
and retirement plans under the Code and pertinent regulations or any state
statute or regulation. Any such changes will apply uniformly to all Contracts
that are affected. You will be given written notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners 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 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 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.
DISTRIBUTION
The Contracts offered by this Prospectus may be purchased from representatives
of Allmerica Investments, Inc., a registered broker-dealer under the Securities
and Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA 01653, is also the principal underwriter and distributor and is an
indirect wholly owned subsidiary of First Allmerica. The Contract also may be
purchased from certain independent broker-dealers which are NASD members.
The Company pays commissions, not to exceed 5.0% of payments, to registered
representatives of Allmerica Investments, Inc. Alternative commission schedules
are available with lower initial commission amounts based on payments, plus
ongoing annual compensation of up to 1% of Contract value. Managers who
supervise the agents will receive overriding commissions ranging up to no more
than 2% of payments.
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 expense
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 charges assessed on the Contract will be retained by the
Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor. Owners may direct any inquiries to their financial
representative or to Annuity Client Services, Allmerica Financial Life Insurance
and Annuity Company, 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-533-7881.
50
<PAGE>
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
51
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed 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 contract and the Fixed
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 Securities and
Exchange Commission.
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 separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contracts, 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 nine full Contract years.
STATE RESTRICTIONS: 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 the 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 the Contract is issued after the Annuitant's 81st birthday, no
payments to the Fixed Account will be permitted at any time. If an
allocation designated as a Fixed Account allocation is
received at the Principal Office during a period when the
Fixed Account is not available due to the limitations
outlined above, the monies will be allocated to the Money
Market Fund.
The Fixed Account is not available to Owners who purchase the Contract in the
state of Oregon.
A-1
<PAGE>
APPENDIX B
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 21.61% 16.17% 13.29%
DGPF International Equity Series..... 5/6/93 5.96% 10.85% 10.46%
Fidelity VIP Overseas Portfolio...... 9/5/91 32.44% 15.01% 11.74%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 23.29% N/A 13.12%
Select Aggressive Growth Fund........ 9/16/92 28.38% 20.92% 18.16%
Select Capital Appreciation Fund..... 4/30/95 15.41% N/A 19.01%
Select Value Opportunity Fund........ 5/2/93 -13.01% 11.14% 9.62%
Select Growth Fund................... 9/16/92 19.73% 26.74% 18.13%
Core Equity Fund..................... 9/4/91 19.18% 22.83% 16.00%
Fidelity VIP Growth Portfolio........ 9/5/91 27.14% 27.28% 20.66%
Equity Index Fund.................... 9/4/91 10.48% 25.46% 17.52%
Select Growth and Income Fund........ 9/16/92 8.54% 19.36% 14.05%
Fidelity VIP Equity-Income Portfolio... 9/5/91 -3.07% 16.13% 14.97%
Fidelity VIP II Asset Manager
Portfolio........................... 5/4/94 1.53% 13.33% 11.31%
Fidelity VIP High Income Portfolio... 9/24/91 -1.23% 8.44% 10.34%
Select Investment Grade Income Fund... 9/5/91 -9.53% 4.94% 5.55%
Government Bond Fund................. 9/8/91 -8.37% 3.83% 4.45%
Money Market Fund.................... 9/9/91 -3.84% 3.05% 3.15%
</TABLE>
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>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 29.81% 16.86% 13.84%
DGPF International Equity Series..... 5/6/93 14.08% 11.61% 10.81%
Fidelity VIP Overseas Portfolio...... 9/5/91 40.56% 15.69% 11.91%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 31.39% N/A 13.88%
Select Aggressive Growth Fund........ 9/16/92 36.65% 21.57% 18.44%
Select Capital Appreciation Fund..... 4/30/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 5/2/93 -6.08% 11.91% 10.01%
Select Growth Fund................... 9/16/92 27.92% 27.23% 18.36%
Core Equity Fund..................... 9/4/91 27.46% 23.46% 16.25%
Fidelity VIP Growth Portfolio........ 9/5/91 35.45% 27.89% 20.92%
Equity Index Fund.................... 9/4/91 18.67% 25.96% 17.67%
Select Growth and Income Fund........ 9/16/92 16.71% 19.96% 14.30%
Fidelity VIP Equity-Income Portfolio... 9/5/91 4.79% 16.92% 15.24%
Fidelity VIP II Asset Manager
Portfolio........................... 5/4/94 9.48% 13.98% 11.79%
Fidelity VIP High Income Portfolio... 9/24/91 6.59% 9.28% 10.50%
Select Investment Grade Income Fund... 9/5/91 -2.41% 5.85% 5.73%
Government Bond Fund................. 9/8/91 -1.22% 4.71% 4.58%
Money Market Fund.................... 9/9/91 3.66% 3.96% 3.29%
</TABLE>
B-1
<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 FOR YEAR SINCE
FUND ENDED INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 21.61% 16.17% 13.28%
DGPF International Equity Series..... 10/29/92 5.96% 10.85% 9.91%
Fidelity VIP Overseas Portfolio...... 1/28/87 32.44% 15.01% 9.72%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 23.29% 12.88% 11.33%
Select Aggressive Growth Fund........ 8/21/92 28.38% 20.92% 18.71%
Select Capital Appreciation Fund..... 4/28/95 15.41% N/A 19.01%
Select Value Opportunity Fund........ 4/30/93 -13.01% 11.14% 9.61%
Select Growth Fund................... 8/21/92 19.73% 26.74% 18.62%
Core Equiy Fund...................... 4/29/85 19.18% 22.83% 15.50%
Fidelity VIP Growth Portfolio........ 10/9/86 27.14% 27.28% 18.00%
Equity Index Fund.................... 9/28/90 10.48% 25.46% 18.85%
Select Growth and Income Fund........ 8/21/92 8.54% 19.36% 14.01%
Fidelity VIP Equity-Income Portfolio... 10/9/86 -3.07% 16.13% 12.61%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 1.53% 13.33% 11.49%
Fidelity VIP High Income Portfolio... 9/19/85 -1.23% 8.44% 10.74%
Select Investment Grade Income Fund... 4/29/85 -9.53% 4.94% 6.06%
Government Bond Fund................. 8/26/91 -8.37% 3.83% 4.27%
Money Market Fund.................... 4/29/85 -3.84% 3.05% 3.70%
</TABLE>
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 FOR YEAR SINCE
FUND ENDED INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 29.81% 16.86% 13.83%
DGPF International Equity Series..... 10/29/92 14.08% 11.61% 10.17%
Fidelity VIP Overseas Portfolio...... 1/28/87 40.56% 15.69% 9.84%
T.Rowe Price International Stock
Portfolio........................... 3/31/94 31.39% 13.56% 11.82%
Select Aggressive Growth Fund........ 8/21/92 36.65% 21.57% 18.98%
Select Capital Appreciation Fund..... 4/28/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/30/93 -6.08% 11.91% 10.00%
Select Growth Fund................... 8/21/92 27.92% 27.23% 18.84%
Core Equity Fund..................... 4/29/85 27.46% 23.46% 15.68%
Fidelity VIP Growth Portfolio........ 10/9/86 35.45% 27.89% 18.24%
Equity Index Fund.................... 9/28/90 18.67% 25.96% 18.95%
Select Growth and Income Fund........ 8/21/92 16.71% 19.96% 14.26%
Fidelity VIP Equity-Income Portfolio... 10/9/86 4.79% 16.92% 12.86%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 9.48% 13.98% 11.53%
Fidelity VIP High Income Portfolio... 9/19/85 6.59% 9.28% 10.83%
Select Investment Grade Income Fund... 4/29/85 -2.41% 5.85% 6.15%
Government Bond Fund................. 8/26/91 -1.22% 4.71% 4.40%
Money Market Fund.................... 4/29/85 3.66% 3.96% 3.73%
</TABLE>
B-2
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 21.61% 16.17% 13.29%
DGPF International Equity Series..... 4/20/94 5.97% 10.87% 9.44%
Fidelity VIP Overseas Portfolio...... 4/20/94 32.45% 15.02% 12.70%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 23.26% N/A 13.09%
Select Aggressive Growth Fund........ 4/20/94 28.37% 20.91% 18.65%
Select Capital Appreciation Fund..... 4/30/95 15.40% N/A 18.99%
Select Value Opportunity Fund........ 4/20/94 -13.03% 11.13% 9.30%
Select Growth Fund................... 4/20/94 19.70% 26.72% 24.36%
Core Equity Fund..................... 4/20/94 19.24% 22.88% 20.66%
Fidelity VIP Growth Portfolio........ 4/20/94 27.14% 27.27% 25.15%
Equity Index Fund.................... 4/21/94 10.48% 25.47% 22.83%
Select Growth and Income Fund........ 4/20/94 8.55% 19.36% 17.48%
Fidelity VIP Equity-Income Portfolio... 4/20/94 -3.05% 16.14% 15.54%
Fidelity VIP II Asset Manager
Portfolio........................... 5/11/94 1.54% 13.32% 11.53%
Fidelity VIP High Income Portfolio... 4/20/94 -1.27% 8.41% 7.35%
Select Investment Grade Income Fund... 4/21/94 -9.49% 4.99% 4.31%
Government Bond Fund................. 4/20/94 -8.36% 3.84% 3.48%
Money Market Fund.................... 4/10/94 -3.85% 3.03% 3.15%
</TABLE>
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>
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS SUB-ACCOUNT
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/3/94 29.81% 16.86% 13.84%
DGPF International Equity Series..... 4/20/94 14.08% 11.61% 9.99%
Fidelity VIP Overseas Portfolio...... 4/20/94 40.56% 15.69% 13.21%
T. Rowe Price International Stock
Portfolio........................... 5/1/95 31.39% N/A 13.87%
Select Aggressive Growth Fund........ 4/20/94 36.65% 21.57% 19.18%
Select Capital Appreciation Fund..... 4/30/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/20/94 -6.08% 11.91% 9.90%
Select Growth Fund................... 4/20/94 27.92% 27.23% 24.74%
Core Equity Fund..................... 4/20/94 27.46% 23.46% 21.10%
Fidelity VIP Growth Portfolio........ 4/20/94 35.45% 27.89% 25.65%
Equity Index Fund.................... 4/21/94 18.67% 25.96% 23.20%
Select Growth and Income Fund........ 4/20/94 16.71% 19.96% 17.93%
Fidelity VIP Equity-Income Portfolio... 4/20/94 4.79% 16.92% 16.13%
Fidelity VIP II Asset Manager
Portfolio........................... 5/11/94 9.48% 13.98% 12.01%
Fidelity VIP High Income Portfolio... 4/20/94 6.59% 9.28% 8.01%
Select Investment Grade Income Fund... 4/21/94 -2.41% 5.85% 4.94%
Government Bond Fund................. 4/20/94 -1.22% 4.71% 4.10%
Money Market Fund.................... 4/10/94 3.66% 3.96% 3.81%
</TABLE>
C-1
<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 FOR YEAR SINCE
FUND ENDED INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 21.61% 16.17% 13.28%
DGPF International Equity Series..... 10/29/92 5.97% 10.87% 10.26%
Fidelity VIP Overseas Portfolio...... 1/28/87 32.45% 15.02% 9.73%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 23.26% 12.85% 11.30%
Select Aggressive Growth Fund........ 8/21/92 28.37% 20.91% 18.69%
