KA1997.sai
Rule 497(c)
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[Keyport Logo]
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Service Hotline 800-367-3653 Keyline 800-367-3654
Keyport Logo is a registered service mark of Keyport Life Insurance
Company.
K.A.VAP 5/97
Yes. I would like to receive the Keyport Advisor Variable Annuity Statement
of
Additional Information.
Yes. I would like to receive the Statement of Additional Information for
the Eligible Funds of:
The Alger American Fund
Liberty Variable Investment Trust
SteinRoe Variable Investment Trust
Alliance Variable Products Series Fund, Inc.
MFS Variable Insurance Trust
Name
Address
City
State
Zip
BUSINESS REPLY MAIL
FIRST CLASS MAIL PERMIT NO. 6719 BOSTON, MA
POSTAGE WILL BE PAID BY ADDRESSEE
KEYPORT LIFE INSURANCE CO.
125 HIGH STREET
BOSTON, MA 02110-9773
NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES
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November 15, 1997 Prospectus for
Keyport Advisor
Variable Annuity
Including Eligible Fund Prospectuses for
THE ALGER AMERICAN FUND
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
LIBERTY VARIABLE INVESTMENT TRUST
MFS VARIABLE INSURANCE TRUST
STEINROE VARIABLE INVESTMENT TRUST
NOT May lose value
FDIC No bank guarantee
INSURED
GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
Variable Account A
OF
KEYPORT LIFE INSURANCE COMPANY
This Prospectus offers Group Variable Annuity Contracts (the "Contracts")
and the related Certificates (the "Certificates") that are designed to fund
benefits under certain group arrangements including those that qualify for
special tax treatment under the Internal Revenue Code of 1986 (the "Code").
As required by certain states, the Certificates may be offered as
individual contracts. Unless otherwise noted or the context so requires all
references to the Certificates include the Contracts and the individual
Contracts. The Certificates are offered on a flexible payment basis.
The variable annuity Contract (form number DVA(1)) and the Certificates
described in this prospectus provide for accumulation of Certificate Values
on a variable basis, and also on a fixed basis, and payments of periodic
annuity payments on either a variable or fixed basis. The Certificates are
designed for use by individuals for retirement planning purposes.
This prospectus generally describes only the variable features of the
Certificate (for a summary of the fixed features, see Appendix A on Page
27). If the Certificate Owner elects to have Certificate Values accumulated
on a variable basis, Purchase Payments will be allocated to a segregated
investment account of Keyport Life Insurance Company ("Keyport"),
designated Variable Account A ("Variable Account").
The Variable Account invests in shares of the following investment
companies at their net asset value: The Alger American Fund ("Alger
American Fund")--Alger American Growth Portfolio ("Alger Growth") and Alger
American Small Capitalization Portfolio ("Alger Small Cap"); Alliance
Variable Products Series Fund, Inc. ("Alliance Series Fund")--Global Bond
Portfolio ("Alliance Global Bond") and Premier Growth Portfolio ("Alliance
Premier Growth"); Liberty Variable Investment Trust ("Liberty Trust")
(formerly named Keyport Variable Investment Trust)-- Colonial Growth and
Income Fund, Variable Series ("Colonial Growth and Income"); Colonial
International Fund for Growth, Variable Series ("Colonial Int'l Fund for
Growth"); Colonial Strategic Income Fund, Variable Series ("Colonial
Strategic Income"); Colonial U.S. Stock Fund, Variable Series ("Colonial
U.S. Stock"); Liberty All-Star Equity Fund, Variable Series ("Liberty All-
Star Equity"); Newport Tiger Fund, Variable Series ("Newport Tiger"); and
Stein Roe Global Utilities Fund, Variable Series ("Stein Roe Global
Utilities"); MFS Variable Insurance Trust ("MFS Trust")--MFS Emerging
Growth Series ("MFS Emerging Growth") and MFS Research Series ("MFS
Research"); and SteinRoe Variable Investment Trust ("SteinRoe Trust")--
Stein Roe Balanced Fund, Variable Series ("Stein Roe Balanced"); Stein Roe
Growth Stock Fund, Variable Series ("Stein Roe Growth Stock"); Stein Roe
Money Market Fund, Variable Series ("Stein Roe Money Market"); Stein Roe
Mortgage Securities Fund, Variable Series ("Stein Roe Mortgage
Securities"); and Stein Roe Special Venture Fund, Variable Series ("Stein
Roe Special Venture").
The Variable Account may offer other forms of the Contracts and
Certificates with features, and fees and charges which vary from the
Certificates, and provide for investment in other Sub-accounts which may
invest in different or additional mutual funds. Other Contracts and
Certificates will be described in separate prospectuses and statements of
additional information.
A Statement of Additional Information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is herein
incorporated by reference. It is available, at no charge, by writing
Keyport at 125 High Street, Boston, MA 02110, by calling (800) 437-4466, or
by returning the postcard on the back cover of this prospectus. A table of
contents for the Statement of Additional Information is on Page 26.
The Certificates may be sold by or through banks or other depository
institutions. The Contract and Certificates: are not insured by the FDIC;
are not a deposit or other obligation of, or guaranteed by, the depository
institution; and are subject to investment risks, including the possible
loss of principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH THE INFORMATION A PROSPECTIVE INVESTOR SHOULD
KNOW BEFORE INVESTING. THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE
REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS
AUTHORIZED BY KEYPORT TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THIS OFFERING, AND IF GIVEN OR MADE, SUCH UNAUTHORIZED
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON.
The date of this prospectus is November 15, 1997
TABLE OF CONTENTS
Page
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 7
Condensed Financial Information 8
Performance Information 8
Keyport and the Variable Account 9
Purchase Payments and Applications 10
Investments of the Variable Account 10
Allocations of Purchase Payments 10
Eligible Funds 11
Transfer of Variable Account Value 13
Substitution of Eligible Funds and Other Variable Account Changes 14
Deductions 14
Deductions for Certificate Maintenance Charge 14
Deductions for Mortality and Expense Risk Charge 15
Deductions for Daily Distribution Charge 15
Deductions for Contingent Deferred Sales Charge 15
Deductions for Transfers of Variable Account Value 16
Deductions for Premium Taxes 17
Deductions for Income Taxes 17
Total Variable Account Expenses 17
Other Services 17
The Certificates 18
Variable Account Value 18
Valuation Periods 19
Net Investment Factor 19
Modification of the Certificate 19
Right to Revoke 19
Death Provisions for Non-Qualified Certificates 19
Death Provisions for Qualified Certificates 21
Certificate Ownership 21
Assignment 21
Partial Withdrawals and Surrender 21
Annuity Provisions 22
Annuity Benefits 22
Income Date and Annuity Option 22
Change in Income Date and Annuity Option 22
Annuity Options 22
Variable Annuity Payment Values 23
Proof of Age, Sex, and Survival of Annuitant 23
Suspension of Payments 24
Tax Status 24
Introduction 24
Taxation of Annuities in General 24
Qualified Plans 25
Tax-Sheltered Annuities 26
Individual Retirement Annuities 26
Corporate Pension and Profit-Sharing Plans 26
Deferred Compensation Plans with Respect to
Service for State and Local Governments 26
Variable Account Voting Privileges 26
Sales of the Certificates 27
Legal Proceedings 27
Inquiries by Certificate Owners 27
Table of Contents--Statement of Additional Information 27
Appendix A--The Fixed Account (also known as the Modified
Guaranteed Annuity Account) 28
Appendix B--Telephone Instructions 31
GLOSSARY OF SPECIAL TERMS
Accumulation Unit: An accounting unit of measure used to calculate Variable
Account Value.
Annuitant: The Annuitant is the natural person to whom any annuity payments
will be made starting on the Income Date. The Annuitant may not be over age
90 on the Certificate Date (age 75 for Qualified Certificates).
Certificate Anniversary: The same month and day as the Certificate Date in
each subsequent year of the Certificate.
Certificate Date: The effective date of the Certificate; it is shown on the
Certificate Schedule.
Certificate Owner: The person (or persons in the case of joint ownership)
who possesses all the ownership rights under the Certificate. The primary
Certificate Owner may not be over age 90 on the Certificate Date (age 75
for Qualified Certificates and age 90 for a joint Owner).
Certificate Value: The sum of the Variable Account Value and the Fixed
Account Value.
Certificate Withdrawal Value: The Certificate Value increased or decreased
by a limited Market Value Adjustment less any premium taxes and Certificate
Maintenance Charge and applicable Contingent Deferred Sales Charges.
Certificate Year: Any period of 12 months commencing with the Certificate
Date and each Certificate Anniversary thereafter shall be a Certificate
Year.
Covered Person: The person(s) identified on the Certificate Schedule whose
death may result in an Adjustment of Certificate Value, a waiver of any
Contingent Deferred Sales Charges and a waiver of any Market Value
Adjustment or whose medically necessary stay in a hospital or nursing
facility may allow the Certificate Owner to be eligible for either a total
or partial waiver of the Contingent Deferred Sales Charge.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant, Certificate Owner, or joint
Certificate Owner. The Designated Beneficiary will be the first person
among the following who is alive on the date of death: primary Certificate
Owner; joint Certificate Owner; primary beneficiary; contingent
beneficiary; and if none of the above is alive, the primary Certificate
Owner's estate. If the primary Certificate Owner and joint Certificate
Owner are both alive, they will be the Designated Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the
Variable Account under the Certificates.
Fixed Account: Part of Keyport's general account to which Purchase Payments
may be allocated or Certificate Values may be transferred.
Fixed Account Value: The value of all Fixed Account amounts accumulated
under the Certificate prior to the Income Date.
Guarantee Period Anniversary: An anniversary of a Guarantee Period's Start
Date.
Guarantee Period Month: The first Guarantee Period Month is the monthly
period which begins on the Start Date. Subsequent Guarantee Period Months
begin on the same day in the ensuing months.
Guarantee Period Year: The first Guarantee Period Year is the annual period
which begins on the Start Date. Subsequent Guarantee Period Years begin on
each Guaranteed Period Anniversary.
In Force: The status of the Certificate before the Income Date so long as
it is not totally surrendered, the Certificate Value under a Certificate
does not go to zero, and there has not been a death of the Annuitant or any
Certificate Owner that will cause the Certificate to end within at most
five years of the date of death.
Income Date: The date on which annuity payments are to begin.
Non-Qualified Certificate: Any Certificate that is not issued under a
Qualified Plan.
Office: Keyport's executive office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Certificate: Certificates issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Sections 401, 403(b) or 408(b) of the Internal Revenue Code. Keyport treats
Section 457 plans as Qualified Plans.
Start Date: The date an amount is first allocated to a Guarantee Period.
Variable Account: A separate investment account of Keyport into which
Purchase Payments under the Certificates may be allocated. The Variable
Account is divided into Sub-Accounts ("Sub-Account") that correspond to the
Eligible Funds in which they invest.
Variable Account Value: The value of all Variable Account amounts
accumulated under the Certificate prior to the Income Date.
Written Request: A request written on a form satisfactory to Keyport,
signed by the Certificate Owner and a disinterested witness, and filed at
Keyport's Office.
SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by
the Securities and Exchange Commission to assist the owner of a variable
annuity certificate in understanding the transaction and operating expenses
the owner will directly or indirectly bear under a certificate. The values
reflect expenses of the Variable Account as well as the Eligible Funds
under the Certificates. The expenses shown for the Eligible Funds and the
examples should not be considered a representation of future expenses.
Certificate Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of Purchase Payments): 7%1
Years from Date of Payment Sales Charge
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or later 0%
Maximum Total Certificate Owner Transaction Expenses
(as a percentage of Purchase Payments): 7%
Annual Certificate Maintenance Charge2 $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Distribution Charge: .15%
Total Variable Account Annual Expenses: 1.40%
Alger American Fund, Alliance Series Fund, Liberty Trust,
MFS Trust, and SteinRoe Trust Annual Expenses3
(as a percentage of average net assets)
Total Fund
Operating
Expenses After
Management Other Any
Expense
Fund Fees Expenses Reimbursements4
Alger Growth .75% .04% .79%
Alger Small Cap .85% .03% .88%
Alliance Global Bond .44 % .50%
.94%(1.15%)4
Alliance Premier Growth .72 % .23%
.95%(1.23%)4
Colonial Growth & Income .65 % .14%
.79%
Colonial Int'l Fund for Growth .90% .50% 1.40%
Colonial Strategic Income .65% .15% .80%(.86%)4
Colonial U.S. Stock .80% .15% .95%
Liberty All-Star Equity .80% .13% .93%
Newport Tiger .90% .37% 1.27%
Stein Roe Global Utilities .65% .16% .81%
MFS Emerging Growth .75% .25% 1.00
(1.16%)4
MFS Research .75% .25% 1.00%(1.48%)4
Stein Roe Balanced .60% .07% .67%
Stein Roe Growth Stock .65% .08% .73%
Stein Roe Money Market .50% .15% .65%
Stein Roe Mortgage Securities .55% .15% .70%(.72)
Stein Roe Special Venture .65% .10% .75%
THE ABOVE EXPENSES FOR THE ELIGIBLE FUNDS WERE PROVIDED BY THE FUNDS.
KEYPORT HAS NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.
Example #1 -- Assuming surrender of the Certificate at the end of the
periods shown.5
_______________________________
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
Alger Growth $ 93 $122 $162 $319
Alger Small Cap 94 125 167 331
Alliance Global Bond 94 127 170 338
Alliance Premier Growth 94 127 171 340
Colonial Growth & Income 93 122 162 319
Colonial Int'l Fund for Growth 99 141 195 395
Colonial Strategic Income 93 123 162 321
Colonial U.S. Stock 94 127 171 340
Liberty All-Star Equity 94 127 170 337
Newport Tiger 97 137 188 379
Stein Roe Global Utilities 93 123 163 322
MFS Emerging Growth 95 129 174 346
MFS Research 95 129 174 346
Stein Roe Balanced 91 119 155 304
Stein Roe Growth Stock 92 120 159 312
Stein Roe Money Market 91 118 154 301
Stein Roe Mortgage Securities 92 120 157 308
Stein Roe Special Venture 92 121 160 314
Example #2 -- Assuming annuitization of the Certificate at the end of the
periods shown.5
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
Alger Growth 23 73 132 319
Alger Small Cap 24 76 137 331
Alliance Global Bond 24 78 140 338
Alliance Premier Growth 24 78 141 340
Colonial Growth & Income 23 73 132 319
Colonial Int'l Fund for Growth 29 93 165 395
Colonial Strategic Income 23 74 132 321
Colonial U.S. Stock 24 78 141 340
Liberty All-Star Equity 24 78 140 337
Newport Tiger 27 88 158 379
Stein Roe Global Utilities 23 74 133 322
MFS Emerging Growth 25 80 144 346
MFS Research 25 80 144 346
Stein Roe Balanced 21 70 125 304
Stein Roe Growth Stock 22 71 129 312
Stein Roe Money Market 21 69 124 301
Stein Roe Mortgage Securities 22 70 127 308
Stein Roe Special Venture 23 72 130 314
Example #3 -- Assuming the Certificate stays in force through the periods
shown.