Select Capital Appreciation Fund..... 4/28/95 15.40% N/A 18.99%
Select Value Opportunity Fund........ 4/30/93 -13.03% 11.13% 9.58%
Select Growth Fund................... 8/21/92 19.70% 26.72% 18.60%
Core Equity Fund..................... 4/29/85 19.24% 22.88% 15.50%
Fidelity VIP Growth Portfolio........ 10/9/86 27.14% 27.27% 17.98%
Equity Index Fund.................... 9/28/90 10.48% 25.47% 18.85%
Select Growth and Income Fund........ 8/21/92 8.55% 19.36% 14.01%
Fidelity VIP Equity-Income Portfolio... 10/9/86 -3.05% 16.14% 12.71%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 1.54% 13.32% 11.48%
Fidelity VIP High Income Portfolio... 9/19/85 -1.27% 8.41% 10.71%
Select Investment Grade Income Fund... 4/29/85 -9.49% 4.99% 6.10%
Government Bond Fund................. 8/26/91 -8.36% 3.84% 4.58%
Money Market Fund.................... 4/29/85 -3.85% 3.03% 3.67%
</TABLE>
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 FOR YEAR SINCE
FUND ENDED INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select International Equity Fund..... 5/2/94 29.81% 16.86% 13.83%
DGPF International Equity Series..... 10/29/92 14.08% 11.61% 10.50%
Fidelity VIP Overseas Portfolio...... 1/28/87 40.56% 15.69% 9.84%
T.Rowe Price International Stock
Portfolio........................... 3/31/94 31.39% 13.56% 11.82%
Select Aggressive Growth Fund........ 8/21/92 36.65% 21.57% 18.97%
Select Capital Appreciation Fund..... 4/28/95 23.55% N/A 19.67%
Select Value Opportunity Fund........ 4/30/93 -6.08% 11.91% 9.98%
Select Growth Fund................... 8/21/92 27.92% 27.23% 18.83%
Core Equity Fund..................... 4/29/85 27.46% 23.46% 15.64%
Fidelity VIP Growth Portfolio........ 10/9/86 35.45% 27.89% 18.23%
Equity Index Fund.................... 9/28/90 18.67% 25.96% 18.94%
Select Growth and Income Fund........ 8/21/92 16.71% 19.96% 14.25%
Fidelity VIP Equity-Income Portfolio... 10/9/86 4.79% 16.92% 12.95%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 9.48% 13.98% 11.53%
Fidelity VIP High Income Portfolio... 9/19/85 6.59% 9.28% 10.83%
Select Investment Grade Income Fund... 4/29/85 -2.41% 5.85% 6.15%
Government Bond Fund................. 8/26/91 -1.22% 4.71% 4.69%
Money Market Fund.................... 4/29/85 3.66% 3.96% 3.73%
</TABLE>
C-2
<PAGE>
APPENDIX D
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a payment of $50,000 is made on the issue date and no
additional payments are made. Assume there are no withdrawals and that the
Withdrawal Without Surrender Charge Amount is equal to the greater of 10% of the
current 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 $ 5,400.00 8% $3,888.00
2 58,320.00 8,320.00 8% 4,000.00
3 62,985.60 12,985.60 7% 3,500.00
4 68,024.45 18,024.45 6% 3,000.00
5 73,466.40 23,466.40 5% 2,500.00
6 79,343.72 29,343.72 4% 2,000.00
7 85,691.21 35,691.21 3% 1,500.00
8 92,546.51 42,546.51 2% 1,000.00
9 99,950.23 49,950.23 1% 500.00
10 107,946.25 57,946.25 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 10% 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, based on Hypothetical Accumulated Value.
<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 $ 5,400.00 8% $0.00
2 58,320.00 0.00 8,320.00 8% 0.00
3 62,985.60 0.00 12,985.60 7% 0.00
4 68,024.45 30,000.00 18,024.45 6% 718.53
5 41,066.40 10,000.00 4,106.68 5% 294.67
6 33,551.72 5,000.00 3,355.17 4% 65.79
7 30,835.85 10,000.00 3,083.59 3% 207.49
8 22,502.72 15,000.00 2,250.27 2% 254.99
9 8,102.94 0.00 810.29 1% 0.00
10 8,751.17 0.00 1,248.45 0% 0.00
</TABLE>
D-1
<PAGE>
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 (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers of withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 -1
= [(1+.08)/(1+.10)] to the power of 2555/365 -1
= (.98182) -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>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
D-2
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 -1
= [(1+.08)/(1+.11)] to the power of 2555/365 -1
= (.97297) to the power of 7 -1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the negative of the excess interest earned
over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 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.
D-3
<PAGE>
APPENDIX E
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- -------- ------------ ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield 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 WITHDRAWAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- -------- ------------ ----------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $0.00 $0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
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 reduced
E-1
<PAGE>
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
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.
E-2
<PAGE>
APPENDIX F
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period................... 1.605 1.398 1.355 1.127 0.956 1.000 N/A N/A
End of Period......................... 2.084 1.605 1.398 1.355 1.127 0.956 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 129,946 130,011 115,585 77,485 37,680 12,530 N/A N/A
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.736 1.596 1.519 1.284 1.143 1.129 1.000 N/A
End of Period......................... 1.980 1.736 1.596 1.519 1.284 1.143 1.129 N/A
Units Outstanding at End of Period (in
thousands).......................... 63,396 68,279 62,134 44,416 34,692 26,924 6,681 N/A
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period................... 1.814 1.632 1.484 1.330 1.230 1.226 0.906 1.030
End of Period......................... 2.550 1.814 1.632 1.484 1.330 1.230 1.226 0.906
Units Outstanding at End of Period (in
thousands).......................... 58,821 59,052 56,689 63,050 65,256 59,774 25,395 6,728
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO
Unit Value:
Beginning of Period................... 1.396 1.222 1.203 1.064 1.000 N/A N/A N/A
End of Period......................... 1.834 1.396 1.222 1.203 1.064 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 68,032 68,367 59,832 35,915 10,882 N/A N/A N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period................... 2.513 2.305 1.970 1.686 1.292 1.342 1.139 1.000
End of Period......................... 3.433 2.513 2.305 1.970 1.686 1.292 1.342 1.139
Units Outstanding at End of Period (in
thousands).......................... 123,337 125,758 106,790 89,974 70,349 54,288 26,158 2,019
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period................... 1.875 1.670 1.482 1.383 1.000 N/A N/A N/A
End of Period......................... 2.316 1.875 1.670 1.482 1.383 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 81,133 80,048 70,932 52,927 16,096 N/A N/A N/A
SELECT VALUE OPPORTUNITY FUND
Unit Value:
Beginning of Period................... 2.011 1.945 1.580 1.249 1.075 1.167 1.000 N/A
End of Period......................... 1.889 2.011 1.945 1.580 1.249 1.075 1.167 N/A
Units Outstanding at End of Period (in
thousands).......................... 103,456 99,750 85,126 60,145 43,433 33,049 9,902 N/A
</TABLE>
F-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>
SELECT GROWTH FUND
Unit Value:
Beginning of Period................... 2.671 2.001 1.514 1.259 1.024 1.055 1.058 1.000
End of Period......................... 3.417 2.671 2.001 1.514 1.259 1.024 1.055 1.058
Units Outstanding at End of Period (in
thousands).......................... 136,939 121,005 96,643 62,633 47,078 38,415 26,064 3,039
CORE EQUITY FUND
Unit Value:
Beginning of Period................... 2.748 2.336 1.894 1.599 1.221 1.236 1.175 1.111
End of Period......................... 3.503 2.748 2.336 1.894 1.599 1.221 1.236 1.175
Units Outstanding at End of Period (in
thousands).......................... 167,814 164,914 156,173 135,573 116,008 102,399 72,609 34,373
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period................... 3.586 2.608 2.143 1.895 1.419 1.440 1.224 1.135
End of Period......................... 4.857 3.586 2.608 2.143 1.895 1.419 1.440 1.224
Units Outstanding at End of Period (in
thousands).......................... 160,262 149,009 148,211 142,450 116,485 90,717 49,136 18,253
EQUITY INDEX FUND
Unit Value:
Beginning of Period................... 3.265 2.581 1.977 1.640 1.221 1.266 1.135 1.074
End of Period......................... 3.874 3.265 2.581 1.977 1.640 1.221 1.226 1.135
Units Outstanding at End of Period (in
thousands).......................... 131,644 107,625 85,344 57,428 39,534 29,176 22,466 9,535
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period................... 2.270 1.978 1.638 1.370 1.066 1.074 0.987 1.000
End of Period......................... 2.650 2.270 1.978 1.638 1.370 1.066 1.074 0.987
Units Outstanding at End of Period (in
thousands).......................... 132,428 119,107 103,543 82,434 63,841 51,098 31,846 4,711
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 3.107 2.824 2.236 1.185 1.490 1.412 1.211 1.051
End of Period......................... 3.256 3.107 2.824 2.236 1.185 1.490 1.412 1.211
Units Outstanding at End of Period (in
thousands).......................... 188,374 187,989 180,001 167,000 139,145 104,356 61,264 17,855
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period................... 1.717 1.514 1.273 1.127 0.977 1.000 N/A N/A
End of Period......................... 1.879 1.717 1.514 1.273 1.127 0.977 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 78,861 69,704 55,551 42415 33444 20720 N/A N/A
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 2.142 2.272 1.958 1.743 1.465 1.510 1.270 1.047
End of Period......................... 2.284 2.142 2.272 1.958 1.743 1.465 1.510 1.270
Units Outstanding at End of Period (in
thousands).......................... 97,498 97,829 76,343 53,956 38,042 27,041 13,583 3,625
</TABLE>
F-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>
SELECT INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period................... 1.629 1.530 1.418 1.390 1.073 1.250 1.145 1.073
End of Period......................... 1.590 1.629 1.530 1.418 1.390 1.196 1.250 1.145
Units Outstanding at End of Period (in
thousands).......................... 106,780 102,088 86,816 79,054 69,168 57,454 48,488 15,428
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period................... 1.469 1.384 1.311 1.285 1.152 1.179 1.112 1.075
End of Period......................... 1.451 1.469 1.384 1.311 1.285 1.152 1.179 1.112
Units Outstanding at End of Period (in
thousands).......................... 51,711 48,930 35,261 30,921 31,710 32,519 60,265 29,844
MONEY MARKET FUND
Unit Value:
Beginning of Period................... 1.262 1.214 1.167 1.124 1.077 1.051 1.035 1.013
End of Period......................... 1.308 1.262 1.214 1.167 1.124 1.077 1.051 1.035
Units Outstanding at End of Period (in
thousands).......................... 205,622 128,730 91,676 92,354 69,311 37,668 30,815 30,778
</TABLE>
F-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>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period................... 1.605 1.398 1.355 1.128 0.956 1.000
End of Period......................... 2.084 1.605 1.398 1.355 1.128 0.956
Number of Units Outstanding at End of
Period (in thousands)............... 10,841 9,713 8,076 5,068 2,093 446
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.508 1.387 1.319 1.115 0.993 1.000
End of Period......................... 1.720 1.508 1.387 1.319 1.115 0.993
Number of Units Outstanding at End of
Period (in thousands)............... 4,560 4,148 3,266 2,023 1,304 667
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period................... 1.443 1.298 1.180 1.058 0.978 1.000
End of Period......................... 2.028 1.443 1.298 1.180 1.058 0.978
Number of Units Outstanding at End of
Period (in thousands)............... 4,796 4,358 3,601 3,114 2,804 1,697
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO
Unit Value:
Beginning of Period................... 1.396 1.222 1.203 1.064 1.000 N/A
End of Period......................... 1.834 1.396 1.222 1.203 1.064 N/A
Number of Units Outstanding at End of
Period (in thousands)............... 5,937 5,670 4,536 2,506 542 N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period................... 1.989 1.825 1.560 1.335 1.023 1.000
End of Period......................... 2.718 1.989 1.825 1.560 1.335 1.023
Number of Units Outstanding at End of
Period (in thousands)............... 11,108 10,282 7,947 5,681 2,907 1,211
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period................... 1.875 1.670 1.482 1.115 1.000 N/A
End of Period......................... 2.316 1.875 1.670 1.482 1.115 N/A
Number of Units Outstanding at End of
Period (in thousands)............... 6,678 5,947 5,197 3,849 1,069 N/A
SMALL-MID CAP VALUE FUND
Unit Value:
Beginning of Period................... 1.823 1.764 1.433 1.131 0.975 1.000
End of Period......................... 1.712 1.823 1.764 1.433 1.131 0.975
Number of Units Outstanding at End of
Period (in thousands)............... 8,309 7,243 5,466 3,037 1,614 795
SELECT GROWTH FUND
Unit Value:
Beginning of Period................... 2.756 2.064 1.562 1.229 1.057 1.000
End of Period......................... 3.525 2.756 2.064 1.562 1.229 1.057
Number of Units Outstanding at End of
Period (in thousands)............... 11,455 8,389 5,589 2,645 1,278 406
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CORE EQUITY FUND
Unit Value:
Beginning of Period................... 2.336 1.986 1.610 1.359 1.037 1.000
End of Period......................... 2.977 2.336 1.986 1.610 1.359 1.037
Number of Units Outstanding at End of
Period (in thousands)............... 10,700 9,224 7,404 4,652 2,436 947
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period................... 2.712 1.972 1.620 1.433 1.073 1.073
End of Period......................... 3.673 2.712 1.972 1.620 1.433 1.073
Number of Units Outstanding at End of
Period (in thousands)............... 16,528 13,035 11,575 9,342 4,952 1,944
EQUITY INDEX FUND
Unit Value:
Beginning of Period................... 2.766 2.187 1.675 1.390 1.035 1.000
End of Period......................... 3.282 2.766 2.187 1.675 1.390 1.035
Number of Units Outstanding at End of
Period (in thousands)............... 11,440 8,479 5,712 2,417 947 189
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period................... 2.193 1.911 1.582 1.324 1.030 1.000
End of Period......................... 2.559 2.193 1.911 1.582 1.324 1.030
Number of Units Outstanding at End of
Period (in thousands)............... 8,958 7,519 6,124 3,759 2,173 832
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 2.238 2.034 1.610 1.430 1.073 1.000
End of Period......................... 2.345 2.238 2.034 1.610 1.430 1.073
Number of Units Outstanding at End of
Period (in thousands)............... 17,836 16,111 12,959 9,957 5,738 2,214
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period................... 1.732 1.527 1.284 1.137 0.985 1.000
End of Period......................... 1.896 1.732 1.527 1.284 1.137 0.985
Number of Units Outstanding at End of
Period (in thousands)............... 4,614 3,514 3,125 2,735 2,025 1,240
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period................... 1.455 1.543 1.330 1.184 0.995 1.000
End of Period......................... 1.551 1.455 1.543 1.330 1.184 0.995
Number of Units Outstanding at End of
Period (in thousands)............... 15,020 14,203 9,794 5,635 2,530 985
SELECT INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period................... 1.348 1.267 1.174 1.151 0.990 1.000
End of Period......................... 1.316 1.348 1.267 1.174 1.151 0.990
Number of Units Outstanding at End of
Period (in thousands)............... 5,686 5,160 3,889 2,854 1,677 1,677
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period................... 1.273 1.199 1.136 1.113 0.998 1.000
End of Period......................... 1.257 1.273 1.199 1.136 1.113 0.998
Number of Units Outstanding at End of
Period (in thousands)............... 4,118 2,605 1,694 1,629 1,098 363
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Unit Value:
Beginning of Period................... 1.195 1.149 1.105 1.064 1.020 1.000
End of Period......................... 1.239 1.195 1.149 1.105 1.064 1.020
Number of Units Outstanding at End of
Period (in thousands)............... 10,044 8,683 8,628 7,379 4,194 1,837
</TABLE>
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACT FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF ALLMERICA INVESTMENT TRUST, FIDELITY VARIABLE INSURANCE
PRODUCTS FUND, FIDELITY VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE
INTERNATIONAL SERIES, INC., AND DELAWARE GROUP PREMIUM FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE ALLMERICA ADVANTAGE AND EXECANNUITY PLUS PROSPECTUSES
FOR THE ABOVE SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K DATED MAY 1, 2000 ("THE
PROSPECTUSES"). THE PROSPECTUSES MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES,
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440 LINCOLN STREET, WORCESTER,
MASSACHUSETTS 01653, TELEPHONE 1-800-533-7881.
DATED MAY 1, 2000
FAFLIC Allmerica Advantage/ExecAnnuity Plus
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.............................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY................................................................3
SERVICES....................................................................3
UNDERWRITERS................................................................3
ANNUITY BENEFIT PAYMENTS....................................................4
EXCHANGE OFFER..............................................................6
PERFORMANCE INFORMATION.....................................................8
FINANCIAL STATEMENTS........................................................F-1
</TABLE>
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 $25 billion in combined assets and over $43 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 states and jurisdictions in which it is licensed to
operate.
Currently, 18 Sub-Accounts of the Variable Account are available under the
Allmerica Advantage contract (the "Contract") and ExecAnnuity Plus contract
(Form A3018-94), a predecessor contract no longer being sold. Each Sub-Account
invests in a corresponding investment portfolio of Allmerica Investment Trust
(the "Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"),
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund
("DGPF"). The Trust is managed by Allmerica Financial Investment Management
Services, Inc. Fidelity VIP and Fidelity VIP II are managed by Fidelity
Management & Research Company ("FMR"). The T. Rowe Price International Stock
Portfolio of T. Rowe Price is managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"). The International Equity Series of DGPF is managed by
Delaware International Advisers Ltd. ("International Advisers").
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified management investment companies. Eleven different funds of the Trust
are available under the
2
<PAGE>
Contract: the Core Equity Fund (formerly the Growth Fund), Select Investment
Grade Income Fund, Money Market Fund, Equity Index Fund, Government Bond Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and Select
Value Opportunity Fund. Four of the portfolios of Fidelity VIP are available
under the Contract: the Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and Fidelity VIP
Overseas Portfolio. One portfolio of Fidelity VIP II is available under the
Contract: the Fidelity VIP II Asset Manager Portfolio. One portfolio of T. Rowe
Price is available under the Contract: the T. Rowe Price International Stock
Portfolio. The International Equity Series is the only Series of DGPF available
under the Contract. Each Fund, Portfolio and Series available under the Contract
(together, the "Underlying Funds") 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-Accounts are held on
an open account basis. A Sub-Account's ownership of Underlying Fund shares is
reflected on the records of the Underlying Fund and is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account VA-K of the Company as of December
31, 1999 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street,
3
<PAGE>
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 NASD registered representatives of Allmerica Investments and from
certain independent broker-dealers which are NASD members and whose
representatives are authorized by applicable law to sell variable annuity
contracts.
Commissions are paid by the Company to its licensed insurance agents on sales of
the Contract. 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.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity policies.
Registered representatives of Allmerica Investments receive commissions of up to
5% (4% on contracts originally issued as part of a 401(k) plan) of payments.
Independent broker-dealers receive commission of 5%, a portion of which is paid
to their registered representatives.
Commissions are paid by the Company, and 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 aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Separate Account VA-K (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999 were $3,098,376, $3,517,208
and $3,451,291.
No commissions were retained by Allmerica Investments for sales of all 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..............................$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2)...............0.000335
4
<PAGE>
(5) Annual Charge (one-day equivalent of 1.45% per annum)....................................0.000040
(6) Net Investment Rate (4) - (5)............................................................0.000295
(7) Net Investment Factor 1.000000 + (6).....................................................1.000295
(8) Accumulation Unit Value -- Current Period (1) x (7)....................................$ 1.135335
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulated Unit Value at the end of the Valuation Period would have been
$1.134574.