A $1,000 investment in each Sub-Account listed would be subject to the same
expenses shown in Example #2, assuming 5% annual return on assets.
1Contingent Deferred Sales Charges are deducted only if the Certificate is
totally or partially surrendered. A surrender will not incur the Charge
percentage shown as follows:
1. In any Certificate Year, Certificate Owners may withdraw an aggregate
amount, not to exceed, at the time of withdrawal, the Certificate's
earnings, which equal: (a) the Certificate Value, less (b) the portion of
the Purchase Payments not previously withdrawn.
2. In any Certificate Year after the first, Certificate Owners may
withdraw, in addition to the amount available in 1., the amount by which
10% of the Certificate Value as of the preceding Certificate Anniversary
exceeds the amount available in 1.
2This charge will be waived on the first Certificate Anniversary and in
certain other instances (see "Deductions for Certificate Maintenance
Charge"). Keyport reserves the right to impose a transfer fee after prior
notice to Certificate Owners, but currently does not impose any charge.
Premium taxes are not shown. Keyport deducts the amount of premium taxes,
if any, when paid unless Keyport elects to defer such deduction.
3All Trust and Fund expenses are for 1996 with the exception of those for
Liberty All-Star Equity, which are estimated since Liberty All-Star Equity
commenced operations in November, 1997. The Alliance Series Fund, Liberty
Trust (Colonial Strategic Income only), MFS Trust, and SteinRoe Trust
(Stein Roe Mortgage Securities only) expenses reflect such Fund's or
Trust's adviser's agreement to reimburse expenses above certain limits (see
footnote 4).
4Expense information shown for Alliance Series Fund has been restated to
reflect current fees and is net of voluntary expense reimbursements. The
Alliance Series Fund Adviser has agreed to continue such reimbursements for
the foreseeable future. Each percentage shown in the parentheses is what
the total expenses would be in the absence of expense reimbursement: for
Alliance Global Bond--1.15%; and for Alliance Premier Growth--1.23%.
Liberty Trust's manager has agreed until 4/30/98 to reimburse all expenses,
including management fees, in excess of the following percentage of the
average annual net assets of each Fund, so long as such reimbursement would
not result in the Fund's inability to qualify as a regulated investment
company under the Internal Revenue Code: 1.00% for Colonial Growth &
Income, Liberty All-Star Equity, Stein Roe Global Utilities and Colonial
U.S. Stock; 1.75% for Colonial Int'l Fund for Growth and Newport Tiger; and
.80% for Colonial Strategic Income. For Colonial Strategic Income, the
total .80% shown in the table is after expense reimbursement and the .86%
shown in the parentheses is what the total for 1996 would be in the absence
of expense reimbursement.
MFS Trust's Adviser has agreed to bear, subject to reimbursement, expenses
for each of the two Eligible Funds shown such that each Fund's total
operating expenses shall not exceed, on an annualized basis, 1.25% of the
average daily net assets of the Fund from January 1, 1997 through December
31, 1998, and 1.50% of the average daily net assets of the Fund from
January 1, 1999 through December 31, 2004; provided however, that this
obligation may be terminated or revised at any time. Each percentage shown
in the parentheses is what the total expenses would be in the absence of
expense reimbursement: for MFS Emerging Growth--1.16%; and for MFS Research-
- -1.48%.
SteinRoe Trust's adviser has voluntarily agreed until 4/30/98 to reimburse
all expenses, including management fees, in excess of the following
percentage of the average annual net assets of each Fund, so long as such
reimbursement would not result in the Fund's inability to qualify as a
regulated investment company under the Internal Revenue Code: .80% for
Stein Roe Special Venture and Stein Roe Growth Stock; .65% for Stein Roe
Money Market; .75% for Stein Roe Balanced; and .70% for Stein Roe Mortgage
Securities. For Stein Roe Mortgage Securities, the total .70% shown in the
table is after expense reimbursement and the .72% shown in the parentheses
is what the total for 1996 would be in the absence of expense
reimbursement.
5The annuity is designed for retirement planning purposes. Surrenders prior
to the Income Date are not consistent with the long-term purposes of the
Certificate and the applicable tax laws.
The examples should not be considered a representation of past or future
expenses and charges of the Sub-Accounts. Actual expenses may be greater or
less than those shown. Similarly, the assumed 5% annual rate of return is
not an estimate or a guarantee of future investment performance. See
"Deductions" in this prospectus, "Management of the Fund" in the
prospectuses for Alger American Fund and the Alliance Series Fund, "Trust
Management Organizations" and "Expenses of the Funds" in the prospectus for
Liberty Trust, "Management of the Series" and "Expenses" in the prospectus
for MFS Trust, and "How the Funds are Managed" in the prospectus for
SteinRoe Trust.
SYNOPSIS
The following Synopsis should be read in conjunction with the detailed
information in this prospectus and the Statement of Additional Information.
Please refer to the Glossary of Special Terms for the meaning of certain
defined terms. Variations from the information appearing in this prospectus
due to individual state requirements are described in supplements which are
attached to this prospectus, or in endorsements to the Certificates, as
appropriate.
The Certificate allows Certificate Owners to allocate Purchase Payments to
the Variable Account and also to the Fixed Account. The Variable Account is
a separate investment account maintained by Keyport. The Fixed Account is
part of Keyport's "general account", which consists of all Keyport's assets
except the Variable Account and the assets of other separate investment
accounts maintained by Keyport. Certificate Owners may allocate payments
to, and receive annuity payments from the Variable Account and/or the Fixed
Account. If the Certificate Owner allocates payments to the Variable
Account, the accumulation values and annuity payments will fluctuate
according to the investment experience of the Sub-Accounts chosen. If the
Certificate Owner allocates payments to the Fixed Account, the accumulation
values will increase at guaranteed interest rates and annuity payments will
be of a fixed amount. Fixed Account Values are subject to a limited market
value adjustment. (See "Keyport and the Variable Account" on Page 9 for
more information on the Variable Account and Appendix A on Page 27 for more
information on the Fixed Account.) If the Certificate Owner allocates
payments to both Accounts, then the accumulation values and annuity
payments will be variable in part and fixed in part.
The Certificate permits Purchase Payments to be made on a flexible Purchase
Payment basis. The minimum initial payment is $5,000. The minimum amount
for each subsequent payment is $1,000 or such lesser amount as Keyport may
permit from time to time (currently $250). (See "Purchase Payments" on Page
9.)
There are no deductions made from Purchase Payments for sales charges at
the time of purchase. A Contingent Deferred Sales Charge may be deducted in
the event of a total or partial surrender (see "Partial Withdrawals and
Surrenders" on Page 20). The Contingent Deferred Sales Charge is based on a
graded table of charges. The charge will not exceed 7% of that portion of
the amount surrendered that represents Purchase Payments made during the
seven years immediately preceding the request for surrender. (See
"Deductions for Contingent Deferred Sales Charge" on Page 14.)
Keyport deducts a Mortality and Expense Risk Charge, which is equal on an
annual basis to 1.25% of the average daily net asset values in the Variable
Account attributable to the Certificates. (See "Deductions for Mortality
and Expense Risk Charge" on Page 14.) Keyport also deducts a daily
distribution charge which is equal on an annual basis to .15% of the same
values. (See "Deductions for Daily Distribution Charge" on Page 14.)
Keyport deducts an annual Certificate Maintenance Charge (currently $36.00)
from the Variable Account Value for administrative expenses. Prior to the
Income Date, Keyport reserves the right to change this charge for future
years. Keyport will in certain instances waive this charge. (See
"Deductions for Certificate Maintenance Charge" on Page 13.)
Keyport reserves the right to deduct a charge of $25 for each transfer in
excess of 12 per Certificate Year but currently does not do so. (See
"Transfer of Variable Account Value" on Page 12.)
Premium taxes will be charged against the Certificate Value. Currently such
premium taxes range from 0% to 5.0%. (See "Deductions for Premium Taxes" on
Page 15.)
There are no federal income taxes on increases in the value of a
Certificate until a distribution occurs, in the form of a lump sum payment,
annuity payments, or the making of a gift or assignment of the Certificate.
A federal penalty tax (currently 10%) may also apply. (See "Tax Status" on
Page 22.)
The Certificate allows the Certificate Owner to revoke the Certificate
generally within 10 days of delivery (see "Right to Revoke" on Page 18).
For most states, Keyport will refund the Certificate Value as of the date
the returned Certificate is received by Keyport, plus any distribution
charges previously deducted. The Certificate Owner thus will bear the
investment risk during the revocation period. In other states, Keyport will
return Purchase Payments.
CONDENSED FINANCIAL INFORMATION
Accumulation Unit Values*
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year** of Year of Year
Year
Alger Growth $10.000 $ 9.900 8,927 1996
Alger Small Cap 10.000 10.065 6,760
1996
Alliance Global Bond 10.000 9.883 3,744
1996
Alliance Premier Growth 10.000 10.198 5,012 1996
Colonial Growth & Income 10.000 15.217 17,117 1996
Colonial Int'l Fund for
Growth 10.000 10.075 13,317 1996
Newport Tiger 10.000 12.555 7,691 1996
Colonial Strategic Income 10.000 12.642 17,084 1996
Colonial U.S. Stock 10.000 15.935 8,507 1996
Newport Tiger 10.000 12.555 7,691 1996
Liberty All-Star Equity (Not available before November 1997)
Stein Roe Global Utilities 10.000 12.095 2,268
1996
MFS Emerging Growth 10.000 9.716 5,714
1996
MFS Research 10.000 9.978 11,120 1996
Stein Roe Balanced 10.000 21.264 6,116 1996
Stein Roe Growth Stock 10.000 27.242 871 1996
Stein Roe Money Market 10.000 13.288 1,619 1996
Stein Roe Mortgage
Securities 10.000 16.621 6,945 1996
Stein Roe Special Venture 10.000 29.237 2,017 1996
* Accumulation Unit Values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
** Each $10.000 value is as of November 18, 1996, which is the date the
Fund Sub-Account first became available.
The full financial statements for Keyport and the Variable Account are in
the Statement of Additional Information.
PERFORMANCE INFORMATION
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
Certain of the Eligible Funds have been available for Keyport and/or non-
Keyport variable annuity contracts for periods prior to the commencement of
the offering of the Certificates described in this prospectus. Any
performance information for such periods will be based on the historical
results of the Eligible Funds being applied to the Certificate for the
specified time periods.
Performance information is not intended to indicate either past performance
under an actual Certificate or future performance.
The Sub-Accounts may advertise total return information for various periods
of time. Total return performance information is based on the overall
percentage change in value of a hypothetical investment in the specific Sub-
Account over a given period of time.
Average annual total return information shows the average percentage change
in the value of an investment in the Sub-Account from the beginning date of
the measuring period to the end of that period. This standardized version
of average annual total return reflects all historical investment results,
less all charges and deductions applied against the Sub-Account and a
Certificate (including any Contingent Deferred Sales Charge that would
apply if a Certificate Owner surrendered the Certificate at the end of each
period indicated). Average total return does not take into account any
premium taxes and would be lower if these taxes were included.
In order to calculate average annual total return, Keyport divides the
change in value of a Sub-Account under a Certificate surrendered on a
particular date by a hypothetical $1,000 investment in the Sub-Account made
by the Certificate Owner at the beginning of the period illustrated. The
resulting total rate for the period is then annualized to obtain the
average annual percentage change during the period. Annualization assumes
that the application of a single rate of return each year during the period
will produce the ending value, taking into account the effect of
compounding.
The Sub-Accounts may present additional total return information computed
on a different basis.
First, the Sub-Accounts may present total return information computed on
the same basis as described above, except deductions will not include the
Contingent Deferred Sales Charge. This presentation assumes that the
investment in the Certificate continues beyond the period when the
Contingent Deferred Sales Charge applies, consistent with the long-term
investment and retirement objectives of the Certificate. The total return
percentage will thus be higher under this method than the standard method
described above.
Second, the Sub-Accounts may present total return information calculated by
dividing the change in a Sub-Account's Accumulation Unit value over a
specified time period by the Accumulation Unit value of that Sub-Account at
the beginning of the period. This computation results in a 12-month change
rate or, for longer periods, a total rate for the period which Keyport
annualizes in order to obtain the average annual percentage change in the
Accumulation Unit value for that period. The change percentages do not take
into account the Contingent Deferred Sales Charge, the Certificate
Maintenance Charge and premium tax charges. The percentages would be lower
if these charges were included.
The Stein Roe Money Market Sub-Account is a money market Sub-Account that
also may advertise yield and effective yield information. The yield of the
Sub-Account refers to the income generated by an investment in the Sub-
Account over a specifically identified 7-day period. This income is
annualized by assuming that the amount of income generated by the
investment during that week is generated each week over a 52-week period
and is shown as a percentage. The yield reflects the deduction of all
charges assessed against the Sub-Account and a Certificate but does not
take into account Contingent Deferred Sales Charges and premium tax
charges. The yield would be lower if these charges were included.
The effective yield of the Stein Roe Money Market Sub-Account is calculated
in a similar manner but, when annualizing such yield, income earned by the
Sub-Account is assumed to be reinvested. This compounding effect causes
effective yield to be higher than yield.
KEYPORT AND THE VARIABLE ACCOUNT
Keyport Life Insurance Company was incorporated in Rhode Island in 1957 as
a stock life insurance company. Its executive and administrative offices
are at 125 High Street, Boston, Massachusetts 02110. Its home office is at
695 George Washington Highway, Lincoln, Rhode Island 02865.
Keyport writes individual and group annuity contracts on a non-
participating basis. Keyport is licensed to do business in all states
except New York and is also licensed in the District of Columbia and the
Virgin Islands. Keyport has been rated A+ (Superior) by A.M. Best and
Company, independent analysts of the insurance industry. Keyport has been
rated A+ each year since 1976, the first year Keyport was subject to Best's
alphabetic rating system. Standard & Poor's ("S & P") has rated Keyport AA-
for excellent financial security, Moody's has rated Keyport A1 for good
financial strength and Duff & Phelps has rated Keyport AA- for very high
claims paying ability. The Best's A+ rating is in the highest rating
category, which also includes A++. S & P and Duff & Phelps have one rating
category above AA and Moody's has two rating categories above A. The
Moody's "1" modifier signifies that Keyport is in the higher end of the A
category while the S&P and Duff & Phelps "-" modifier signifies that
Keyport is at the lower end of the AA category. These ratings merely
reflect the opinion of the rating company as to the relative financial
strength of Keyport and Keyport's ability to meet its contractual
obligations to its policyholders. Even though assets in the Variable
Account are held separately from Keyport's other assets, ratings of Keyport
may still be relevant to Certificate Owners since not all of Keyport's
contractual obligations relate to payments based on those segregated assets
(e.g., see "Death Provisions" for Keyport's obligation after certain deaths
to increase the Certificate Value if it is less than Death Benefit Amount
or otherwise enhance the death benefit with interest).
Keyport is one of the Liberty Financial Companies. Keyport is ultimately
controlled by Liberty Mutual Insurance Company of Boston, Massachusetts, a
multi-line insurance company.
The Variable Account was established by Keyport pursuant to the provisions
of Rhode Island Law on January 30, 1996. The Variable Account meets the
definition of "separate account" under the federal securities laws. The
Variable Account is registered with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940. Such
registration does not involve supervision of the management of the Variable
Account or Keyport by the Securities and Exchange Commission.
Obligations under the Certificates are the obligations of Keyport. Although
the assets of the Variable Account are the property of Keyport, these
assets are held separately from the other assets of Keyport and are not
chargeable with liabilities arising out of any other business Keyport may
conduct. Income, capital gains and/or capital losses, whether or not
realized, from assets allocated to the Variable Account are credited to or
charged against the Variable Account without regard to the income, capital
gains, and/or capital losses arising out of any other business Keyport may
conduct. Thus, Keyport does not guarantee the investment performance of the
Variable Account. The Variable Account Value and the amount of variable
annuity payments will vary with the investment performance of the
investments in the Variable Account.
PURCHASE PAYMENTS AND APPLICATIONS
The initial Purchase Payment is due on the Certificate Date. The minimum
initial Purchase Payment is $5,000. Additional Purchase Payments can be
made at the Certificate Owner's option. Each subsequent Purchase Payment
must be at least $1,000 or such lesser amount as Keyport may permit from
time to time (currently $250). Keyport may reject any Purchase Payment.
If the application for a Certificate is in good order and it calls for
amounts to be allocated to the Variable Account, Keyport will apply the
initial Purchase Payment to the Variable Account and credit the Certificate
with Accumulation Units within two business days of receipt. If the
application for a Certificate is not in good order, Keyport will attempt to
get it in good order within five business days. If it is not complete at
the end of this period, Keyport will inform the applicant of the reason for
the delay and that the Purchase Payment will be returned immediately unless
the applicant specifically consents to Keyport's keeping the Purchase
Payment until the application is complete. Once the application is
complete, the Purchase Payment will be applied within two business days of
its completion. Keyport has reserved the right to reject any application.
Keyport confirms, in writing, to the Certificate Owner the allocation of
all Purchase Payments and the re-allocation of values after any requested
transfer. Keyport must be notified immediately by the Certificate Owner of
any processing error.
Keyport will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Keyport will accept
an application for a Certificate that contains a signature signed under a
power of attorney if a copy of that power of attorney is submitted with the
application. Second, Keyport will issue a Certificate that is replacing an
existing life insurance or annuity policy that was issued by either Keyport
or an affiliated company without having previously received a signed
application from the applicant. Certain dealers or other authorized persons
such as employers and Qualified Plan fiduciaries will inform Keyport of an
applicant's answers to the questions in the application by telephone or by
order ticket and cause the initial Purchase Payment to be paid to Keyport.
If the information is in good order, Keyport will issue the Certificate
with a copy of an application completed with that information. The
Certificate will be delivered to the Certificate Owner with a letter from
Keyport that will give the Certificate Owner an opportunity to respond to
Keyport if any of the application information is incorrect. Alternatively,
Keyport's letter may request the Certificate Owner to confirm the
correctness of the information by signing either a copy of the application
or a Certificate delivery receipt that ratifies the application in all
respects (in either case, a copy of the signed document would be returned
to Keyport for its permanent records). All purchases are confirmed, in
writing, to the applicant by Keyport. Keyport's liability under a
Certificate extends only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
Purchase Payments applied to the Variable Account will be invested in one
or more of the Eligible Fund Sub-Accounts designated as permissible
investments in accordance with the selection made by the Certificate Owner
in the application. Any selection must specify the percentage of the
Purchase Payment that is allocated to each Sub-Account or must specify the
asset allocation model selected. (See "Other Services, The Programs".) The
percentage for each Sub-Account, if not zero, must be at least 5% and must
be a whole number. A Certificate Owner may change the allocation
percentages without fee, penalty or other charge. Allocation changes must
be made by Written Request unless the Certificate Owner has by Written
Request authorized Keyport to accept telephone allocation instructions from
the Certificate Owner or from a person acting for the Certificate Owner as
an attorney-in-fact under a power of attorney. By authorizing Keyport to
accept telephone changes, a Certificate Owner agrees to accept and be bound
by the conditions and procedures established by Keyport from time to time.
The current conditions and procedures are in Appendix B and Certificate
Owners authorizing telephone allocation instructions will be notified, in
advance, of any changes.
The Variable Account is segmented into Sub-Accounts. Each Sub-Account
contains the shares of one of the Eligible Funds and such shares are
purchased at net asset value. Eligible Funds and Sub-accounts may be added
or withdrawn as permitted by applicable law. The Sub-Accounts in the
Variable Account and the corresponding Eligible Funds currently are as
follows:
Eligible Funds of Alger American Fund Sub-Accounts
Alger Growth Alger Growth Sub-Account
Alger Small Cap Alger Small Cap Sub-Account
Eligible Funds of Alliance Series Fund Sub-Accounts
Alliance Global Bond Alliance Global Bond Sub-
Account
Alliance Premier Growth Alliance Premier Growth Sub-
Account
Eligible Funds of Liberty Trust Sub-Accounts
Colonial Growth & Income Colonial Growth & Income Sub-
Account
Colonial Int'l Fund for Growth Colonial Int'l Fund for Growth
Sub-Account
Colonial Strategic Income Colonial Strategic Income Sub-
Account
Colonial U.S. Stock Colonial U.S. Stock Sub-
Account
Liberty All-Star Equity Liberty All-Star Equity Sub-
Account
Newport Tiger Newport Tiger Sub-Account
Stein Roe Global Utilities Stein Roe Global Utilities
Sub-Account
Eligible Funds of MFS Trust Sub-Accounts
MFS Emerging Growth MFS Emerging Growth Sub-
Account
MFS Research MFS Research Sub-Account
Eligible Funds of SteinRoe Trust Sub-Accounts
Stein Roe Balanced Stein Roe Balanced Sub-Account
Stein Roe Growth Stock Stein Roe Growth Stock Sub-
Account
Stein Roe Money Market Stein Roe Money Market Sub-
Account
Stein Roe Mortgage Securities Stein Roe Mortgage
Securities
Sub-Account
Stein Roe Special Venture Stein Roe Special Venture
Sub-Account
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds listed above of Alger American Fund,
Alliance Series Fund, Liberty Trust, MFS Trust and SteinRoe Trust, and any
other mutual funds with which Keyport and the Variable Account may enter
into a participation agreement for the purpose of making such mutual funds
available as Eligible Funds under certain Certificates.
Fred Alger Management, Inc. ("Alger Management") is the investment manager
for both Eligible Funds of Alger American Fund. Alger Management has been
in the business of providing investment advisory services since 1964.
Alliance Capital Management L.P. is the investment advisor for both
Eligible Funds of Alliance Series Fund. AIGAM International Limited serves
as sub-adviser for Alliance Global.
Liberty Advisory Services Corp. ("LASC")(formerly named Keyport Advisory
Services Corp.), a subsidiary of Keyport, is the manager for Liberty Trust
and its Eligible Funds. Colonial Management Associates, Inc. ("Colonial"),
an affiliate of Keyport, serves as sub-adviser for the Eligible Funds
(except for Newport Tiger, Stein Roe Global Utilities and Liberty All-Star
Equity). Colonial has provided investment advisory services since 1931.
Newport Fund Management, Inc., an affiliate of Keyport, serves as sub-
adviser for Newport Tiger. Liberty Asset Management Company, an affiliate
of Keyport, serves as sub-adviser for Liberty All-Star Equity and the
current portfolio managers are J.P. Morgan Investment Management Inc.,
Oppenheimer Capital, Wilke/Thompson Capital Management Inc., Westwood
Management Corp. and Palley-Needelman Asset Management, Inc.
Massachusetts Financial Services Company ("MFS") is the investment advisor
for both Eligible Funds of MFS Trust. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in
the United States, Massachusetts Investors Trust.
Stein Roe & Farnham Incorporated ("Stein Roe") is the investment adviser
for each Eligible Fund of SteinRoe Trust and sub-adviser for Stein Roe
Global Utilities. In 1986, Stein Roe was organized and succeeded to the
business of Stein Roe & Farnham, a partnership. Stein Roe is an affiliate
of Keyport. Stein Roe and its predecessor have provided investment advisory
and administrative services since 1932.
The investment objectives of the Eligible Funds are briefly described
below. More detailed information, including investor considerations related
to the risks of investing in a particular Eligible Fund, may be found in
the current prospectus for that Fund. An investor should read that
prospectus carefully before selecting a fund for investing. The prospectus
is available, at no charge, from a salesperson or by writing Keyport at the
address shown on Page 1 or by calling (800) 437-4466.
Eligible Funds of Alger
American Fund and Variable Account
Sub-Accounts Investment Objective
Alger Growth Long-term capital appreciation
(Alger Growth Sub-Account)
Alger Small Cap Long-term capital appreciation.
(Alger Small Cap Sub-Account)
Eligible Funds of Alliance Series
Fund and Variable Account
Sub-Accounts Investment Objective
Alliance Global Bond A high level of return from a
(Alliance Global Bond combination of current income and
Sub-Account) capital appreciation by investing
in a globally diversified
portfolio of high quality debt
securities denominated in the U.S.
Dollar and a range of foreign
currencies.
Alliance Premier Growth Growth of capital rather than
(Alliance Premier Growth current income.
Sub-Account)
Eligible Funds of Liberty Trust
and Variable Account
Sub-Accounts Investment Objective
Colonial Growth & Income Primarily income and long-term
(Colonial Growth & Income capital growth and,
secondarily,
Sub- Account)(formerly named preservation of capital.
Colonial-Keyport Growth and
Income Fund)
Colonial Int'l Fund for Growth Long-term capital growth, by
(Colonial Int'l Fund for Growth investing primarily in non-U.S.
Sub-Account)(formerly named equity securities.
Colonial-Keyport Int'l Fund for
Growth)
Colonial Strategic Income A high level of current income, as
(Colonial Strategic Income is consistent with prudent risk and
Sub-Account)(formerly named maximizing total return, by
Colonial-Keyport Strategic diversifying investments primarily
Income Fund) in U.S. and foreign government and
high yield, high risk corporate
debt securities.
Colonial U.S. Stock Long-term capital growth by
(Colonial U.S. Stock Sub Account) investing primarily in large
(formerly named Colonial-Keyport capitalization equity securities.
U.S. Stock Fund)
Liberty All-Star Equity Total investment return, comprised
(Liberty All-Star Equity Sub-Account) of long-term capital appreciation
and current income, through
investment primarily in a
diversified portfolio of equity
securities.
Newport Tiger
(Newport Tiger Sub-Account)(formerly Long term capital growth by
named Newport-Keyport Tiger Fund) investing primarily in equity
securities of companies located in
the nine Tigers of Asia (Hong Kong,
Singapore, South Korea, Taiwan,
Malaysia, Thailand, Indonesia,
China and the Philippines).
Stein Roe Global Utilities
(Stein Roe Global Utilities Sub-Account) Current income and long-term
growth
(formerly named Colonial-Keyport of capital and income.
Utilities Fund)
Eligible Funds of MFS Trust
and Variable Account
Sub-Accounts Investment Objective
MFS Emerging Growth Long-term growth of capital.
(MFS Emerging Growth Sub-Account)
MFS Research Long-term growth of capital and
(MFS Research Sub-Account) future income.
Eligible Funds of SteinRoe Trust
and Variable Account
Sub-Accounts Investment Objective
Stein Roe Balanced High total investment return
(Stein Roe Balanced through investment in a changing
Sub-Account) (formerly named SteinRoe mix of securities.
Managed Assets Fund)
Stein Roe Growth Stock Long-term growth of capital through
(Stein Roe Growth Stock investment primarily in common
Sub-Account)(formerly named SteinRoe stocks.
Managed Growth Stock Fund)
Stein Roe Money Market High current income from short-term
(Stein Roe Money Market money market instruments while
Sub-Account)(formerly named SteinRoe emphasizing preservation of capital
Cash Income Fund) and maintaining excellent
liquidity.
Stein Roe Mortgage Securities Highest possible level of
current
(Stein Roe Mortgage Securities income consistent with safety of
Sub-Account)(formerly named SteinRoe principal and maintenance of
Mortgage Securities Income Fund) liquidity through investment
primarily in mortgage-backed
securities.
Stein Roe Special Venture Capital growth by investing
(Stein Roe Special Venture primarily in common stocks,
Sub-Account)(formerly named SteinRoe convertible securities, and other
Capital Appreciation Fund) securities selected for prospective
capital growth.
There is no assurance that the Eligible Funds will achieve their stated
objectives.
All the Eligible Funds are funding vehicles for variable annuity contracts
and variable life insurance policies offered by separate accounts of
Keyport and of insurance companies affiliated and unaffiliated with
Keyport. The risks involved in this "mixed and shared funding" are
disclosed in the Eligible Fund prospectuses under the following captions:
Alger American Fund--"Participating Insurance Companies and Plans";
Alliance Series Fund--"Introduction to the Fund"; Liberty Trust--"The
Trust"; MFS Trust--"Investment Concept of the Trust"; and SteinRoe Trust--
"The Trust".
Transfer of Variable Account Value
Certificate Owners may transfer Variable Account Value from one Sub-Account
to another Sub-Account and/or to the Fixed Account.
The Certificate allows Keyport to charge a transfer fee and to limit the
number of transfers that can be made in a specified time period.
Certificate Owners should be aware that transfer limitations may prevent a
Certificate Owner from making a transfer on the date he or she wants to,
with the result that the Certificate Owner's future Certificate Value may
be lower than it would have been had the transfer been made on the desired
date.
Currently, Keyport has no limit on the number or frequency of transfers,
and it is not charging a transfer fee of $25 for each transfer in excess of
12 per Certificate Year. However, for transfers under different
Certificates that are being requested under powers of attorney with a
common attorney-in-fact or that are, in Keyport's determination, based on
the recommendation of a common investment adviser or broker/dealer, there
is a transfer limitation of one transfer every 30 days or such shorter time
period as Keyport may permit.
Currently, Keyport is limiting each transfer to a maximum of $500,000 or
such greater amount as Keyport may permit. All transfers requested for a
Certificate on the same day will be treated as a single transfer and the
total combined transfer amount will be subject to the $500,000 limitation.