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 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 Exchanged Contract and, in the case of a Single Payment
Exchanged Contract, applies the charge for a greater number of years. 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 0.20% 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.
6
<PAGE>
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.
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.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of the
Exchanged Contract becomes the "payment" for the new Contract. Therefore, prior
purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
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 Funds 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 Funds. 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
7
<PAGE>
contract will be deemed to have been issued and to have received past purchase
payments as if there had been no exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying 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.
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 1.45% 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:
8
<PAGE>
<TABLE>
<CAPTION>
YEARS FROM DATE OF PAYMENT CHARGE AS PERCENTAGE OF NEW
TO DATE OF WITHDRAWAL PURCHASE PAYMENT WITHDRAWN*
<S> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 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 periods 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 1.45% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the 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.
9
<PAGE>
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1999:
<TABLE>
<S> <C>
Yield 4.67%
Effective Yield 4.78%
</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 Money Market 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.
10
<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 the 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
for the year then ended and the changes in each of their net assets for each of
the two years in the period then ended, 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 Funds, 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, 9999
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 31,666,387 $ 7,482,662 $ 12,444,661
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. - - -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 188,078 - -
--------------- --------------- ---------------
Total assets .......................................................... 31,854,465 7,482,662 12,444,661
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 3,249
--------------- --------------- ---------------
Net assets ............................................................. $ 31,854,465 $ 7,482,662 $12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 31,854,465 $ 7,482,662 $ 12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 10,700,441 5,686,038 10,043,976
Net asset value per unit, December 31, 1999 ................................ $ 2.976930 $ 1.315971 $ 1.238694
<CAPTION>
SELECT
EQUITY INDEX GOVERNMENT BOND AGGRESSIVE GROWTH
--------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 37,628,197 $ 5,177,193 $ 30,195,322
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. - - -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- -----------------
Total assets .......................................................... 37,628,197 5,177,193 30,195,322
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 75,965 - -
--------------- --------------- -----------------
Net assets ............................................................. $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Units outstanding, December 31, 1999 ....................................... 11,440,299 4,117,854 11,108,225
Net asset value per unit, December 31, 1999 ................................ $ 3.282452 $ 1.257255 $ 2.718285
<CAPTION>
SELECT GROWTH SELECT VALUE
SELECT GROWTH AND INCOME OPPORTUNITY
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 40,381,292 $ 22,998,632 $ 14,229,174
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. - - -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- ---------------
Total assets .......................................................... 40,381,292 22,998,632 14,229,174
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - 75,512 -
--------------- --------------- ---------------
Net assets ............................................................. $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 11,455,113 8,957,758 8,309,201
Net asset value per unit, December 31, 1999 ................................ $ 3.525176 $ 2.559024 $ 1.712460
</TABLE>
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, 9999
<TABLE>
<CAPTION>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL
EQUITY APPRECIATION EQUITY
----------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 22,588,494 $ 15,467,194 $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. - - -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - 7,844,338
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- -----------------
Total assets .......................................................... 22,588,494 15,467,194 7,844,338
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 3 - 2
Net assets ............................................................. $ 22,588,491 15,467,194 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 22,588,491 $ 15,467,194 $ 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Units outstanding, December 31, 1999 ....................................... 10,840,734 6,678,146 4,559,804
Net asset value per unit, December 31, 1999 ................................ $ 2.083668 $ 2.316091 $ 1.7203236091
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
----------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 23,300,730 41,823,565 60,703,679
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- ----------------
Total assets .......................................................... 23,300,730 41,823,565 60,703,679
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
---------------- ---------------- ----------------
Net assets ............................................................. $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Units outstanding, December 31, 1999 ....................................... 15,019,986 17,835,666 16,527,943
Net asset value per unit, December 31, 1999 ................................ $ 1.551315 $ 2.344940 $ 3.672791
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
-------------- ------------------ ---------------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 9,725,194 8,748,250 -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - 10,889,577
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
-------------- ------------------ ---------------------
Total assets .......................................................... 9,725,194 8,748,250 10,889,577
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
-------------- ------------------ ---------------------
Net assets ............................................................. $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Units outstanding, December 31, 1999 ....................................... 4,796,337 4,613,840 5,937,367
Net asset value per unit, December 31, 1999 ................................ $ 2.027630 $ 1.896089 $ 1.834075
</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>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,095 $ 460,500 $ 598,236 $ 284,297
------------- ------------ ------------ ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 323,203 91,695 147,935 373,833
Administrative expense fees. . . . . . . . . . . . . . . . . 52,614 14,927 24,082 60,857
------------- ------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 375,817 106,622 172,017 434,690
------------- ------------ ------------ ------------
Net investment income (loss) . . . . . . . . . . . . . . . (210,722) 353,878 426,219 (150,393)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 2,354,633 5,800 - 45,159
Net realized gain (loss) from sales of investments . . . . . 314,692 (11,579) - 294,331
------------- ------------ ------------ ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 2,669,325 (5,779) - 339,490
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 3,944,336 (523,111) - 5,088,920
------------- ------------ ------------ ------------
Net realized and unrealized gain (loss) . . . . . . . . . 6,613,661 (528,890) - 5,428,410
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from operations . . $ 6,402,939 $ (175,012) $ 426,219 $5,278,017
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
<CAPTION>
SELECT SELECT GROWTH
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH AND INCOME
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,146 $ - $ 15,054 $ 214,299
--------------- ----------------- ------------- -------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 57,267 286,970 367,811 240,871
Administrative expense fees. . . . . . . . . . . . . . . . . 9,322 46,716 59,876 39,211
--------------- ----------------- ------------- -------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 66,589 333,686 427,687 280,082
--------------- ----------------- ------------- -------------
Net investment income (loss) . . . . . . . . . . . . . . . 200,557 (333,686) (412,633) (65,783)
--------------- ----------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - - 956,687 1,417,591
Net realized gain (loss) from sales of investments . . . . . (25,022) 348,108 242,691 166,282
--------------- ----------------- ------------- -------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . (25,022) 348,108 1,199,378 1,583,873
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (219,399) 7,883,902 7,400,373 1,439,837
--------------- ----------------- ------------- -------------
Net realized and unrealized gain (loss) . . . . . . . . . (244,421) 8,232,010 8,599,751 3,023,710
--------------- ----------------- ------------- -------------
Net increase (decrease) in net assets from operations . . $ (43,864) $ 7,898,324 $ 8,187,118 $ 2,957,927
--------------- ----------------- ------------- -------------
--------------- ----------------- ------------- -------------
<CAPTION>
SELECT VALUE
OPPORTUNITY
-------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 77
-------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 168,326
Administrative expense fees. . . . . . . . . . . . . . . . . 27,402
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 195,728
-------------
Net investment income (loss) . . . . . . . . . . . . . . . (195,651)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 770,979
Net realized gain (loss) from sales of investments . . . . . (19,671)
-------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 751,308
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (1,364,169)
-------------
Net realized and unrealized gain (loss) . . . . . . . . . (612,861)
-------------
Net increase (decrease) in net assets from operations . . $ (808,512)
-------------
-------------
</TABLE>
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>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 136,850 $1,886,309
------------- -------------- ------------- ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 223,269 155,151 85,251 277,658
Administrative expense fees. . . . . . . . . . . . . . . . . 36,347 25,257 13,879 45,201
------------- -------------- ------------- ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 259,616 180,408 99,130 322,859
------------- -------------- ------------- ------------
Net investment income (loss) . . . . . . . . . . . . . . . (259,616) (180,408) 37,720 1,563,450
------------- -------------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - 18,801 9,995 70,516
Net realized gain (loss) from sales of investments . . . . . 233,508 73,953 85,179 (255,991)
------------- -------------- ------------- ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 233,508 92,754 95,174 (185,475)
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 5,024,680 2,949,396 776,394 (29,248)
------------- -------------- ------------- ------------
Net realized and unrealized gain (loss) . . . . . . . . . 5,258,188 3,042,150 871,568 (214,723)
------------- -------------- ------------- ------------
Net increase (decrease) in net assets from operations . . $ 4,998,572 $ 2,861,742 $ 909,288 $1,348,727
------------- -------------- ------------- ------------
------------- -------------- ------------- ------------
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP II
EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,437 $ 64,545 $ 98,590 $ 206,350
------------- -------------- ------------ ---------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 500,740 571,004 89,844 89,813
Administrative expense fees. . . . . . . . . . . . . . . . . 81,516 92,955 14,626 14,621
------------- -------------- ------------ ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 582,256 663,959 104,470 104,434
------------- -------------- ------------ ---------------
Net investment income (loss) . . . . . . . . . . . . . . . (40,819) (599,414) (5,880) 101,916
------------- -------------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 1,196,860 4,058,271 159,017 261,376
Net realized gain (loss) from sales of investments . . . . . 518,090 423,817 166,845 43,434
------------- -------------- ------------ ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 1,714,950 4,482,088 325,862 304,810
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (29,350) 10,852,568 2,373,555 284,089
------------- -------------- ------------ ---------------
Net realized and unrealized gain (loss) . . . . . . . . . 1,685,600 15,334,656 2,699,417 588,899
------------- -------------- ------------ ---------------
Net increase (decrease) in net assets from operations . . $ 1,644,781 $ 14,735,242 $2,693,537 $ 690,815
------------- -------------- ------------ ---------------
------------- -------------- ------------ ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
-------------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,305
-------------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 108,177
Administrative expense fees. . . . . . . . . . . . . . . . . 17,611
-------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 125,788
-------------------
Net investment income (loss) . . . . . . . . . . . . . . . (86,483)
-------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 123,530
Net realized gain (loss) from sales of investments . . . . . 127,661
-------------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 251,191
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 2,415,777
-------------------
Net realized and unrealized gain (loss) . . . . . . . . . 2,666,968
-------------------
Net increase (decrease) in net assets from operations . . $ 2,580,485
-------------------
-------------------
</TABLE>
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (210,722) $ (60,681) $ 353,878 $ 284,315
Net realized gain (loss). . . . . . . . . . . . . . . . 2,669,325 227,744 (5,779) 22,115
Net unrealized gain (loss). . . . . . . . . . . . . . . 3,944,336 2,783,753 (523,111) 69,734
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 6,402,939 2,950,816 (175,012) 376,164
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,252,999 1,295,185 359,462 477,719
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (987,135) (854,008) (308,427) (278,536)
Contract benefits . . . . . . . . . . . . . . . . . . . . (216,420) (139,181) - -
Contract charges. . . . . . . . . . . . . . . . . . . . . (6,798) (5,051) (949) (805)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,506,045 3,331,381 653,869 1,501,451
Other transfers from (to) the General Account . . . . . . 1,358,025 267,895 (3,653) (45,851)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,906,716 3,896,221 700,302 1,653,978
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 10,309,655 6,847,037 525,290 2,030,142
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 21,544,810 14,697,773 6,957,372 4,927,230
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 31,854,465 $ 21,544,810 $ 7,482,662 $ 6,957,372
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 426,219 $ 412,863 $ (150,393) $ (38,931)
Net realized gain (loss). . . . . . . . . . . . . . . . - - 339,490 783,712
Net unrealized gain (loss). . . . . . . . . . . . . . . - - 5,088,920 3,420,684
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 426,219 412,863 5,278,017 4,165,465
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 41,248,758 42,956,520 2,053,314 1,870,086
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (663,576) (1,527,192) (1,285,807) (1,165,798)
Contract benefits . . . . . . . . . . . . . . . . . . . . (163,706) (7,305) (317,893) (196,777)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,910) (2,579) (6,761) (4,591)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (38,919,763) (43,621,528) 6,865,573 5,748,639
Other transfers from (to) the General Account . . . . . . 141,135 2,251,241 1,513,207 548,442
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,639,938 49,157 8,821,633 6,800,001
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,066,157 462,020 14,099,650 10,965,466
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 10,375,255 9,913,235 23,452,582 12,487,116
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 12,441,412 $ 10,375,255 $ 37,552,232 $ 23,452,582
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
GOVERNMENT BOND
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 200,557 $ 114,541
Net realized gain (loss). . . . . . . . . . . . . . . . (25,022) 18,037
Net unrealized gain (loss). . . . . . . . . . . . . . . (219,399) 22,198
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . (43,864) 154,776
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 377,457 341,848
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (121,601) (183,152)
Contract benefits . . . . . . . . . . . . . . . . . . . . (2,353) (230)
Contract charges. . . . . . . . . . . . . . . . . . . . . (695) (486)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,653,622 946,095
Other transfers from (to) the General Account . . . . . . (999) 24,821
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,905,431 1,128,896
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,861,567 1,283,672
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 3,315,626 2,031,954
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 5,177,193 $ 3,315,626
--------------- ---------------
--------------- ---------------
</TABLE>
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>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (333,686) $ (248,987) $ (412,633) $ (223,375)
Net realized gain (loss). . . . . . . . . . . . . . . . 348,108 120,729 1,199,378 343,553
Net unrealized gain (loss). . . . . . . . . . . . . . . 7,883,902 1,626,872 7,400,373 4,813,123
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 7,898,324 1,498,614 8,187,118 4,933,301
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,341,167 1,667,973 2,185,824 1,762,877
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,018,716) (1,107,960) (1,027,454) (1,154,143)
Contract benefits . . . . . . . . . . . . . . . . . . . . (157,606) (5,407) (66,619) (46,068)
Contract charges. . . . . . . . . . . . . . . . . . . . . (7,973) (6,478) (9,601) (5,919)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,002,025 3,440,969 6,544,402 5,348,619
Other transfers from (to) the General Account . . . . . . 684,379 461,145 1,449,947 743,351
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,843,276 4,450,242 9,076,499 6,648,717
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 9,741,600 5,948,856 17,263,617 11,582,018
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 20,453,722 14,504,866 23,117,675 11,535,657
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 30,195,322 $ 20,453,722 $ 40,381,292 $ 23,117,675
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
SELECT GROWTH SELECT VALUE
AND INCOME OPPORTUNITY
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (65,783) $ (24,404) $ (195,651) $ (54,898)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,583,873 185,469 751,308 67,905
Net unrealized gain (loss). . . . . . . . . . . . . . . 1,439,837 1,752,366 (1,364,169) 319,879
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,957,927 1,913,431 (808,512) 332,886
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 887,196 916,420 807,164 1,013,793
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (698,848) (709,978) (578,815) (592,743)
Contract benefits . . . . . . . . . . . . . . . . . . . . (239,854) (158,824) (70,078) (6,487)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,329) (3,598) (4,406) (3,938)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,882,328 2,191,454 853,303 2,413,513
Other transfers from (to) the General Account . . . . . . 653,591 641,774 823,362 408,183
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,480,084 2,877,248 1,830,530 3,232,321
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,438,011 4,790,679 1,022,018 3,565,207
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 16,485,109 11,694,430 13,207,156 9,641,949
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,923,120 $ 16,485,109 $ 14,229,174 $ 13,207,156
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL SELECT CAPITAL
EQUITY APPRECIATION
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (259,616) $ (1,682) $ (180,408) $ (134,524)
Net realized gain (loss). . . . . . . . . . . . . . . . 233,508 92,023 92,754 1,842,555
Net unrealized gain (loss). . . . . . . . . . . . . . . 5,024,680 1,717,818 2,949,396 (486,273)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 4,998,572 1,808,159 2,861,742 1,221,758
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 938,996 911,710 806,871 977,644
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (598,035) (543,238) (408,501) (481,265)
Contract benefits . . . . . . . . . . . . . . . . . . . . (103,902) (35,297) (73,268) (6,055)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,551) (4,110) (3,766) (3,180)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,043,370 1,774,816 844,374 676,351
Other transfers from (to) the General Account . . . . . . 722,884 388,199 291,915 83,210
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,998,762 2,492,080 1,457,625 1,246,705
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,997,334 4,300,239 4,319,367 2,468,463
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 15,591,157 11,290,918 11,147,827 8,679,364
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,588,491 $ 15,591,157 $ 15,467,194 $ 11,147,827
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
DGPF FIDELITY VIP
INTERNATIONAL EQUITY HIGH INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 37,720 $ 97,218 $ 1,563,450 $ 834,606
Net realized gain (loss). . . . . . . . . . . . . . . . 95,174 37,951 (185,475) 658,212
Net unrealized gain (loss). . . . . . . . . . . . . . . 776,394 277,546 (29,248) (2,709,154)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 909,288 412,715 1,348,727 (1,216,336)
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 367,188 450,397 1,076,323 2,062,177
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (323,376) (251,355) (1,108,186) (987,162)
Contract benefits . . . . . . . . . . . . . . . . . . . . (75,382) - (80,940) (107,858)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,042) (1,772) (4,678) (4,164)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 460,977 1,017,275 924,886 5,202,627
Other transfers from (to) the General Account . . . . . . 252,896 99,261 472,556 607,069
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 680,261 1,313,806 1,279,961 6,772,689
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,589,549 1,726,521 2,628,688 5,556,353
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,254,787 4,528,266 20,672,042 15,115,689
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 7,844,336 $ 6,254,787 $ 23,300,730 $ 20,672,042
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</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>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (40,819) $ (71,964) $ (599,414) $ (282,421)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,714,950 1,679,271 4,482,088 3,404,903
Net unrealized gain (loss). . . . . . . . . . . . . . . (29,350) 1,360,035 10,852,568 6,094,613
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 1,644,781 2,967,342 14,735,242 9,217,095
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 2,283,854 2,398,189 3,005,646 2,265,258
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,561,021) (1,518,197) (1,926,189) (1,842,522)
Contract benefits . . . . . . . . . . . . . . . . . . . . (372,120) (137,044) (334,648) (153,105)
Contract charges. . . . . . . . . . . . . . . . . . . . . (11,244) (10,250) (13,812) (11,095)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,505,465 5,061,840 8,245,102 2,328,047
Other transfers from (to) the General Account . . . . . . 1,280,927 935,806 1,647,348 713,595
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 4,125,861 6,730,344 10,623,447 3,300,178
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 5,770,642 9,697,686 25,358,689 12,517,273
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 36,052,923 26,355,237 35,344,990 22,827,717
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 41,823,565 $ 36,052,923 $ 60,703,679 $ 35,344,990
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
FIDELITY VIP FIDELITY VIP II
OVERSEAS ASSET MANAGER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (5,880) $ 11,939 $ 101,916 $ 75,632
Net realized gain (loss). . . . . . . . . . . . . . . . 325,862 318,370 304,810 515,185
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,373,555 200,255 284,089 92,247
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,693,537 530,564 690,815 683,064
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 414,849 436,787 537,213 447,933
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (327,147) (334,149) (414,012) (551,001)
Contract benefits . . . . . . . . . . . . . . . . . . . . (25,172) (27,009) (32,731) (68,728)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,345) (2,070) (1,840) (1,417)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 528,915 833,047 1,419,160 701,410
Other transfers from (to) the General Account . . . . . . 156,409 175,177 464,372 102,018
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 745,509 1,081,783 1,972,162 630,215
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 3,439,046 1,612,347 2,662,977 1,313,279
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,286,148 4,673,801 6,085,273 4,771,994
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 9,725,194 $ 6,286,148 $ 8,748,250 $ 6,085,273
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (86,483) $ (6,236)
Net realized gain (loss). . . . . . . . . . . . . . . . 251,191 75,474
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,415,777 794,299
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,580,485 863,537
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 425,683 476,174
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (207,845) (231,411)
Contract benefits . . . . . . . . . . . . . . . . . . . . (102,701) (13,764)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,157) (1,792)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (13,653) 1,103,994
Other transfers from (to) the General Account . . . . . . 294,802 174,146
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 394,129 1,507,347
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,974,614 2,370,884
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 7,914,963 5,544,079
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 10,889,577 $ 7,914,963
--------------- ---------------
--------------- ---------------
</TABLE>
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 Allmerica Advantage, ExecAnnuity Plus
and Allmerica Immediate Advantage variable annuity contracts, in addition to
other contracts (the Delaware Medallion variable annuity contracts), is a
separate investment account of First Allmerica Financial Life Insurance Company
(the Company). The Company is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Separate Account VA-K was 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. 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 Allmerica Advantage and
ExecAnnuity Plus variable annuity contracts and twenty Sub-Accounts under the
Allmerica Immediate Advantage variable annuity contracts. Each Sub-Account
invests exclusively in a corresponding investment portfolio of Allmerica
Investment Trust (the Trust) managed by Allmerica Financial Investment
Management Services, Inc. (AFIMS), an indirect wholly-owned subsidiary of the
Company; or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR); or of the Delaware Group Premium Fund
(DGPF) managed by Delaware International Advisers Ltd.; or of the T. Rowe Price
International Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming
International, Inc. The Trust, Fidelity VIP, Fidelity VIP II, DGPF, and T. Rowe
Price (the Funds) are open-end, management investment companies registered under
the 1940 Act.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity 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 the Funds. 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 the
Funds 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 the Funds 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 . . . . . . . . . . . . . . . . . . . . . . 9,563,995 $ 24,918,919 $ 3.311
Investment Grade Income . . . . . . . . . . . . . . 7,119,564 7,820,753 1.051
Money Market . . . . . . . . . . . . . . . . . . . 12,444,661 12,444,661 1.000
Equity Index. . . . . . . . . . . . . . . . . . . . 9,268,029 27,182,985 4.060
Government Bond . . . . . . . . . . . . . . . . . . 5,120,863 5,367,144 1.011
Select Aggressive Growth . . . . . . . . . . . . . 8,852,337 18,974,244 3.411
Select Growth . . . . . . . . . . . . . . . . . . . 13,244,110 26,686,731 3.049
Select Growth and Income. . . . . . . . . . . . . . 11,897,895 18,647,029 1.933
Select Value Opportunity. . . . . . . . . . . . . . 9,355,144 14,597,670 1.521
Select International Equity . . . . . . . . . . . . 11,121,858 15,206,169 2.031
Select Capital Appreciation . . . . . . . . . . . . 7,533,947 11,724,744 2.053
DGPF International Equity . . . . . . . . . . . . . 421,059 6,393,416 18.630
Fidelity VIP High Income . . . . . . . . . . . . . 2,060,188 24,328,238 11.310
Fidelity VIP Equity-Income . . . . . . . . . . . . 1,626,743 35,043,958 25.710
Fidelity VIP Growth . . . . . . . . . . . . . . . . 1,105,110 38,840,482 54.930
Fidelity VIP Overseas . . . . . . . . . . . . . . . 354,417 6,671,145 27.440
Fidelity VIP II Asset Manager . . . . . . . . . . . 468,573 7,634,435 18.670
T. Rowe Price International Stock . . . . . . . . . 571,932 7,547,860 19.040
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum to Allmerica Advantage,
ExecAnnuity Plus and to Allmerica Immediate Advantage 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 of Allmerica Advantage,
ExecAnnuity Plus and Allmerica Immediate Advantage 0.20% 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.