If the $500,000 limitation is exceeded, no amount of the transfer will be
executed by Keyport.
In applying the $500,000 limitation, Keyport may treat as one transfer all
transfers requested by a Certificate Owner for multiple Certificates he or
she owns. If the $500,000 limitation is exceeded for multiple transfers
requested on the same day that are treated as a single transfer, no amount
of the transfer will be executed by Keyport.
In applying the $500,000 limitation to transfers requested by a common
attorney-in-fact or investment adviser, Keyport will treat as one transfer
all transfers requested under different Certificates that are being
requested under powers of attorney with a common attorney-in-fact or that
are, in Keyport's determination, based on the recommendation of a common
investment adviser or broker/dealer. If the $500,000 limitation is exceeded
for multiple transfers requested on the same day that are treated as a
single transfer, no amount of the transfer will be executed by Keyport. If
a transfer is executed under one Certificate and, within the next 30 days,
a transfer request for another Certificate is determined by Keyport to be
related to the executed transfer under this paragraph's rules, the transfer
request will not be executed by Keyport. In order for it to be executed, it
would need to be requested again after the 30 day period has expired and
it, along with any other transfer requests that are collectively treated as
a single transfer, would need to total less than $500,000.
Keyport's interest in applying these limitations is to protect the
interests of both Certificate Owners who are not engaging in significant
transfer activity and Certificate Owners who are engaging in such activity.
Keyport has determined that the actions of Certificate Owners engaging in
significant transfer activity among Sub-Accounts may cause an adverse
affect on the performance of the Eligible Fund for the Sub-Account
involved. The movement of Sub-Account values from one Sub-Account to
another may prevent the appropriate Eligible Fund from taking advantage of
investment opportunities because it must maintain a liquid position in
order to handle redemptions. Such movement may also cause a substantial
increase in Fund transaction costs which must be indirectly borne by
Certificate Owners.
Certificate Owners will be notified, in advance, of the imposition of any
transfer fee or of a change in the limitation on the number of transfers.
The fee will not exceed the lesser of $25 and the cost of effecting a
transfer.
Transfers must be made by Written Request unless the Certificate Owner has
by Written Request authorized Keyport to accept telephone transfer requests
from the Certificate Owner or from a person acting for the Certificate
Owner as an attorney-in-fact under a power of attorney. By authorizing
Keyport to accept telephone transfer instructions, a Certificate Owner
agrees to accept and be bound by the conditions and procedures established
by Keyport from time to time. The current conditions and procedures are in
Appendix B and Certificate Owners authorizing telephone transfers will be
notified, in advance, of any changes. Written transfer requests may be made
by a person acting for the Certificate Owner as an attorney-in-fact under a
power of attorney.
Transfer requests received by Keyport before the close of trading on the
New York Stock Exchange (currently 4:00 PM Eastern Time) will be initiated
at the close of business that day. Any requests received later will be
initiated at the close of the next business day. Each request from a
Certificate Owner to transfer value will be executed by both redeeming and
acquiring Accumulation Units on the day Keyport initiates the transfer.
If 100% of any Sub-Account's value is transferred and the allocation
formula for Purchase Payments includes that Sub-Account, then the
allocation formula for future Purchase Payments will automatically change
unless the Certificate Owner instructs otherwise. For example, if the
allocation formula is 50% to Sub-Account A and 50% to Sub-Account B and all
of Sub-Account A's value is transferred to Sub-Account B, the allocation
formula will change to 100% to Sub-Account B unless the Certificate Owner
instructs otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If the shares of any of the Eligible Funds should no longer be available
for investment by the Variable Account or if in the judgment of Keyport's
management further investment in such fund shares should become
inappropriate in view of the purpose of the Certificate, Keyport may add or
substitute shares of another Eligible Fund or of another mutual fund for
Eligible Fund shares already purchased under the Certificate. No
substitution of Fund shares in any Sub-Account may take place without prior
approval of the Securities and Exchange Commission and notice to
Certificate Owners, to the extent required by the Investment Company Act of
1940.
Keyport has also reserved the right, subject to compliance with the law as
currently applicable or subsequently changed: (a) to operate the Variable
Account in any form permitted under the Investment Company Act of 1940 or
in any other form permitted by law; (b) to take any action necessary to
comply with or obtain and continue any exemptions from the Investment
Company Act of 1940 or to comply with any other applicable law; (c) to
transfer any assets in any Sub-Account to another Sub-Account, or to one or
more separate investment accounts, or to Keyport's general account; or to
add, combine or remove Sub-Accounts in the Variable Account; and (d) to
change the way Keyport assesses charges, so long as the aggregate amount is
not increased beyond that currently charged to the Variable Account and the
Eligible Funds in connection with the Certificates.
DEDUCTIONS
Deductions for Certificate Maintenance Charge
Keyport has responsibility for all administration of the Certificates and
the Variable Account. This administration includes, but is not limited to,
preparation of the Certificates, maintenance of Certificate Owners'
records, and all accounting, valuation, regulatory and reporting
requirements. Keyport makes a Certificate Maintenance Charge for such
services during the accumulation and annuity payment periods. At the
present time the Certificate Maintenance Charge is $36 per Certificate
Year. PRIOR TO THE INCOME DATE THE CERTIFICATE MAINTENANCE CHARGE IS NOT
GUARANTEED AND MAY BE CHANGED BY KEYPORT. The Certificate Maintenance
Charge will be waived before the Income Date if:
(i) it is the first Certificate Anniversary, or
(ii) the Certificate Value is greater than or equal to $40,000 on the
Certificate Anniversary date this charge is imposed, or
(iii) Purchase Payments of at least $2,000 have been made in the prior
Certificate Year and there has been no partial withdrawal in the prior
Certificate Year.
The Certificate Maintenance Charge will be waived on and after the Income
Date for the current year if:
(i) variable annuity Option A (Income for a Fixed Number of Years) is
applicable; and
(ii) at the time of the first payment of the year, the present value of all
of the remaining payments (see "Option A" on Page 21) is greater than or
equal to $40,000.
Prior to the Income Date, the full amount of the charge will be deducted
from the Variable Account Value on each Certificate Anniversary and on the
date of any total surrender not falling on the Certificate Anniversary. On
the Income Date, a pro-rata portion of the charge due on the next
Certificate Anniversary will be deducted from the Variable Account Value.
This pro-rata charge covers the period from the prior Certificate
Anniversary to the Income Date. For example, if the Income Date occurs 73
days after that prior anniversary, then one-fifth (i.e., 73 days/365 days)
of the annual charge would be deducted on the Income Date. The charge will
be deducted from each Sub-Account in the proportion that the value of each
bears to the Variable Account Value.
Once annuity payments begin on the Income Date or once they begin after
surrender benefits are applied under a settlement option, the yearly cost
of the Certificate Maintenance Charge for a payee's annuity will be the
same as the yearly amount in effect immediately before the annuity payments
begin. Keyport may not later change the amount of the Certificate
Maintenance Charge deducted from the annuity payments. The charge will be
deducted on a pro-rata basis from each annuity payment. For example, if
annuity payments are monthly, then one-twelfth of the annual charge will be
deducted from each payment.
Deductions for Mortality and Expense Risk Charge
Although variable annuity payments made to Annuitants will vary in
accordance with the investment performance of the investments of the
Variable Account, they will not be affected by the mortality experience
(death rate) of persons receiving such payments or of the general
population. Keyport guarantees the Death Benefits described below (see
"Death Provisions"). Keyport assumes an expense risk since the Certificate
Maintenance Charge after the Income Date will stay the same and not be
affected by variations in expenses.
To compensate it for assuming mortality and expense risks, for each
Valuation Period Keyport deducts from each Sub-Account a Mortality and
Expense Risk Charge equal on an annual basis to 1.25% of the average daily
net asset value of the Sub-Account. The charge is deducted during both the
accumulation and annuity periods (i.e., both before and after the Income
Date). Less than the full charge will be deducted from Sub-Account values
attributable to Certificates issued to employees of Keyport and other
persons specified in "Sales of the Certificates".
Deductions for Daily Distribution Charge
Keyport also deducts from each Sub-Account each Valuation Period a daily
Distribution Charge equal on an annual basis to 0.15% of the average daily
net asset value of the Sub-Account. This charge compensates Keyport for
certain sales distribution expenses relating to the Certificate.
This charge will not be deducted from Sub-Account values attributable to
Certificates that have reached the maximum cumulative distribution charge
limit defined below and to Certificates issued to employees of Keyport and
other persons specified in "Sales of the Certificates". The charge is also
not deducted from Sub-Account values attributable to Annuity Units. Keyport
may decide not to deduct the charge from Sub-Account values attributable to
a Certificate issued in an internal exchange or transfer of an annuity
contract of Keyport's general account.
Deductions for Contingent Deferred Sales Charge
A sales charge is not deducted from the Certificate's Purchase Payments
when initially received. However, a Contingent Deferred Sales Charge may be
deducted upon a surrender.
In order to determine whether a Contingent Deferred Sales Charge will be
due upon a partial or total surrender, Keyport maintains a separate set of
records. These records identify the date and amount of each Purchase
Payment made to the Certificate and the Certificate Value over time.
Certificate Owners will be permitted to make partial surrenders during the
Accumulation Period without incurring a Contingent Deferred Sales Charge,
as follows:
1. In any Certificate Year, Certificate Owners may withdraw an
aggregate amount not to exceed, at the time of the withdrawal, the
Certificate's earnings, which equal: (a) the Certificate Value, less (b)
the portion of the Purchase Payments not previously withdrawn.
2. In any Certificate Year after the first, Certificate Owners may
withdraw, in addition to the amount available in 1., the amount by which
10% of the Certificate Value as of the preceding Certificate Anniversary
exceeds the amount available in 1.
Contingent Deferred Sales Charges, as discussed below, will be deducted
with respect to withdrawals in excess of these amounts.
In computing the applicable charge amounts, the amount of any surrender in
any Certificate Year after the first as set forth in 2. above, will be
deducted from the Purchase Payments in chronological order from the oldest
to the most recent until the amount is fully deducted. Any amount so
deducted will not be subject to a charge.
The following additional amounts will be deducted from the Purchase
Payments in the same chronological order: the amount of any surrender in
the first Certificate Year in excess of the amount set forth in 1. above
and the amount of any surrender in any later Certificate Year in excess of
the combined amount set forth in 1. and 2. above. The Contingent Deferred
Sales Charge for each Purchase Payment from which a deduction is made will
be equal to (a) multiplied by (b), where:
(a) is the amount so deducted; and
(b) is the applicable percentage for the number of years that have elapsed
from the date of that payment to the date of surrender. Years are measured
from the month and day of payment to the same month and day in each
subsequent calendar year. The percentages applicable to each Purchase
Payment during the seven years after the date of its payment are: 7% during
year 1; 6% during year 2; 5% during year 3; 4% during year 4; 3% during
year 5; 2% during year 6; 1% during year 7; and 0% thereafter.
The applicable Contingent Deferred Sales Charges for each Purchase Payment
are then totaled. The lesser of this total amount and the Certificate's
maximum cumulative distribution charge will be deducted from the
Certificate Value in the same manner as the surrender amount. The maximum
cumulative distribution charge is equal to (a) less (b), where (a) is 9% of
the total Purchase Payments made to the Certificate and (b) is the sum of
all prior Contingent Deferred Sale Charge deductions from the Certificate
Value and all prior Variable Account daily distribution charges applicable
to the Certificate from the 0.15% distribution charge factor. After each
surrender, Keyport's records will be adjusted to reflect any deductions
made from the applicable Purchase Payments.
Example: Two Purchase Payments were made one year apart for $5,000 and
$7,000. The Certificate Value has grown to an assumed $13,200 when the
Certificate Owner decides to withdraw $8,000. The Certificate Value at the
beginning of the Certificate Year of surrender was $13,000. The Contingent
Deferred Sales Charge percentages at the time of surrender are an assumed
5% for the $5,000 payment and 6% for the $7,000 payment. The portion of the
surrender representing the Certificate's earnings ($13,200 less $12,000, or
$1,200) would not be subject to charges. Since $1,200 is less than the
amount guaranteed not to have charges (10% of $13,000, or $1,300), an
additional $100 would not be subject to charges. This $100 would be
deducted from the oldest Purchase Payment, reducing it from $5,000 to
$4,900. The $1,200 increase in value plus the additional $100 leaves $6,700
($8,000 - 1,200 - 100) to be deducted. This $6,700 would be deducted from
the $4,900 of the first payment still left and $1,800 of the second
payment. The total Contingent Deferred Sales Charge would be $4,900
multiplied by the applicable 5% and $1,800 times the applicable 6%, or a
total of $353. The distribution charge records would now reflect $0 for the
1st payment and $5,200 for the 2nd payment. The $8,000 requested plus the
$353 charge would be deducted from Certificate Values under the rules
specified in "Partial Withdrawals and Surrender" on Page 20.
The Contingent Deferred Sales Charge, when it is applicable, will be used
to cover the expenses of selling the Certificate, including compensation
paid to selling dealers and the cost of sales literature. Any expenses not
covered by the charge will be paid from Keyport's general account, which
may include monies deducted from the Variable Account for the Mortality and
Expense Risk Charge. A dealer selling the Certificate may receive up to
6.00% of Purchase Payments with additional compensation later based on the
Certificate Value of those payments. During certain time periods selected
by Keyport and KFSC, the percentage may increase to 6.25%.
The Contingent Deferred Sales Charge will be waived in the event a Covered
Person is confined in a medical facility in accordance with the provisions
and conditions of an endorsement relating to such confinements.
The Contingent Deferred Sales Charge will be eliminated under Certificates
issued to employees of Keyport and other persons specified in "Sales of the
Certificates".
Keyport may reduce or change to 0% any Contingent Deferred Sales Charge
percentage under a Certificate issued in an internal exchange or transfer
of an annuity contract of Keyport's general account.
Keyport may allow, under the Systematic Withdrawal Program and under other
permitted circumstances, all or part of the amount in 2. above to also be
available in the first Certificate Year. If so, the amount in 2. above
will be calculated by substituting the initial Purchase Payment for the
Certificate Value.
Deductions for Transfers of Variable Account Value
The Certificate allows Keyport to charge a transfer fee. Currently no fee
is being charged. Certificate Owners will be notified, in advance, of the
imposition of any fee. The fee will not exceed the lesser of $25 and the
cost of effecting a transfer.
Deductions for Premium Taxes
Keyport deducts the amount of any premium taxes levied by any state or
governmental entity when paid unless Keyport elects to defer such
deduction. It is not possible to describe precisely the amount of premium
tax payable on any transaction involving the Certificate offered hereby.
Such premium taxes depend, among other things, on the type of Certificate
(Qualified or Non-Qualified), on the state of residence of the Certificate
Owner, the state of residence of the Annuitant, the status of Keyport
within such states, and the insurance tax laws of such states. Currently
such premium taxes range from 0% to 5.0% of either total Purchase Payments
or Certificate Value.
Deductions for Income Taxes
Keyport will deduct from any amount payable under the Certificate any
income taxes that a governmental authority requires Keyport to withhold
with respect to that amount. See "Income Tax Withholding" and "Tax-
Sheltered Annuities".
Total Variable Account Expenses
Total Variable Account expenses in relation to the Certificate will be the
Certificate Maintenance Charge, the Mortality and Expense Risk Charge, and
the Daily Sales Charge.
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and therefore the deductions from and expenses paid
out of the assets of the Eligible Funds. These deductions and expenses are
described in the Eligible Fund prospectuses.
OTHER SERVICES
The Programs. Keyport offers several investment related programs which are
available only prior to the Income Date: Asset Allocation; Dollar Cost
Averaging; Systematic Investment; and Systematic Withdrawal Programs. A
Rebalancing Program is available prior to and after the Income Date. Under
each Program, the related transfers between and among Sub-Accounts and the
Fixed Account are not counted as one of the twelve free transfers. Each of
the Programs has its own requirements, as discussed below. Keyport reserves
the right to terminate any Program.
If the Certificate Owner has submitted the required telephone authorization
form, certain changes may be made by telephone. For those Programs
involving transfers, Owners may change instructions by telephone with
regard to which Sub-Accounts or the Fixed Account Certificate Value may be
transferred. The current conditions and procedures are described in
Appendix B.
Dollar Cost Averaging Program. Keyport offers a Dollar Cost Averaging
Program that Certificate Owners may participate in by Written Request. The
program periodically transfers Accumulation Units from the Stein Roe Money
Market Sub-Account or the One-Year Guarantee Period of the Fixed Account to
other Sub-Accounts selected by the Certificate Owner. The program allows a
Certificate Owner to invest in Variable Sub-Accounts over time rather than
having to invest in those Sub-Accounts all at once. The program is
available for initial and subsequent Purchase Payments and for Certificate
Value transferred into the Stein Roe Money Market Sub-Account or the One-
Year Guarantee Period. Under the program, Keyport makes automatic transfers
on a periodic basis out of the Stein Roe Money Market Sub-Account or the
One-Year Guarantee Period into one or more of the other available Sub-
Accounts (Keyport reserves the right to limit the number of Sub-Accounts
the Certificate Owner may choose but there are currently no limits).
The Certificate Owner by Written Request must specify the Stein Roe Money
Market Sub-Account or the One Year Guarantee Period from which the
transfers are to be made, the monthly amount to be transferred (minimum
$100) and the Sub-Account(s) to which the transfers are to be made. The
first transfer will occur at the close of the Valuation Period that
includes the 30th day after the receipt of the Certificate Owner's Written
Request. Each succeeding transfer will occur one month later (e.g., if the
30th day after the receipt date is April 8, the second transfer will occur
at the close of the Valuation Period that includes May 8). When the
remaining value is less than the monthly transfer amount, that remaining
value will be transferred and the program will end. Before this final
transfer, the Certificate Owner may extend the program by allocating
additional Purchase Payments to the Stein Roe Money Market Sub-Account or
the One Year Guarantee Period or by transferring Certificate Value to the
Stein Roe Money Market Sub-Account or the One Year Guarantee Period. The
Certificate Owner may, by Written Request or by telephone, change the
monthly amount to be transferred, change the Sub-Account(s) to which the
transfers are to be made, or end the program. The program will
automatically end if the Income Date occurs. Keyport reserves the right to
end the program at any time by sending the Certificate Owner a notice one
month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 4:00 PM Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Keyport from time to time. The current conditions and procedures appear in
Appendix B, and Certificate Owners in a dollar cost averaging program will
be notified, in advance, of any changes.
Asset Allocation Program. Certificate Owners may select from five asset
allocation model portfolios developed by Ibbotoson Associates (Model A --
Capital Preservation, Model B -- Income and Growth, Model C -- Moderate
Growth, Model D -- Growth, and Model E -- Aggressive Growth). If a
Certificate Owner elects one of the models, initial and subsequent Purchase
Payments will automatically be allocated among the Sub-Accounts in the
model. Only one model may be used in a Certificate at a time. Certificate
Owners may use a questionnaire and scoring system to determine the model
which corresponds to their risk tolerance and time horizons.
Periodically Ibbotoson Associates will review the models and may determine
that a reconfiguration of the Sub-Accounts and percentage allocations among
those Sub-Accounts is appropriate. Certificate Owners will receive
notification prior to any reconfiguration.
The Fixed Account is not available in any asset allocation model. A
Certificate Owner may allocate initial or subsequent Purchase Payments, or
Certificate Value, between an asset allocation model and the Fixed Account.
Rebalancing Program. In accordance with the Certificate Owner's election of
the relative Purchase Payment percentage allocations, Keyport will
automatically rebalance the Certificate Value of each Sub-Account
quarterly. On the last day of the calendar quarter, Keyport will
automatically rebalance the Certificate Value in each of the Sub-Accounts
to match the current Purchase Payment percentage allocations. The Program
may be terminated at any time and the percentages may be altered by Written
Request. The requested change must be received at the Office ten (10) days
prior to the end of the calendar quarter. Certificate Value allocated to
the Fixed Account is not subject to automatic rebalancing. After the Income
Date, automatic rebalancing applies only to variable annuity payments and
Keyport will rebalance the number of Annuity Units in each Sub-Account
(Annuity Units are used to calculate the amount of each Sub-Account annuity
payment; see "Variable Annuity Benefits" in the Statement of Additional
Information).
Systematic Investment Program. Purchase Payments may be made by monthly
draft against the bank account of any Certificate Owner who has completed
and returned to Keyport a Systematic Investment Program application and
authorization form. The application and authorization form may be obtained
from Keyport or from the sales representative. Each Systematic Investment
Program Purchase Payment is subject to a current minimum of $50.
Systematic Withdrawal Program. To the extent permitted by law, Keyport will
make monthly, quarterly, semi-annually or annual distributions of a
predetermined dollar amount to the Certificate Owner that has enrolled in
the Systematic Withdrawal Program. Under the Program, all distributions
will be made directly to the Certificate Owner and will be treated for
federal tax purposes as any other withdrawal or distribution of Certificate
Value. (See "Tax Status".) The Certificate Owner may specify the amount of
each partial withdrawal, subject to a minimum of $100. Systematic
withdrawals may be made from any Sub-Account or Guarantee Period of the
Fixed Account. In each Certificate Year, portions of Certificate Value may
be withdrawn without the imposition of any Contingent Deferred Sales Charge
("Free Withdrawal Amount"). If withdrawals pursuant to the Program are
greater than the Free Withdrawal Amount, the amount of the withdrawals
greater than the Free Withdrawal Amount will be subject to the applicable
Contingent Deferred Sales Charge. Any unrelated voluntary partial
withdrawal a Certificate Owner makes during a Certificate Year will be
aggregated with withdrawals pursuant to the Program to determine the
applicability of any Contingent Deferred Sales Charge under the Certificate
provisions regarding partial withdrawals.
Unless the Certificate Owner specifies the Sub-Account or Sub-Accounts or
the Fixed Account from which withdrawals of Certificate Value shall be made
or if the amount in a specified Sub-Account is less than the predetermined
amount, Keyport will make withdrawals under the Program in the manner
specified for partial withdrawals in "Partial Withdrawals and Surrender".
All Sub-Account withdrawals under the Program will be effected by canceling
the number of Accumulation Units equal in value to the amount to be
distributed to the Certificate Owner and any applicable Contingent Deferred
Sales Charge.
The Program may be combined with all other Programs except the Systematic
Investment Program.
It may not be advisable to participate in the Systematic Withdrawal Program
and incur a Contingent Deferred Sales Charge when making additional
Purchase Payments under the Certificate.
THE CERTIFICATES
Variable Account Value
The Variable Account Value for a Certificate is the sum of the value of
each Sub-Account to which values are allocated under a Certificate. The
value of each Sub-Account is determined at any time by multiplying the
number of Accumulation Units attributable to that Sub-Account by the
Accumulation Unit value for that Sub-Account at the time of determination.
The Accumulation Unit value is an accounting unit of measure used to
determine the change in an Accumulation Unit's value from Valuation Period
to Valuation Period.
Each Purchase Payment that is made results in additional Accumulation Units
being credited to the Certificate and the appropriate Sub-Account
thereunder. The number of additional units for any Sub-Account will equal
the amount allocated to that Sub-Account divided by the Accumulation Unit
value for that Sub-Account at the time of investment.
Valuation Periods
The Variable Account is valued each Valuation Period using the net asset
value of the Eligible Fund shares. A Valuation Period is the period
commencing at the close of trading on the New York Stock Exchange on each
Valuation Date and ending at the close of trading for the next succeeding
Valuation Date. A Valuation Date is each day that the New York Stock
Exchange is open for business. The New York Stock Exchange is currently
closed on weekends, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net Investment Factor
Variable Account Value will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect value, Keyport utilizes an Accumulation Unit value.
Each Sub-account has its own Accumulation Units and value per Unit. The
Unit value applicable during any Valuation Period is determined at the end
of that period.
When Keyport first purchased Eligible Fund shares on behalf of the Variable
Account, Keyport valued each Accumulation Unit at a specified dollar
amount. The Unit value for each Sub-Account in any Valuation Period
thereafter is determined by multiplying the value for the prior period by a
net investment factor. This factor may be greater or less than 1.0;
therefore, the Accumulation Unit may increase or decrease from Valuation
Period to Valuation Period. Keyport calculates a net investment factor for
each Sub-Account by dividing (a) by (b) and then subtracting (c) (i.e.,
(a/b) - c), where:
(a) is equal to:
(i) the net asset value per share of the Eligible Fund at the end of the
Valuation Period; plus
(ii) the per share amount of any distribution made by the Eligible Fund if
the "ex-dividend" date occurs during that same Valuation Period.
(b) is the net asset value per share of the Eligible Fund at the end of the
prior Valuation Period.
(c) is equal to:
(i) the Valuation Period equivalent of the Mortality and Expense Risk
Charge; plus
(ii) the Valuation Period equivalent of the daily Distribution Charge; plus
(iii) a charge factor, if any, for any tax provision established by Keyport
as a result of the operations of that Sub-Account.
If a Certificate ever reaches the maximum cumulative sales charge limit
defined in "Deductions for Contingent Deferred Sales Charge", Unit values
without (c)(ii) above will be used thereafter. For Certificates issued to
employees of Keyport and other persons specified in "Sales of the
Certificates", Unit values with .35% in (c)(i) above and without (c)(ii)
above will be used. Unit values without (c)(ii) above may be used for
certain Certificates issued in an internal exchange or transfer (see
"Deductions for Daily Distribution Charge").
Modification of the Certificate
Only Keyport's President or Secretary may agree to alter the Certificate or
waive any of its terms. Any changes must be made in writing and with the
Certificate Owner's consent, except as may be required by applicable law.
Right to Revoke
The Certificate Owner may return the Certificate within 10 days after he or
she receives it by delivering or mailing it to Keyport's Office. The return
of the Certificate by mail will be effective when the postmark is affixed
to a properly addressed and postage-prepaid envelope. The returned
Certificate will be treated as if Keyport never issued it and Keyport will
refund either the Certificate Value or Purchase Payments, as required by
state law.
For Certificates delivered in California to a Certificate Owner age 60 or
older, the Certificate Owner may return the Certificate to Keyport's Office
or to the agent from whom the Certificate was purchased. If the Certificate
is received at Keyport's Office or by the agent within 30 days after the
Certificate Owner receives the Certificate, Keyport will refund the
Certificate Value.
DEATH PROVISIONS FOR NON-QUALIFIED CERTIFICATES
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant. These
provisions apply if, before the Income Date while the Certificate is In
Force, the primary Certificate Owner or any Joint Certificate Owner dies
(whether or not the decedent is also the Annuitant) or the Annuitant dies
under a Certificate with a non-natural Certificate Owner such as a trust.
The Designated Beneficiary will control the Certificate after such a death.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
primary Certificate Owner as of the decedent's date of death. And, if the
Annuitant is the decedent, the new Annuitant will be any living contingent
annuitant, otherwise the surviving spouse. The Certificate may continue
until another death occurs (i.e., until the death of the Annuitant, primary
Certificate Owner or joint Certificate Owner). Except for this paragraph,
all of "Death Provisions" will apply to that subsequent death.
In all other cases, the Certificate may continue up to five years from the
date of death. During this period, the Designated Beneficiary may exercise
all ownership rights, including the right to make transfers or partial
surrenders or the right to totally surrender the Certificate for its
Surrender Value. If the Certificate is still in effect at the end of the
five-year period, Keyport will automatically end it then by paying the
Certificate Value to the Designated Beneficiary. If the Designated
Beneficiary is not then alive, Keyport will pay any person(s) named by the
Designated Beneficiary in a Written Request; otherwise the Designated
Beneficiary's estate.
The Covered Person under this paragraph shall be the decedent if he or she
is the first to die of the primary Certificate Owner, Joint Certificate
Owner, Annuitant, or, if there is a non-natural Certificate Owner such as a
trust, the Annuitant shall be the Covered Person. If the Covered Person
dies, the Certificate Value will be increased, as provided below, if it is
less than the Death Benefit Amount ("DBA"). The DBA is:
The DBA at issue is the initial Purchase Payment. Thereafter, the DBA is
calculated for each Valuation period by adding any additional Purchase
Payments, and deducting any partial withdrawals, including any applicable
surrender charge. This resulting amount is the "net Purchase Payment death
benefit". The Certificate Value for each Certificate Anniversary (the
"Anniversary Value") before the 81st birthday of the Covered Person is
determined. Each Anniversary Value is increased by any Purchase Payments
made after that anniversary. This resultant value is then decreased by an
amount calculated at the time of any partial withdrawal made after that
anniversary. The amount is calculated by taking the amount of any partial
withdrawal, and dividing by the Certificate Value immediately preceding the
partial withdrawal, and then multiplying by the Anniversary Value
immediately preceding the withdrawal. The greatest Anniversary Value, as so
adjusted, (the "greatest Anniversary Value") is the DBA unless the net
Purchase Payment death benefit is higher. The net Purchase Payment death
benefit will be the DBA if such amount is higher than the greatest
Anniversary Value.