For contracts issued on Form A3018-94 (ExecAnnuity Plus), a contract fee is
deducted on the contract anniversary and upon full surrender of the contract
when the accumulated value is $50,000 or less. The fee is the lesser of $30 or
3% of the accumulated value on the contract anniversary or full surrender date.
For contracts issued on Form A3025-96 (Allmerica Advantage), a contract fee of
$30 is deducted on the contract anniversary and upon full surrender when the
accumulated value is less than $50,000. The fee is currently waived for all
contracts (ExecAnnuity Plus and Allmerica Advantage) 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 to registered representatives of
Allmerica Investments by the Company. Allmerica Advantage and ExecAnnuity Plus
contracts have a contingent deferred sales charge and no deduction is made for
sales charges at the time of the sale.
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
Issuance of Units . . . . . . . . . . . . . . . 2,838,227 $ 7,105,831 3,196,609 $ 6,772,868
Redemption of Units . . . . . . . . . . . . . . (1,362,213) (3,199,115) (1,373,701) (2,876,647)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,476,014 $ 3,906,716 1,822,908 $ 3,896,221
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Investment Grade Income
Issuance of Units . . . . . . . . . . . . . . . 1,668,246 $ 2,226,512 2,044,414 $ 2,696,090
Redemption of Units . . . . . . . . . . . . . . (1,141,863) (1,526,210) (773,878) (1,042,112)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 526,383 $ 700,302 1,270,536 $ 1,653,978
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Money Market
Issuance of Units . . . . . . . . . . . . . . . 45,985,028 $ 50,757,480 48,203,810 $ 54,962,039
Redemption of Units . . . . . . . . . . . . . . (44,623,695) (49,117,542) (48,148,881) (54,912,882)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,361,333 $ 1,639,938 54,929 $ 49,157
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Equity Index
Issuance of Units . . . . . . . . . . . . . . . 4,377,991 $ 12,478,466 4,063,578 $ 9,923,583
Redemption of Units . . . . . . . . . . . . . . (1,416,195) (3,656,833) (1,295,473) (3,123,582)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 2,961,796 $ 8,821,633 2,768,105 $ 6,800,001
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Government Bond
Issuance of Units . . . . . . . . . . . . . . . 3,481,100 $ 4,068,069 2,440,242 $ 3,015,884
Redemption of Units . . . . . . . . . . . . . . (1,968,201) (2,162,638) (1,529,683) (1,886,988)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,512,899 $ 1,905,431 910,559 $ 1,128,896
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Aggressive Growth
Issuance of Units . . . . . . . . . . . . . . . 2,754,461 $ 5,755,614 3,742,763 $ 7,274,206
Redemption of Units . . . . . . . . . . . . . . (1,928,576) (3,912,338) (1,407,342) (2,823,964)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 825,885 $ 1,843,276 2,335,421 $ 4,450,242
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth
Issuance of Units . . . . . . . . . . . . . . . 4,449,518 $ 12,858,990 4,160,290 $ 9,729,097
Redemption of Units . . . . . . . . . . . . . . (1,383,502) (3,782,491) (1,360,001) (3,080,380)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,066,016 $ 9,076,499 2,800,289 $ 6,648,717
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth and Income
Issuance of Units . . . . . . . . . . . . . . . 2,419,585 $ 5,776,930 2,568,312 $ 4,993,792
Redemption of Units . . . . . . . . . . . . . . (980,376) (2,296,846) (1,170,883) (2,116,544)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,439,209 $ 3,480,084 1,397,429 $ 2,877,248
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Value Opportunity
Issuance of Units . . . . . . . . . . . . . . . 2,585,542 $ 4,303,678 2,771,415 $ 5,006,786
Redemption of Units . . . . . . . . . . . . . . (1,519,807) (2,473,148) (994,406) (1,774,465)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,065,735 $ 1,830,530 1,777,009 $ 3,232,321
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Select International Equity
Issuance of Units . . . . . . . . . . . . . . . 2,901,922 $ 4,637,861 2,894,703 $ 4,527,204
Redemption of Units . . . . . . . . . . . . . . (1,774,034) (2,639,099) (1,258,209) (2,035,124)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,127,888 $ 1,998,762 1,636,494 $ 2,492,080
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Capital Appreciation
Issuance of Units . . . . . . . . . . . . . . . 1,668,178 $ 3,161,299 1,891,659 $ 3,122,674
Redemption of Units . . . . . . . . . . . . . . (936,701) (1,703,674) (1,142,204) (1,875,969)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 731,477 $ 1,457,625 749,455 $ 1,246,705
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
DGPF International Equity
Issuance of Units . . . . . . . . . . . . . . . 1,442,035 $ 1,822,469 1,486,205 $ 2,175,924
Redemption of Units . . . . . . . . . . . . . . (1,030,011) (1,142,208) (604,270) (862,118)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 412,024 $ 680,261 881,935 $ 1,313,806
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP High Income
Issuance of Units . . . . . . . . . . . . . . . 5,073,951 $ 7,695,969 6,929,705 $ 10,678,702
Redemption of Units . . . . . . . . . . . . . . (4,257,220) (6,416,008) (2,520,698) (3,906,013)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 816,731 $ 1,279,961 4,409,007 $ 6,772,689
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Equity-Income
Issuance of Units . . . . . . . . . . . . . . . 4,637,345 $ 10,608,146 5,589,831 $ 11,872,225
Redemption of Units . . . . . . . . . . . . . . (2,912,701) (6,482,285) (2,438,089) (5,141,881)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,724,644 $ 4,125,861 3,151,742 $ 6,730,344
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Growth
Issuance of Units . . . . . . . . . . . . . . . 5,332,578 $ 16,144,378 3,232,147 $ 7,273,604
Redemption of Units . . . . . . . . . . . . . . (1,839,285) (5,520,931) (1,772,972) (3,973,426)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,493,293 $ 10,623,447 1,459,175 $ 3,300,178
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Overseas
Issuance of Units . . . . . . . . . . . . . . . 1,511,089 $ 2,442,012 1,414,651 $ 1,993,759
Redemption of Units . . . . . . . . . . . . . . (1,072,506) (1,696,503) (657,938) (911,976)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 438,583 $ 745,509 756,713 $ 1,081,783
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP II Asset Manager
Issuance of Units . . . . . . . . . . . . . . . 1,723,766 $ 2,984,705 1,093,306 $ 1,742,931
Redemption of Units . . . . . . . . . . . . . . (623,602) (1,012,543) (704,485) (1,112,716)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,100,164 $ 1,972,162 388,821 $ 630,215
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
T. Rowe Price International Stock
Issuance of Units . . . . . . . . . . . . . . . 1,268,569 $ 1,791,489 1,891,293 $ 2,454,236
Redemption of Units . . . . . . . . . . . . . . (1,001,312) (1,397,360) (756,997) (946,889)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 267,257 $ 394,129 1,134,296 $ 1,507,347
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
</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 the Funds 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 . . . . . . . . . . . . . . . . . . . $ 7,440,215 $ 1,859,502
Investment Grade Income. . . . . . . . . . . 2,167,164 1,107,184
Money Market . . . . . . . . . . . . . . . . 29,732,493 27,663,120
Equity Index . . . . . . . . . . . . . . . . 10,065,420 1,234,110
Government Bond. . . . . . . . . . . . . . . 3,952,169 1,846,181
Select Aggressive Growth . . . . . . . . . . 3,077,841 1,568,251
Select Growth . . . . . . . . . . . . . . . 10,606,061 985,508
Select Growth and Income . . . . . . . . . . 5,923,944 984,048
Select Value Opportunity . . . . . . . . . . 3,494,767 1,088,909
Select International Equity. . . . . . . . . 2,921,317 1,182,168
Select Capital Appreciation. . . . . . . . . 1,989,362 693,344
DGPF International Equity. . . . . . . . . . 1,425,526 697,548
Fidelity VIP High Income . . . . . . . . . . 7,052,384 4,138,457
Fidelity VIP Equity-Income . . . . . . . . . 8,326,912 3,045,010
Fidelity VIP Growth. . . . . . . . . . . . . 15,675,402 1,593,098
Fidelity VIP Overseas. . . . . . . . . . . . 2,032,652 1,134,006
Fidelity VIP II Asset Manager. . . . . . . . 2,914,612 579,158
T. Rowe Price International Stock. . . . . . 1,290,960 859,784
-------------- --------------
Totals . . . . . . . . . . . . . . . . . . $120,089,201 $ 52,259,386
-------------- --------------
-------------- --------------
</TABLE>
NOTE 8 - PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-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
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 on April
24, 1998 in Post-Effective Amendment No. 9, and is
incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT pursuant to
a trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement was
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9, and is incorporated by reference herein.
(b) Sales Agreements were previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and are incorporated by
reference herein.
(c) General Agent's Agreement was previously filed on
April 24, 1998 in Post-Effective Amendment No. 9, and is
incorporated by reference herein.
(d) Career Agent Agreement with Commission Schedule was
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9, and is incorporated by reference herein.
(e) Registered Representative's Agreement was previously filed
on April 24, 1998 in Post-Effective Amendment No. 9, and is
incorporated by reference herein.
EXHIBIT 4 Policy Form A was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and is incorporated by
reference herein. Specimen Policy Form B was previously filed
on May 1, 1996 in Post-Effective Amendment No. 6, and is
incorporated by reference herein.
EXHIBIT 5 Application Form was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and is incorporated by
reference herein. Specimen Application Form B was previously
filed on May 1, 1996 in Post-Effective Amendment No. 6, and is
incorporated by reference herein.
<PAGE>
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws, as
amended to reflect its name change, were previously filed on
October 1, 1995 in Post-Effective Amendment No. 4, and are
incorporated by reference herein. The Depositor's Revised
Bylaws were previously filed on April 30, 1996 in
Post-Effective Amendment No. 5, and are incorporated by
reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Services Agreement was previously filed on
April 30, 1996 in Post-Effective Amendment No. 5, 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, effective January 1, 1997, was
previously filed on May 1, 1997 in Post-Effective
Amendment No. 8, and is incorporated by reference herein.
(d) T. Rowe Price Service Agreement was previously filed on
April 24, 1998 in Post-Effective Amendment No. 9, and is
incorporated by reference herein.
(e) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9, and are incorporated by reference herein.
(f) 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) Participation Agreement between the Company and Allmerica
Investment Trust dated March 22, 2000 is filed herewith.
(b) Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Insurance Products Fund
Participation Agreement is filed herewith. Participation
Agreement, as amended, with Variable Insurance Products Fund
was previously filed on April 24, 1998 in Post-Effective
Amendment No. 9, and is incorporated by reference herein.
(c) Amendment dated Marcy 29, 2000 and Amendment dated
October 4, 1999 to the Variable Insurance Products Fund II
Participation Agreement is filed herewith. Participation
Agreement, as amended, with Variable Insurance Products
Fund II was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and is incorporated by
reference herein.
<PAGE>
(d) Form of Amendment to the Delaware Group Premium Fund
Participation Agreement was previously filed in April 2000
in Post-Effective Amendment No. 12 of Registration Statement
No. 33-71054/811-8114, and is incorporated by reference
herein. Form of Participation Agreement with Delaware Group
Premium Fund, Inc. was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and is incorporated by
reference herein.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9, and is incorporated by
reference herein.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01553
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) of
Vice President and 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
<PAGE>
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
<PAGE>
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.
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director, President and Chief First 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
<PAGE>
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 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
<PAGE>
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investments Insurance Agency Inc. of 200 Southbridge Parkway Insurance Agency
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 Inc. of 1455 Lincoln Parkway Insurance Agency
Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Inc. of Barkley Bldg-Suite 105 Insurance Agency
Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency Inc. of 631 Lakeland East Drive Insurance Agency
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
<PAGE>
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
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>
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 29, 2000, there were 6,504 Contact holders of qualified
Contracts and 1,893 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder for
monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however,
that this provision shall not eliminate or limit the liability of a
director:
1. for and breach of the director's duty of loyalty to the Company or its
policyholders;
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance
companies pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c.156B
Section 62;
4. for any transactions from which the director derived an improper
personal benefit.
ITEM 29. PRINCIPAL UNDERWRITERS
a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
X VEL Account, VEL II Account, VEL Account III, 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
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate Account
KGC, Fulcrum Separate Account, and Allmerica Select Separate Account
of First Allmerica Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
<PAGE>
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Claudia J. Eckels Vice President
Mary M. Eldridge Secretary/Clerk
Philip L. Heffernan Vice President
J. Kendall Huber Director
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief Executive Officer
David J. Mueller Vice President, Chief Financial Officer,
Financial Operations Principal and Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
(c) As indicated in Part B (Statement of Additional Information) in response
to Item 20(c), the aggregate amount of commissions retained by Allmerica
Investments, Inc., the principal underwriter of the Contracts, was
$3,451,291 for sales of variable contracts funded by the Registrant in
1999. No other commissions or 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.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as
<PAGE>
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/withdrawal 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.
4. A signed statement acknowledging the participant's understanding of (i)
the restrictions on
<PAGE>
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.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 3, 2000
- --------------------------
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
- --------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ----------------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-71052)
<PAGE>
EXHIBIT TABLE
Exhibit 8(f) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(a) Participation Agreement between the Company and Allmerica
Investment Trust
Exhibit 15(b) Amendments to the Variable Insurance Products Fund
Participation Agreement
Exhibit 15(c) Amendments to the Variable Insurance Products Fund II
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: 33-71052 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 of 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. 11 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>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA INVESTMENT TRUST
ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DATED
MARCH 22 , 2000
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of Allmerica Investment Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 22nd day of March, 2000 by and
among: FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); ALLMERICA INVESTMENT TRUST, an unincorporated Massachusetts business
trust (hereinafter the "Fund"), and ALLMERICA FINANCIAL INVESTMENT MANAGEMENT
SERVICES, INC. (hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets (each such series hereinafter referred to as a "Portfolio"), any
one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, Allmerica Investments, Inc. (the "Distributor") is registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (hereinafter
the "1934 Act"), is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company either has registered or will register certain
Variable Products under the 1933 Act or the Contracts 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; and
3
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has either: (i) registered or will
register each Account as a unit investment trust under the 1940 Act; or (ii)
will not register such Account pursuant to the exemptions provided in Sections
3(c)(1) or 3(c)(7) of the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any full
or fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. For purposes of this Section 1.4,
the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee of a request prior to
the close of regular trading on the NYSE shall constitute receipt by the Fund,
provided that the Fund receives notice of such request for redemption on the
next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.8. The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Fund's shares. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on the
Portfolio shares in additional shares of that Portfolio. The Company reserves
the right to revoke this election and to receive all such income dividends and
capital gain distributions in cash. The Fund shall notify the Company of the
number of shares so issued as payment of such dividends and distributions.
1.9. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products either
(i) are or will be registered under 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 the Company will make every effort to maintain such exemption and will
notify the Fund immediately upon having a reasonable basis for believing that
such exemption no longer applies or might not apply in the future.
2.2. The Company represents and warrants that with respect to any Accounts
which are exempt from registration under the 1940 Act in reliance on 3(c)(1) or
3(c)(7) thereof: (i) the principle underwriter for each such Account and any
sub-accounts thereof is a registered broker-dealer with the SEC under the 1934
Act; (ii) the shares of the Portfolios of the Trust are an will continue to be
the only investment securities held by the corresponding sub-accounts; and (iii)
with regard to each Portfolio, the Company, on behalf of the corresponding
sub-account.
2.3. The Company represents and warrants that the Variable Products will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, and that the sale of the Variable Products shall comply
in all material respects with state insurance suitability requirements. The
Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law, that it has legally and
validly established each Account as a segregated asset account under the
Massachusetts Insurance Code, and 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
5
<PAGE>
1940 Act to serve as a segregated investment account for the Variable Products;
or (ii) has not been so registered in proper reliance upon an exemption from
registration under Section 3(c) of the 1940 Act.
2.4. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act. The
Fund shall amend the registration statement for its shares under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund.
2.5. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.6. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.7. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.8. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.9. The Fund represents that it is lawfully organized and validly existing
under the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with the 1940 Act.
2.10. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.11. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
6
<PAGE>
2.12. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid, which
includes coverage for larceny and embezzlement, shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund and the Distributor promptly in writing in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document. Alternatively, the Company may print
the Fund's prospectus and/or its statement of additional information in
combination with other fund companies' prospectuses and statements of additional
information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of its
proxy statements, reports to shareholders, and other communications (except for
prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing these documents to current
contract owners, and the Company shall bear the cost for such documents used for
purposes other than distribution to current contract owners.
7
<PAGE>
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund or the Adviser(s) is named, at least fifteen Business Days prior
to its use. No such material shall be used if the Fund or its designee
reasonably objects to such use within fifteen Business Days after receipt of
such material.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Variable Products other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee,
except with the permission of the Fund.
8
<PAGE>
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement, prospectus or private placement
memorandum for the Variable Products, as such registration statement, prospectus
and private placement memorandum may be amended or supplemented from time to
time, or in published reports for each Account which are in the public domain or
approved by the Company for distribution to contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
private placement memorandums, reports, solicitations for voting instructions,
sales literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (I.E., any
written communication distributed or made generally available to customers or
the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, private placement memorandums, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Distributor may make payments to the Company or to the distributor for the
Variable Products if and in amounts agreed to by the Distributor in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund
9
<PAGE>
and the Adviser or by another party. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (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 Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
The responsibilities to report such information and conflicts and to assist the
Board will be carried out with a view only to the interests of contract owners
and plan participants, as applicable.
7.3. If it is determined by a majority of the Board, or a majority of its
members who are not "interested persons" of the Fund, the Adviser or the Company
as that term is defined in the 1940 Act (hereinafter "disinterested members"),
that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy
10
<PAGE>
or eliminate the irreconcilable material conflict, up to and including: (1)
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 (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Distributor and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Variable
Products. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Variable Products if an offer to do so has been declined
by vote of a majority of contract owners materially adversely affected by the
irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
11
<PAGE>
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including 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 expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) 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 private placement memorandum for the Variable Products or
contained in the Variable Products or sales literature for the Variable
Products (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 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 the Company
by or on behalf of the Fund for use in the registration statement,
prospectus or private placement memorandum for the Variable Products or in
the Variable Products or sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable Products
or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Fund or an Adviser) or unlawful conduct
of the Company or persons under its control, with respect to the sale or
distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund 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
statements therein not misleading, if such a statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
12
<PAGE>
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company 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 Company 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 Company of any
such claim shall not relieve the Company 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 Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company'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
Company 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.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it manages,
to indemnify and hold harmless the Company, each of its directors, officers, and
employees, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and
individually, "Indemnified Party," for purposes of this Section 8.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
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 expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of shares of the Portfolio
that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (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 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 the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Products not
supplied by the Fund or persons under its control and other than
statements
13
<PAGE>
or representations authorized by the Company) or unlawful conduct of the
Fund, Adviser(s) or Distributor or persons under their control, with
respect to the sale or distribution of the Variable Products or Portfolio
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, 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 the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an 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.