When Keyport receives due proof of the Covered Person's death, Keyport will
compare, as of the date of death, the Certificate Value to the DBA. If the
Certificate Value was less than the DBA, Keyport will increase the current
Certificate Value by the amount of the difference. Note that while the
amount of the difference is determined as of the date of death, that amount
is not added to the Certificate Value until Keyport receives due proof of
death. The amount to be credited will be allocated to the Variable Account
and/or the Fixed Account based on the Purchase Payment allocation selection
that is in effect when Keyport receives due proof of death. Whether or not
the Certificate Value is increased because of this minimum death provision,
the Designated Beneficiary may, by the later of the 90th day after the
Covered Person's death and the 60th day after Keyport is notified of the
death, surrender the Certificate for the Certificate Withdrawal Value
without any applicable Contingent Deferred Sales Charge being deducted. For
a surrender after the applicable 90 or 60 day period and for a surrender at
any time after the death of a non-Covered Person, any applicable Contingent
Deferred Sales Charge would be deducted. If the Certificate is not
surrendered, it will continue for the time period specified above.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Keyport
pay any benefit of $5,000 or more under an annuity payment option that
meets the following: (a) the first payment to the Designated Beneficiary
must be made no later than one year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over a period
not extending beyond that person's life expectancy; and (c) any payment
option that provides for payments to continue after the death of the
Designated Beneficiary will not allow the successor payee to extend the
period of time over which the remaining payments are to be made.
Death of Certain Non-Certificate Owner Annuitant. These provisions apply
if, before the Income Date while the Certificate is In Force, (a) the
Annuitant dies, (b) the Annuitant is not a Certificate Owner, and (c) the
Certificate Owner is a natural person. The Certificate will continue after
the Annuitant's death. The new Annuitant will be any living contingent
annuitant, otherwise the primary Certificate Owner. If the Annuitant is the
first to die of the Certificate's primary Certificate Owner, Joint
Certificate Owner and Annuitant, then the Annuitant is the Covered Person
and the Certificate Value will be increased, as provided below, if it is
less than the Death Benefit Amount ("DBA"), as defined above. When Keyport
receives due proof of the Annuitant's death, Keyport will compare, as of
the date of death, the Certificate Value to the DBA. If the Certificate
Value was less than the DBA, Keyport will increase the current Certificate
Value by the amount of the difference. Note that while the amount of the
difference is determined as of the date of death, that amount is not added
to the Certificate Value until Keyport receives due proof of death. The
amount to be credited will be allocated to the Variable Account and/or the
Fixed Account based on the Purchase Payment allocation selection that is in
effect when Keyport receives due proof of death. Whether or not the
Certificate Value is increased because of this minimum death provision, the
Certificate Owner may surrender the Certificate within 90 days of the date
of the Annuitant's death for the Certificate Withdrawal Value without any
applicable Contingent Deferred Sales Charge being deducted. For a surrender
after 90 days, any applicable Contingent Deferred Sales Charge would be
deducted.
DEATH PROVISIONS FOR QUALIFIED CERTIFICATES
Death of Annuitant. If the Annuitant dies before the Income Date while the
Certificate is In Force, the Designated Beneficiary will control the
Certificate after such a death. The Certificate Value will be increased, as
provided below, if it is less than the Death Benefit Amount ("DBA") as
defined above. When Keyport receives due proof of the Annuitant's death,
Keyport will compare, as of the date of death, the Certificate Value to the
DBA. If the Certificate Value was less than the DBA, Keyport will increase
the current Certificate Value by the amount of the difference. Note that
while the amount of the difference is determined as of the date of death,
that amount is not added to the Certificate Value until Keyport receives
due proof of death. The amount to be credited will be allocated to the
Variable Account and/or the Fixed Account based on the Purchase Payment
allocation selection that is in effect when Keyport receives due proof of
death. Whether or not the Certificate Value is increased because of this
minimum death provision, the Designated Beneficiary may, by the later of
the 90th day after the Annuitant's death and the 60th day after Keyport is
notified of the death, surrender the Certificate for the Certificate
Withdrawal Value without any applicable Contingent Deferred Sales Charge
being deducted. For a surrender after the applicable 90 or 60 day period,
any applicable Contingent Deferred Sales Charge would be deducted.
If the Certificate is not surrendered, it may continue for the time period
permitted by the Internal Revenue Code provisions applicable to the
particular Qualified Plan. During this period, the Designated Beneficiary
may exercise all ownership rights, including the right to make transfers or
partial withdrawals or the right to totally surrender the Certificate for
its Certificate Withdrawal Value. If the Certificate is still in effect at
the end of the period, Keyport will automatically end it then by paying the
Certificate Withdrawal Value (without the deduction of any applicable
Contingent Deferred Sales Charge) to the Designated Beneficiary. If the
Designated Beneficiary is not alive then, Keyport will pay any person(s)
named by the Designated Beneficiary in a Written Request; otherwise the
Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may direct by Written Request that Keyport
pay any benefit of $5,000 or more under an annuity payment option that
meets the following: (a) the first payment to the Designated Beneficiary
must be made no later than one year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over a period
not extending beyond that person's life expectancy; and (c) any payment
option that provides for payments to continue after the death of the
Designated Beneficiary will not allow the successor payee to extend the
period of time over which the remaining payments are to be made.
CERTIFICATE OWNERSHIP
The Certificate Owner shall be the person designated in the application.
The Certificate Owner may exercise all the rights of the Certificate. Joint
Certificate Owners are permitted but not contingent Certificate Owners.
The Certificate Owner may by Written Request change the Certificate Owner,
primary beneficiary, contingent beneficiary or contingent annuitant. An
irrevocably-named person may be changed only with the written consent of
such person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult the Plan Administrator and a competent tax
adviser as to the tax consequences resulting from such a transfer.
ASSIGNMENT
The Certificate Owner may assign the Certificate at any time. A copy of any
assignment must be filed with Keyport. The Certificate Owner's rights and
those of any revocably-named person will be subject to the assignment. Any
Qualified Certificate may have limitations on assignability.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences resulting from
any such assignment.
PARTIAL WITHDRAWALS AND SURRENDER
The Certificate Owner may make partial withdrawals from the Certificate.
Keyport must receive a Written Request and the minimum amount to be
withdrawn must be at least $300 or such lesser amount as Keyport may permit
in conjunction with a Systematic Withdrawal Program. If the Certificate
Value after a partial withdrawal would be below $2,500, Keyport will treat
the request as a withdrawal of only the excess amount over $2,500. The
amount withdrawn will include any applicable Contingent Deferred Sales
Charge and therefore the amount actually withdrawn may be greater than the
amount of the surrender check requested. Unless the request specifies
otherwise, the total amount withdrawn will be deducted from all Sub-
Accounts of the Variable Account in the ratio that the value in each Sub-
Account bears to the total Variable Account Value. If there is no value, or
insufficient value, in the Variable Account, then the amount surrendered,
or the insufficient portion, will be deducted from the Fixed Account in the
ratio that each Guarantee Period's value bears to the total Fixed Account
Value.
The Certificate Owner may totally surrender the Certificate by making a
Written Request. Surrendering the Certificate will end it. Upon surrender,
the Certificate Owner will receive the Certificate Withdrawal Value.
Keyport will pay the amount of any surrender within seven days of receipt
of such request. Alternatively, the Certificate Owner may purchase for
himself or herself an annuity option with any surrender benefit of at least
$5,000. Keyport's consent is needed to choose an option if the Certificate
Owner is not a natural person.
Annuity options based on life contingencies cannot be surrendered after
annuity payments have begun. Option A, which is not based on life
contingencies, may be surrendered if a variable payout has been selected.
Because of the potential tax consequences of a full or partial surrender, a
Certificate Owner should consult a competent tax adviser regarding a
surrender.
ANNUITY PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In
Force, payments will begin under the annuity option or options the
Certificate Owner has chosen. The amount of the payments will be determined
by applying the Certificate Value increased or decreased by a limited
Market Value Adjustment of Fixed Account Value described in Appendix A
(less any premium taxes not previously deducted and less any applicable
Certificate Maintenance Charge) on the Income Date in accordance with the
option selected.
Income Date and Annuity Option
The Certificate Owner may select an Income Date and an Annuity Option at
the time of application. If the Certificate Owner does not select an
Annuity Option, Option B will automatically be designated. If the
Certificate Owner does not select an Income Date for the Annuitant, the
Income Date will automatically be the earlier of (i) the later of the
Annuitant's 90th birthday and the 10th Certificate Anniversary and (ii) any
maximum date permitted under state law.
Change in Income Date and Annuity Option
The Certificate Owner may choose or change an Annuity Option or the Income
Date by making a Written Request to Keyport at least 30 days prior to the
Income Date. However, any Income Date must be: (a) for fixed annuity
options, not earlier than the first Certificate Anniversary; and (b) not
later than the earlier of (i) the later of the Annuitant's 90th birthday
and the 10th Certificate Anniversary and (ii) any maximum date permitted
under state law.
Annuity Options
The Annuity Options are:
Option A: Income for a Fixed Number of Years;
Option B: Life Income with 10 Years of Payments Guaranteed; and
Option C: Joint and Last Survivor Income. Other options may be arranged by
mutual consent. Each option is available in two forms - as a variable
annuity for use with the Variable Account and as a fixed annuity for use
with Keyport's general account Fixed Account. Variable annuity payments
will fluctuate while fixed annuity payments will not. The dollar amount of
each fixed annuity payment will be determined by deducting from the Fixed
Account Value increased or decreased by a limited Market Value Adjustment
described in Appendix A, any applicable premium taxes not previously
deducted and then dividing the remainder by $1,000 and multiplying the
result by the greater of: (a) the applicable factor shown in the
appropriate table in the Certificate; or (b) the factor currently offered
by Keyport at the time annuity payments begin. This current factor may be
based on the sex of the payee unless to do so would be prohibited by law.
If no Annuity Option is selected, Option B will automatically be applied.
Unless the Certificate Owner chooses otherwise, Variable Account Value
(less any applicable premium taxes not previously deducted and less any
applicable Certificate Maintenance Charge) will be applied to a variable
annuity option and Fixed Account Value increased or decreased by a limited
Market Value Adjustment described in Appendix A (less any applicable
premium taxes not previously deducted) will be applied to a fixed annuity
option. Any premium taxes will be deducted proportionately from both
Variable Account Value and Fixed Account Value. Whether variable or fixed,
the same Certificate Value applied to each option will produce a different
initial annuity payment as well as different subsequent payments.
The payee is the person who will receive the sum payable under an annuity
option. Any annuity option that provides for payments to continue after the
death of the payee will not allow the successor payee to extend the period
of time over which the remaining payments are to be made.
If the amount available to apply under any variable or fixed option is less
than $5,000, Keyport has reserved the right to pay such amount in one sum
to the payee in lieu of the payment otherwise provided for.
Annuity payments will be made monthly unless quarterly, semi- annual or
annual payments are chosen by Written Request. However, if any payment
provided for would be or becomes less than $100, Keyport has the right to
reduce the frequency of payments to such an interval as will result in each
payment being at least $100.
Option A: Income For a Fixed Number of Years. Keyport will pay an annuity
for a chosen number of years, not fewer than 5 nor over 50 (a period of
years over 30 may be chosen only if it does not exceed the difference
between age 100 and the Annuitant's age on the date of the first payment).
At any time while variable annuity payments are being made, the payee may
elect to receive the following amount: (a) the present value of the
remaining payments, commuted at the interest rate used to create the
annuity factor for this option (this interest rate is 6% per year (5% per
year for Oregon and Texas Certificates), unless 3% per year is chosen by
Written Request at the time the option is selected); less (b) any
Contingent Deferred Sales Charge due by treating the value defined in (a)
as a total surrender. (See "Deductions for Contingent Deferred Sales
Charge".) Instead of receiving a lump sum, the payee may elect another
payment option and the amount applied to the option will not be reduced by
the charge defined in (b) above. If, at the death of the payee, Option A
payments have been made for fewer than the chosen number of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon and Texas
Certificates), unless 3% per year had been chosen by the payee at the time
the option was selected.
The Mortality and Expense Risk Charge is deducted during the Option A
payment period if a variable payout has been selected, but Keyport has no
mortality risk during this period.
If annual payments are chosen for Option A and a variable payout has been
selected, Keyport has available a "stabilizing" payment option that may be
chosen. Each annual payment will be determined as described below in
"Variable Annuity Payment Values". Each annual payment will then be placed
in Keyport's general account, from which it will be paid out in twelve
equal monthly payments. The sum of the twelve monthly payments will exceed
the annual payment amount because of an interest rate factor used by
Keyport that will vary from year to year. The commutation method described
above for calculating the present value of remaining payments applies to
the annual payments. Any monthly payments remaining before the next annual
payment will be commuted at the interest rate that was used to determine
that year's monthly payments.
See "Annuity Payments" on Page 23 for the manner in which Option A may be
taxed.
Option B: Life Income with 10 Years of Payments Guaranteed. Keyport will
pay an annuity during the lifetime of the payee. If, at the death of the
payee, payments have been made for fewer than 10 years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity, this
interest rate is 6% per year (5% per year for Oregon and Texas
Certificates), unless 3% per year had been chosen by the payee at the time
the option was selected.
The amount of the annuity payments will depend on the age of the payee on
the Income Date and it may also depend on the payee's sex.
Option C: Joint and Last Survivor Income. Keyport will pay an annuity for
as long as either the payee or a designated second natural person is alive.
The amount of the annuity payments will depend on the age of both persons
on the Income Date and it may also depend on each person's sex. IT IS
POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH
PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF BOTH PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND
SO ON.
Variable Annuity Payment Values
The amount of the first variable annuity payment is determined by Keyport
using an annuity purchase rate that is based on an assumed annual
investment return of 6% per year (5% per year for Oregon and Texas
Certificates), unless 3% is chosen by Written Request. Subsequent variable
annuity payments will fluctuate in amount and reflect whether the actual
investment return of the selected Sub-Account(s) (after deducting the
Mortality and Expense Risk Charge) is better or worse than the assumed
investment return. The total dollar amount of each variable annuity payment
will be equal to: (a) the sum of all Sub-Account payments; less (b) the pro-
rata amount of the annual Certificate Maintenance Charge. Currently, a
payee may instruct Keyport to change the Sub-Account(s) used to determine
the amount of the variable annuity payments unlimited times every 12
months.
Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex or survival of any payee upon whose
age, sex or survival payments depend. If the age or sex has been misstated,
Keyport will compute the amount payable based on the correct age and sex.
If income payments have begun, any underpayments Keyport may have made will
be paid in full with the next annuity payment. Any overpayments, unless
repaid in one sum, will be deducted from future annuity payments until
Keyport is repaid in full.
SUSPENSION OF PAYMENTS
Keyport reserves the right to postpone surrender payments from the Fixed
Account for up to six months. Keyport reserves the right to suspend or
postpone any type of payment from the Variable Account for any period when:
(a) the New York Stock Exchange is closed other than customary weekend or
holiday closings; (b) trading on the Exchange is restricted; (c) an
emergency exists as a result of which it is not reasonably practicable to
dispose of securities held in the Variable Account or determine their
value; or (d) the Securities and Exchange Commission permits delay for the
protection of security holders. The applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the
conditions described in (b) and (c) exist.