8.2(c). The Adviser 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 Adviser 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 Adviser of any
such claim shall not relieve the Adviser 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 Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser'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 Adviser 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.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for
14
<PAGE>
purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including 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
expenses (or actions in respect thereof), litigation 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 Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct 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.
8.3(c). The Fund 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 Fund 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 Fund of any such claim shall not
relieve the Fund 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 Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund'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 Fund 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.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the
15
<PAGE>
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60) days
advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.1(h) termination by either the Company or the Fund if 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.
10.2. Notwithstanding any termination of this Agreement, the Fund shall, at
the option of the Company, continue to make available additional shares of the
Fund pursuant to the terms and conditions of this Agreement, for all Variable
Products in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Variable Products"). Specifically, without
limitation, the owners of the Existing Variable Products shall be permitted to
direct reallocation of investments in the Portfolios of the Fund, redemption of
investments in the Portfolios of the Fund and/or investment in the
16
<PAGE>
Portfolios of the Fund upon the making of additional purchase payments under the
Existing Variable Products. The parties agree that this Section 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the Variable
Products (as distinct from Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement contract owner initiated or
approved transactions, or (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 Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) 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 Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Allmerica Investment Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Financial Investment Management Services, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
17
<PAGE>
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. 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.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers 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.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. 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 hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
18
<PAGE>
By: /s/ Richard M. Reilly
NAME: Richard M. Reilly
TITLE: Vice President
ALLMERICA INVESTMENT TRUST
By: /s/ John P. Kavanaugh
NAME: John P. Kavanaugh
TITLE: Vice President
ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
By: /s/ Paul T. Kane
NAME: Paul T. Kane
TITLE: Vice President
19
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
---------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VEL II VEL (> 93) 33-71050 811-8130
Inheiritage Inheiritage 33-74184 811-8304
Select Inheiritage
Allmerica Select Separate Account II Select Life 333-62369 811-8987
Group Vel Group VEL 333-06383 811-7663
FUVUL Separate Account ValuePlus Assurance Pending Pending
[To Be Determined] [PremierFocus] N/A N/A
<CAPTION>
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VA-K ExecAnnuity Plus 91 33-71052 811-8114
ExecAnnuity Plus 93
Allmerica Advantage
Allmerica Select Separate Account Allmerica Select Resource I 33-71058 811-8116
Allmerica Select Resource II
Allmerica Select Charter
Separate Accounts VA-A, VA-B, VA-C, Variable Annuities (discontinued)
VA-G, VA-H
- -------------------------------------------------------------------------------------------------------
Fulcrum Separate Account Fulcrum 333-16929 811-7947
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE B
PORTFOLIOS OF
ALLMERICA INVESTMENT TRUST
Select Emerging Markets Fund
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Select Growth Fund
Core Equity Fund (formerly Growth Fund)
Equity Index Fund
Select Growth and Income Fund
Select Income Fund
Select Investment Grade Income Fund
(formerly Investment Grade Income Fund)
Government Bond Fund
Money Market Fund
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund , as soon as possible, but no later than
two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.43 of the
Agreement to which this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
- cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
The Fund must allow at least a 15-day solicitation time to the Company as
the shareowner. (A 5-week period is recommended.) Solicitation time is
calculated as calendar days from (but NOT including,) the meeting,
counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If
<PAGE>
the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) The Fund must
review and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
<PAGE>
Amendment to Participation Agreement
First Allmerica Financial Life Insurance Company, Variable Insurance Products
Fund and Fidelity Distributors Corporation, hereby amend their Participation
Agreement, dated February 18, 1994 and as subsequently amended, by replacing
section 2.5 in its entirety with the following:
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may
make such payments in the future. The Fund has adopted a "no fee" or
"defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have
a board of trustees, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) With respect to Service Class shares and Service Class 2
shares, the Fund has adopted Rule 12b-1 Plans under which it makes
payments to finance distribution expenses. The Fund represents and
warrants that it has a board of trustees, a majority of whom are not
interested persons of the Fund, which has formulated and approved each of
its Rule 12b-1 Plans to finance distribution expenses of the Fund and that
any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly
constituted board of trustees.
IN WITNESS WHEREOF, each party has caused this Amendment to be executed in its
name and on its behalf by its duly authorized representative as of March 29,
2000.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY VARIABLE INSURANCE PRODUCTS FUND
By: /s/ Richard M Reilly By: /s/ Robert C. Pozen
Name: Richard M Reilly Name: Robert C. Pozen
Title: President Title: Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
Name: Kevin J. Kelly
Title: Vice President
<PAGE>
Amendment to the Participation Agreement
Among
Variable Insurance Products Fund
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company, Variable Insurance
Products Fund, and Fidelity Distributors Corporation entered into a
Participation Agreement on February 18, 1994 ("Participation Agreement"); and
WHEREAS, the parties desire to amend the Participation Agreement and restate in
its entirety Schedule A by mutual written consent;
Now, therefore, the parties do hereby agree:
1. "State Mutual Life Assurance Company of America" is hereby replaced with
"First Allmerica Financial Life Insurance Company."
2. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated November 13, 1998, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
All terms and conditions of the Participation Agreement and Schedule 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 representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
Name: Richard M. Reilly
Title: President
Date: May 1, 1999
VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS
CORPORATION
By: /s/ Robert C. Pozen By: /s/ Kevin J. Kelly
Name: Robert C. Pozen Name: Kevin J. Kelly
Title: Senior Vice President Title: Vice President
Date: 3/9/99 Date 3/4/99
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Amended Schedule A to Participation Agreement Dated February 18, 1994
(Products funded by Portfolios of Variable Insurance Products Fund as of 1/1/99)
<TABLE>
<CAPTION>
SEPARATE ACCOUNT* PRODUCT NAME REGISTRATION. EFFECTIVE DATE
- ---------------- ------------ ------------- --------------
<S> <C> <C> <C>
VEL II VEL >93 33-71056 3/15/94
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184 3/15/94
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052 3/15/94
(Annuity) Policy Form A3018-94 811-8814
Separate Account I Group IRA 33-47858 10/9/92
(Annuity) Policy Forms 811-8814
GA-IRA-2.00-92
GAC-IRA-2.00-92
Allmerica Select Select Resource 33-71058 3/15/94
(Annuity) Policy Form 811-8116
A3020-94 GRC
Select Charter 333-63087
Policy Form 811-8116
A3027-98
</TABLE>
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991
<PAGE>
Amendment to Participation Agreement
First Allmerica Financial Life Insurance Company, Variable Insurance Products
Fund II and Fidelity Distributors Corporation, hereby amend their Participation
Agreement, dated March 1, 1994 and as subsequently amended, by replacing section
2.5 in its entirety with the following:
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may
make such payments in the future. The Fund has adopted a "no fee" or
"defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have
a board of trustees, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) With respect to Service Class shares and Service Class 2
shares, the Fund has adopted Rule 12b-1 Plans under which it makes
payments to finance distribution expenses. The Fund represents and
warrants that it has a board of trustees, a majority of whom are not
interested persons of the Fund, which has formulated and approved each of
its Rule 12b-1 Plans to finance distribution expenses of the Fund and that
any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly
constituted board of trustees.
IN WITNESS WHEREOF, each party has caused this Amendment to be executed in its
name and on its behalf by its duly authorized representative as of March 29,
2000.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY VARIABLE INSURANCE PRODUCTS FUND II
By: /s/ Richard M Reilly By: /s/ Robert C. Pozen
Name: Richard M Reilly Name: Robert C. Pozen
Title: President Title: Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
Name: Kevin J. Kelly
Title: Vice President
<PAGE>
Amendment to Schedule A to Participation Agreement
among
Variable Insurance Products Fund II
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
WHEREAS, First Allmerica Financial Life Insurance Company, Variable Insurance
Products Fund II, and Fidelity Distributors Corporation entered into a
Participation Agreement on March 1, 1994 ("Participation Agreement"); and
WHEREAS, the parties desire to amend the Participation Agreement and restate in
its entirety Schedule A by mutual written consent;
NOW, THEREFORE, the parties do hereby agree:
1. "State Mutual Life Assurance Company of America" is hereby replaced with
"First Allmerica Financial Life Insurance Company."
2. To replace Schedule A to the Participation Agreement and any amendments
thereto with the attached Schedule A dated October 4, 1999.
All terms and conditions of the Participation Agreement and Schedule 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 representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
Name: Richard M. Reilly
Title: Vice President
Date: October 6, 1999
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Robert C. Pozen By: /s/ Kevin J. Kelly
Name: Robert C. Pozen Name: Kevin J. Kelly
Title: Senior Vice President Title: Vice President
Date: 10/19/99 Date 10/15/99
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY Amended Schedule A to Participation Agreement
Dated March 1, 1994
(Products funded by Portfolios of Variable Insurance Products Fund II
as of 10/4/99)
<TABLE>
<CAPTION>
SEPARATE ACCOUNT* PRODUCT NAME REGISTRATION
- ---------------- ------------ ------------
<S> <C> <C>
VEL VEL >87 33-14672
(Variable Life) Policy Form 1018-87 811-5183
VEL >91 33-90320
Policy Form 1018-91 811-5183
VEL PLUS 33-42687
Policy Forms 1023-91; 811-5183
1023-93
VEL II VEL >93 33-57792
(Variable Life) Policy Form 1018-93 811-7466
Inheiritage Inheiritage 33-70948
(Variable Life) Policy Form 1026-94 811-8120
Group VEL Group VEL 33-82658
(Variable Life) Policy Form 1029-94 811-8704
VA-K ExecAnnuity 33-39702
(Annuity) ExecAnnuity Plus 811-6293
Advantage
Policy Forms 3018-91;
3021-93;3025-96; 8025-96
</TABLE>
*The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