TAX STATUS
Introduction
The Certificate is designed for use by individuals in retirement plans
which may or may not be Qualified Plans under the provisions of the
Internal Revenue Code (the "Code"). The ultimate effect of federal income
taxes on the Certificate Value, on annuity payments, and on the economic
benefit to the Certificate Owner, Annuitant or Designated Beneficiary
depends on the type of retirement plan for which the Certificate is
purchased and upon the tax and employment status of the individual
concerned. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent
tax adviser. No attempt is made to consider any applicable state or other
tax laws. Moreover, the discussion herein is based upon Keyport's
understanding of current federal income tax laws as they are currently
interpreted. No representation is made regarding the likelihood of
continuation of those current federal income tax laws or of the current
interpretations by the Internal Revenue Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are
no income taxes on increases in the value of a Certificate until a
distribution occurs, in the form of a full surrender, a partial surrender,
an assignment or gift of the Certificate, or annuity payments. A trust or
other entity owning a Non-Qualified Certificate other than as an agent for
an individual is taxed differently; increases in the value of a Certificate
are taxed yearly whether or not a distribution occurs.
Surrenders, Assignments and Gifts. A Certificate Owner who fully surrenders
his or her Certificate is taxed on the portion of the payment that exceeds
his or her cost basis in the Certificate. For Non-Qualified Certificates,
the cost basis is generally the amount of the Purchase Payments made for
the Certificate and the taxable portion of the surrender payment is taxed
as ordinary income. For Qualified Certificates, the cost basis is generally
zero and the taxable portion of the surrender payment is generally taxed as
ordinary income, subject to special 5-year income averaging for lump-sum
distributions received before January 1, 2000. A Designated Beneficiary
receiving a lump sum surrender benefit after the death of the Annuitant or
Certificate Owner is taxed on the portion of the amount that exceeds the
Certificate Owner's cost basis in the Certificate. If the Designated
Beneficiary elects to receive annuity payments within 60 days of the
decedent's death, different tax rules apply. See "Annuity Payments" below.
For Non-Qualified Certificates, the tax treatment applicable to Designated
Beneficiaries may be contrasted with the income-tax-free treatment
applicable to persons inheriting and then selling mutual fund shares with a
date-of-death value in excess of their basis.
Partial withdrawals received under Non-Qualified Certificates prior to
annuitization are first included in gross income to the extent Certificate
Value exceeds Purchase Payments. Then, to the extent the Certificate Value
does not exceed Purchase Payments, such withdrawals are treated as a non-
taxable return of principal to the Certificate Owner. For partial
withdrawals under a Qualified Certificate, payments are treated first as a
non-taxable return of principal up to the cost basis and then a taxable
return of income. Since the cost basis of Qualified Certificates is
generally zero, partial surrender amounts will generally be fully taxed as
ordinary income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as if he or she had received the amount assigned or pledged and
thus is subject to taxation under the rules applicable to partial
withdrawals or surrenders. A Certificate Owner who gives away the
Certificate (i.e., transfers it without full and adequate consideration) to
anyone other than his or her spouse is treated for income tax purposes as
if he or she had fully surrendered the Certificate.
A special computational rule applies if Keyport issues to the Certificate
Owner, during any calendar year, (a) two or more Certificates or (b) one or
more Certificates and one or more of Keyport's other annuity contracts.
Under this rule, the amount of any distribution includable in the
Certificate Owner's gross income is to be determined under Section 72(e) of
the Code by treating all the Keyport contracts as one contract. Keyport
believes that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that at the
time of distribution the sum of the values for all the Certificates or
contracts exceeds the sum of the cost bases for all the contracts.
Annuity Payments. The non-taxable portion of each variable annuity payment
is determined by dividing the cost basis of the Certificate that is
allocated to Variable Account Value by the total number of expected
payments while the non-taxable portion of each fixed annuity payment is
determined by an "exclusion ratio" formula which establishes the ratio that
the cost basis of the Certificate that is allocated to Fixed Account Value
bears to the total expected value of annuity payments for the term of the
annuity. The remaining portion of each payment is taxable. Such taxable
portion is taxed at ordinary income rates. For Qualified Certificates, the
cost basis is generally zero. With annuity payments based on life
contingencies, the payments will become fully taxable once the payee lives
longer than the life expectancy used to calculate the non-taxable portion
of the prior payments. Because variable annuity payments can increase over
time and because certain payment options provide for a lump sum right of
commutation, it is possible that the IRS could determine that variable
annuity payments should not be taxed as described above but instead should
be taxed as if they were received under an agreement to pay interest. This
determination would result in a higher amount (up to 100%) of certain
payments being taxable.
With respect to the "stabilizing" payment option available under Annuity
Option A, pursuant to which each annual payment is placed in Keyport's
general account and paid out with interest in twelve equal monthly
payments, it is possible the IRS could determine that receipt of the first
monthly payout of each annual payment is constructive receipt of the entire
annual payment. Thus, the total taxable amount for each annual payment
would be accelerated to the time of the first monthly payout and reported
in the tax year in which the first monthly payout is received.
Penalty Tax. Payments received by Certificate Owners, Annuitants, and
Designated Beneficiaries under Certificates may be subject to both ordinary
income taxes and a penalty tax equal to 10% of the amount received that is
includable in income. The penalty tax is not imposed on amounts received:
(a) after the taxpayer attains age 59-1/2; (b) in a series of substantially
equal payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided only one Purchase Payment is made to the Certificate, the
Certificate is not issued as a result of a Section 1035 exchange, and the
first annuity payment begins in the first Certificate Year.
Income Tax Withholding. Keyport is required to withhold federal income
taxes on taxable amounts paid under Certificates unless the recipient
elects not to have withholding apply. Keyport will notify recipients of
their right to elect not to have withholding apply. See "Tax-Sheltered
Annuities" (TSAs) for an alternative type of withholding that may apply to
distributions from TSAs that are eligible for rollover to another TSA or an
individual retirement annuity or account (IRA).
Section 1035 Exchanges. A Non-Qualified Certificate may be purchased with
proceeds from the surrender of an existing annuity contract. Such a
transaction may qualify as a tax-free exchange pursuant to Section 1035 of
the Code. It is Keyport's understanding that in such an event: (a) the new
Certificate will be subject to the distribution-at-death rules described in
"Death Provisions for Non-Qualified Certificates"; (b) Purchase Payments
made between August 14, 1982 and January 18, 1985 and the income allocable
to them will, following an exchange, no longer be covered by a
"grandfathered" exception to the penalty tax for a distribution of income
that is allocable to an investment made over ten years prior to the
distribution; and (c) Purchase Payments made before August 14, 1982 and the
income allocable to them will, following an exchange, continue to receive
the following "grandfathered" tax treatment under prior law: (i) the
penalty tax does not apply to any distribution; (ii) partial withdrawals
are treated first as a non-taxable return of principal and then a taxable
return of income; and (iii) assignments are not treated as surrenders
subject to taxation. Keyport's understanding of the above is principally
based on legislative reports prepared by the Staff of the Congressional
Joint Committee on Taxation.
Diversification Standards. The U.S. Secretary of the Treasury has issued
regulations that set standards for diversification of the investments
underlying variable annuity contracts (other than pension plan contracts).
The Eligible Funds are designed to be managed to meet the diversification
requirements for the Certificate as those requirements may change from time
to time. If the diversification requirements are not satisfied, the
Certificate would not be treated as an annuity contract. As a consequence
to the Certificate Owner, income earned on a Certificate would be taxable
to the Certificate Owner in the year in which diversification requirements
were not satisfied, including previously non-taxable income earned in prior
years. As a further consequence, Keyport would be subjected to federal
income taxes on assets in the Variable Account.
The Secretary of the Treasury announced in September 1986 that he expects
to issue regulations which will prescribe the circumstances in which a
Certificate Owner's control of the investments of a segregated asset
account may cause the Certificate Owner, rather than the insurance company,
to be treated as the owner of the assets of the account. The regulations
could impose requirements that are not reflected in the Certificate.
Keyport, however, has reserved certain rights to alter the Certificate and
investment alternatives so as to comply with such regulations. Since the
regulations have not been issued, there can be no assurance as to the
content of such regulations or even whether application of the regulations
will be prospective. For these reasons, Certificate Owners are urged to
consult with their own tax advisers.
Qualified Plans
The Certificate is designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of plan and the terms and conditions of the plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Certificate with the various types of
Qualified Plans. Participants under such Qualified Plans as well as
Certificate Owners, Annuitants, and Designated Beneficiaries are cautioned
that the rights of any person to any benefits under such Qualified Plans
may be subject to the terms and conditions of the plans themselves
regardless of the terms and conditions of the Certificate issued in
connection therewith. Following are brief descriptions of the various types
of Qualified Plans and of the use of the Certificate in connection
therewith. Purchasers of the Certificate should seek competent advice
concerning the terms and conditions of the particular Qualified Plan and
use of the Certificate with that Plan.
Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts
and, subject to certain contribution limitations, exclude the amount of
Purchase Payments from gross income for tax purposes. However, such
Purchase Payments may be subject to Social Security (FICA) taxes. This type
of annuity contract is commonly referred to as a "Tax-Sheltered Annuity"
(TSA).
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Certificate or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies or becomes totally and permanently disabled (within the
meaning of Section 72(m)(7) of the Code) or (b) in the case of hardship. A
hardship distribution must be of employee contributions only and not of any
income attributable to such contributions. Section 403(b)(11) does not
apply to distributions attributable to assets held as of December 31, 1988.
Thus, it appears that the law's restrictions would apply only to
distributions attributable to contributions made after 1988, to earnings on
those contributions, and to earnings on amounts held as of 12/31/88. The
Internal Revenue Service has indicated that the distribution restrictions
of Section 403(b)(11) are not applicable when TSA funds are being
transferred tax-free directly to another TSA issuer, provided the
transferred funds continue to be subject to the Section 403(b)(11)
distribution restrictions.
Keyport will notify a Certificate Owner who has requested a distribution
from a Certificate if all or part of such distribution is eligible for
rollover to another TSA or to an individual retirement annuity or account
(IRA). Any amount eligible for rollover treatment will be subject to
mandatory federal income tax withholding at a 20% rate if the Certificate
Owner receives the amount rather than directing Keyport by Written Request
to transfer the amount as a direct rollover to another TSA or IRA.
Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred basis into
an Individual Retirement Annuity.
Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Certificate to provide benefits under
the plans.
Deferred Compensation Plans With Respect to Service for State and Local
Governments
Section 457 of the Code, while not actually providing for a Qualified Plan
as that term is normally used, provides for certain deferred compensation
plans that enjoy special income tax treatment with respect to service for
tax-exempt organizations, state governments, local governments, and
agencies and instrumentalities of such governments. The Certificate can be
used with such plans. Under such plans, a participant may specify the form
of investment in which his or her participation will be made. However, all
such investments are owned by and subject to the claims of general
creditors of the sponsoring employer.
VARIABLE ACCOUNT VOTING PRIVILEGES
In accordance with its view of present applicable law, Keyport will vote
the shares of the Eligible Funds held in the Variable Account at regular
and special meetings of the shareholders of the Eligible Funds in
accordance with instructions received from persons having the voting
interest in the Variable Account. Keyport will vote shares for which it has
not received instructions in the same proportion as it votes shares for
which it has received instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change,
and as a result Keyport determines that it is permitted to vote the shares
of the Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Certificate prior to the
Income Date shall be the Certificate Owner. The number of shares held in
each Sub-Account which are attributable to each Certificate Owner is
determined by dividing the Certificate Owner's Variable Account Value in
each Sub-Account by the net asset value of the applicable share of the
Eligible Fund. The person having the voting interest after the Income Date
under an annuity payment option shall be the payee. The number of shares
held in the Variable Account which are attributable to each payee is
determined by dividing the reserve for the annuity payments by the net
asset value of one share. During the annuity payment period, the votes
attributable to a payee decrease as the reserves underlying the payments
decrease.
The number of shares in which a person has a voting interest will be
determined as of the date coincident with the date established by the
respective Eligible Fund for determining shareholders eligible to vote at
the meeting of the Fund and voting instructions will be solicited by
written communication prior to such meeting in accordance with the
procedures established by the Eligible Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting
instructions with respect to the proportion of the Eligible Fund shares
held in the Variable Account corresponding to his or her interest in the
Variable Account.
SALES OF THE CERTIFICATES
Keyport Financial Services Corp. ("KFSC") serves as the Principal
Underwriter for the Certificate described in this prospectus. The
Certificate will be sold by salespersons who represent Keyport Life
Insurance Company KFSC's corporate parent as variable annuity agents and
who are registered representatives of broker/dealers who have entered into
distribution agreements with KFSC. KFSC is registered under the Securities
Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. It is located at 125 High Street, Boston,
Massachusetts 02110.
Certificates may be sold with lower or no dealer compensation as part of an
exchange program for other variable annuity contracts previously issued by
Keyport ("Old VA"). Such a Certificate will be issued with an exchange
endorsement. One effect of the endorsement is that no Contingent Deferred
Sales Charge will be assessed under the Old VA at the time of the exchange
and that any Contingent Deferred Sales Charge assessed under the
Certificate in relation to the initial Purchase Payment (i.e., the amount
exchanged) will be calculated based on the actual time of each purchase
payment under the Old VA. The endorsement also provides that the refund
amount described in "Right to Revoke" will not be made if the Certificate
is returned. Instead, Keyport will return the Old VA to the owner and treat
it as if no exchange had occurred.
Certificates may be sold with lower or no dealer compensation (1) to a
person who is an officer, director, or employee of Keyport or of certain
affiliates of Keyport or (2) to any Qualified Plan established for such a
person. Such Certificates may have provisions different from the
Certificates sold to others in that (1) they are not subject to the
deduction for the Certificate Maintenance Charge, the asset-based Sales
charge or the Contingent Deferred Sales Charge and (2) they have a
Mortality and Expense Risk Charge of 0.35% per year.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the
Principal Underwriter are a party. Keyport is engaged in various kinds of
routine litigation which in its judgment is not of material importance in
relation to the total capital and surplus of Keyport.
INQUIRIES BY CERTIFICATE OWNERS
Certificate Owners with questions about their Certificates may write
Keyport Life Insurance Company, Client Service Department, 125 High Street,
Boston, MA 02110, or call (800) 367-3653.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
Page
Keyport Life Insurance Company 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Custodian 4
Principal Underwriter 4
Experts 4
Investment Performance 4
Yields for Stein Roe Money Market Sub-Account 5
Financial Statements 6
Keyport Life Insurance Company 7
Variable Account A
APPENDIX A
THE FIXED ACCOUNT (ALSO KNOWN AS THE MODIFIED GUARANTEED ANNUITY ACCOUNT)
Introduction
This Appendix describes the Fixed Account option available under the
Certificate.
FIXED ACCOUNT VALUES PROVIDED BY THE CERTIFICATE ARE SUBJECT TO A MARKET
VALUE ADJUSTMENT, THE OPERATION OF WHICH MAY RESULT IN UPWARD OR DOWNWARD
ADJUSTMENTS IN AMOUNTS TRANSFERRED AND AMOUNTS PAID (INCLUDING WITHDRAWALS,
SURRENDERS, DEATH BENEFITS, AND AMOUNTS APPLIED TO PURCHASE ANNUITY
PAYMENTS) TO A CERTIFICATE OWNER OR OTHER PAYEE. IN NO EVENT WILL THE
DOWNWARD MARKET VALUE ADJUSTMENT ELIMINATE INTEREST AT THE RATE OF 3% PER
YEAR APPLIED TO THE AMOUNT ALLOCATED TO A GUARANTEED PERIOD. PAYMENTS MADE
FROM FIXED ACCOUNT VALUES AT THE END OF THEIR GUARANTEE PERIOD ARE NOT
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Purchase Payments allocated to the Fixed Account option become part of
Keyport's general account. Because of applicable exemptive and exclusionary
provisions, interests in the Fixed Account options have not been registered
under the Securities Act of 1933 ("1933 Act"), nor is the general account
an investment company under the Investment Company Act. Accordingly,
neither the general account, the Fixed Account option, nor any interest
therein, is subject to regulation under the 1933 Act or the Investment
Company Act. Keyport understands that the Securities and Exchange
Commission has not reviewed the disclosure in the prospectus relating to
the general account and the Fixed Account option.
Investments in the Fixed Account and Capital Protection Plus
Purchase Payments will be allocated to the Fixed Account in accordance with
the selection made by the Certificate Owner in the application. Any
selection must specify that percentage of the Purchase Payment that is to
be allocated to each Guarantee Period of the Fixed Account. The percentage,
if not zero, must be at least 5%. The Certificate Owner may change the
allocation percentages without fee, penalty or other charge. Allocation
changes must be made by Written Request unless the Certificate Owner has by
Written Request authorized Keyport to accept telephone allocation
instructions from the Certificate Owner. By authorizing Keyport to accept
telephone changes, a Certificate Owner agrees to accept and be bound by the
conditions and procedures established by Keyport from time to time. The
current conditions and procedures are in Appendix C and Certificate Owners
authorizing telephone allocation instructions will be notified, in advance,
of any changes.
Keyport currently offers Guarantee Periods of 1, 3, 5, and 7 years. Keyport
may change at any time the number of Guarantee Periods it offers under
newly-issued and in-force Certificates, as well as the length of those
Guarantee Periods. If Keyport stops offering a particular Guarantee Period,
existing Fixed Account Value in such Guarantee Period would not be affected
until the end of the Period (at that time, a Period of the same length
would not be a transfer option). Each Guarantee Period currently offered is
available for initial and subsequent Purchase Payments and for transfers of
Certificate Value.
Keyport offers a Capital Protection Plus program that a Certificate Owner
may request. Under this program, Keyport will allocate part of the Purchase
Payment to the Guarantee Period selected by the Certificate Owner so that
such part, based on that Guarantee Period's interest rate in effect on the
date of allocation, will equal at the end of the Guarantee Period the total
Purchase Payment. The rest of the Purchase Payment will be allocated to the
Sub-Account(s) of the Variable Account based on the Certificate Owner's
allocation. If any part of the Fixed Account Value is surrendered or
transferred before the end of the Guarantee Period, the Value at the end of
that Period will not equal the original Purchase Payment amount.
For an example of Capital Protection Plus, assume Keyport receives a
Purchase Payment of $10,000 when the interest rate for the 7-year Guarantee
Period is 6.75% per year. Keyport will allocate $6,331 to that Guarantee
Period because $6,331 will increase at that interest rate to $10,000 after
7 years. The remaining $3,669 of the payment will be allocated to the Sub-
Account(s) selected by the Certificate Owner.
Fixed Account Value
The Fixed Account Value at any time is equal to:
(a) all Purchase Payments allocated to the Fixed Account plus the interest
subsequently credited on those payments; plus
(b) any Variable Account Value transferred to the Fixed Account plus the
interest subsequently credited on the transferred value; less
(c) any prior partial withdrawals from the Fixed Account, including any
charges therefor; less
(d) any Fixed Account Value transferred to the Variable Account.
Interest Credits
Keyport will credit interest daily (based on an annual compound interest
rate) to Purchase Payments allocated to the Fixed Account at rates declared
by Keyport for Guarantee Periods of one or more years from the month and
day of allocation. Any rate set by Keyport will be at least 3% per year.
Keyport's method of crediting interest means that Fixed Account Value might
be subject to different rates for each Guarantee Period the Certificate
Owner has selected in the Fixed Account. For purposes of this section,
Variable Account Value transferred to the Fixed Account and Fixed Account
Value renewed for another Guarantee Period shall be treated as a Purchase
Payment allocation.
Application of Market Value Adjustment
Any surrender, withdrawal, transfer, or application to an Annuity Option of
Fixed Account Value from a Guarantee Period of three years or more is
subject to a limited Market Value Adjustment, unless: (1) the effective
date of the transaction is at the end of the Guarantee Period; or (2) the
effective date of a surrender is within 90 days of the date of death of the
first Covered Person to die.
If a Market Value Adjustment applies to either a surrender or the
application to an Annuity Option, then any negative Market Value Adjustment
amount will be deducted from the Certificate Value and any positive Market
Value Adjustment amount will be added to the Certificate Value. If a Market
Value Adjustment applies to either a partial withdrawal or a transfer, then
any negative Market Value Adjustment amount will be deducted from the
partial withdrawal or transfer amount after the withdrawal or transfer
amount has been deducted from the Fixed Account Value, and any positive
Market Value Adjustment amount will be added to the applicable amount after
it has been deducted from the Fixed Account Value.
No Market Value Adjustment is ever applicable to Guarantee Periods of fewer
than three years.
Effect of Market Value Adjustment
A Market Value Adjustment reflects the change in prevailing current
interest rates since the beginning of a Guarantee Period. The Market Value
Adjustment may be positive or negative, but any negative Adjustment may be
limited in amount (see Market Value Adjustment Factor below).
Generally, if the Treasury Rate for the Guarantee Period is lower than the
Treasury Rate for a new Guarantee Period with a length equal to the time
remaining in the Guarantee Period, then the application of the limited
Market Value Adjustment will result in a reduction of the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Option.
Similarly, if the Treasury Rate for the Guarantee Period is higher than the
Treasury Rate for a new Guarantee Period with a length equal to the time
remaining in the Guarantee Period, then the application of the Market Value
Adjustment will result in an increase in the amount being surrendered,
withdrawn, transferred, or applied to an Annuity Option.
The Market Value Adjustment will be applied before the deduction of any
applicable surrender charges or applicable taxes.
Market Value Adjustment Factor
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to a Payment Option, by the
Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as the larger of Formula (1) or (2):
(1) (1+a)/(1+b)(n/12)-1
where:
"a" is the Treasury Rate for the number of Guarantee Period Years in the
Guarantee Period;
"b" is the Treasury Rate for a period equal to the time remaining (rounded
up to the next whole number of Guarantee Period Years) to the expiration of
the Guarantee Period; and
"n" is the number of complete Guarantee Period Months remaining before the
expiration of the Guarantee Period.
(2) (1.03)/(1+i)(y+d/#)-1
where:
"i" is the Guaranteed Interest Rate for the Guarantee Period;
"y" is the number of complete Guarantee Period Years that have elapsed in the
Guarantee Period;
"d" is the number of days since the last Guarantee Period Anniversary or,
if "y" is zero, the number of days since the start of the Guarantee Period;
and
"#" is the number of days in the current Guarantee Period Year (i.e., the
sum of "d" and the number of days until the next Guarantee Period
Anniversary).
In Formulas (1) and (2), all references to Guarantee Period, Guarantee
Period Anniversary, Guarantee Period Month, and Guarantee Period Year
relate to the Guarantee Period from which is being taken the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Option.
As stated above, the Formula (2) amount will apply only if it is greater
than the Formula (1) amount. This will occur only when the Formula (1)
amount is negative and the Formula (2) amount is a smaller negative number.
Formula (2) thus ensures that a full (normal) negative Market Value
Adjustment of Formula (1) will not apply to the extent it would decrease
the Guarantee Period's Fixed Account Value (before the deduction of any
applicable surrender charges or any applicable taxes) below the following
amount:
(a) the amount allocated to the Guarantee Period; less
(b) any prior systematic or partial withdrawal amounts; less
(c) any prior amounts transferred to the Variable Account or to another
Guarantee Period in the Fixed Account; plus
(d) interest on the above items (a) through (c) credited annually at a
rate of 3% per year.
Treasury Rates
The Treasury Rate for a Guarantee Period is the interest rate in the
Treasury Constant Maturity Series, as published by the Federal Reserve
Board, for a maturity equal to the number of years specified in "a" and "b"
in Formula (1) above. Weekly Series are published at the beginning of the
following week. To determine "a", Keyport uses the weekly Series first
published on or after the most recent Determination Date which occurs on or
before the Start Date for the Guarantee Period, except that if the Start
Date is the same as the Determination Date or the date of publication, or
any date in between, Keyport instead uses the weekly Series first published
after the prior Determination Date. To determine "b", Keyport uses the
weekly Series first published on or after the most recent Determination
Date which occurs on or before the date on which the Market Value
Adjustment Factor is calculated, except that if the calculation date is the
same as the Determination Date or the date of publication, or any date in
between, Keyport instead uses the weekly Series first published after the
prior Determination Date. The Determination Dates are the last business day
prior to the first and fifteenth of each calendar month.
If the number of years specified in "a" or "b" is not equal to a maturity
in the Treasury Constant Maturity Series, the Treasury Rate will be
determined by straight line interpolation between the interest rates of the
next highest and next lowest maturities.
If the Treasury Constant Maturity Series becomes unavailable, Keyport will
adopt a comparable constant maturity index or, if such a comparable index
also is not available, Keyport will replicate calculation of the Treasury
Constant Maturity Series Index based on U.S. Treasury Security coupon
rates.
End of A Guarantee Period
Keyport will notify a Certificate Owner in writing at least 30 days prior
to the end of a Guarantee Period. At the end of the Guarantee Period,
Keyport will automatically transfer the Guarantee Period's Fixed Account
Value to the Money Market Sub-Account of the Variable Account unless
Keyport previously received a Certificate Owner's Written Request of: (1)
election of a new Guarantee Period from among those being offered by
Keyport at that time; or (2) instructions to transfer the ending Guarantee
Period's Fixed Account Value to one or more Sub-accounts of the Variable
Account. A new Guarantee Period cannot be longer than the number of years
remaining until the Income Date.
Transfers of Fixed Account Value
The Certificate Owner may transfer Fixed Account Value from one Guarantee
Period to another or to one or more Sub-Accounts of the Variable Account
subject to any applicable Market Value Adjustment. If the Fixed Account
Value represents multiple Guarantee Periods, the transfer request must
specify from which values the transfer is to be made.
The Certificate allows Keyport to limit the number of transfers that can be
made in a specified time period. Currently, Keyport is limiting Variable
Account and Fixed Account transfers to generally unlimited transfers per
calendar year with a $500,000 per transfer dollar limit. See "Transfer of
Variable Account Value". These limitations will not apply to any transfer
made at the end of a Guarantee Period. Certificate Owners will be notified,
in advance, of a change in the limitation on the number of transfers.
Transfer requests must be by Written Request unless the Certificate Owner
has authorized Keyport by Written Request to accept telephone transfer
instructions from the Certificate Owner or from a person acting for the
Certificate Owner as an attorney-in-fact under a power of attorney. By
authorizing Keyport to accept telephone transfer instructions, a
Certificate Owner agrees to accept and be bound by the conditions and
procedures established by Keyport from time to time. The current conditions
and procedures are in Appendix B and Certificate Owners authorizing
telephone transfers will be notified, in advance, of any changes. Written
transfer requests may be made by a person acting for the Certificate Owner
as an attorney-in-fact under a power of attorney.
Transfer requests received by Keyport before the close of trading on the
New York Stock Exchange (currently 4:00 PM Eastern Time) will be executed
at the close of business that day. Any requests received later will be
executed at the close of the next business day.
The amount of the transfer will be deducted from the specified values in
the manner stated in the next section below.
If 100% of a Guarantee Period's value is transferred and the current
allocation for Purchase Payments includes that Guarantee Period, then the
allocation formula for future Purchase Payments will automatically change
unless the Certificate Owner instructs otherwise. For example, if the
allocation formula is 50% to the one-year Guarantee Period and 50% to Sub-
Account A and all Fixed Account Value is transferred to Sub-Account A, the
allocation formula will change to 100% to Sub-Account A.
APPENDIX B
TELEPHONE INSTRUCTIONS
Telephone Transfers of Certificate Values
1. If there are Joint Certificate Owners, both must authorize Keyport to
accept telephone instructions but either Certificate Owner may give Keyport
telephone instructions.
2. All callers will be required to identify themselves. Keyport reserves
the right to refuse to act upon any telephone instructions in cases where
the caller has not sufficiently identified himself/herself to Keyport's
satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject to
any claim, loss, liability, cost or expense if it or such person acted in
good faith upon a telephone instruction, including one that is unauthorized
or fraudulent; however, Keyport will employ reasonable procedures to
confirm that a telephone instruction is genuine and, if Keyport does not,
Keyport may be liable for losses due to an unauthorized or fraudulent
instruction. The Certificate Owner thus bears the risk that an unauthorized
or fraudulent instruction that is executed may cause the Certificate Value
to be lower than it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. The application for the Certificate may allow a Certificate Owner to
create a power of attorney by authorizing another person to give telephone
instructions. Unless prohibited by state law, such power will be treated as
durable in nature and shall not be affected by the subsequent incapacity,
disability or incompetency of the Certificate Owner. Either Keyport or the
authorized person may cease to honor the power by sending written notice to
the Certificate Owner at the Certificate Owner's last known address.
Neither Keyport nor any person acting on its behalf shall be subject to
liability for any act executed in good faith reliance upon a power of
attorney.
6. Telephone authorization shall continue in force until (a) Keyport
receives the Certificate Owner's written revocation, (b) Keyport
discontinues the privilege, or (c) Keyport receives written evidence that
the Certificate Owner has entered into a market timing or asset allocation
agreement with an investment adviser or with a broker/dealer.
7. Telephone transfer instructions received by Keyport at 800-367-3653
before the close of trading on the New York Stock Exchange (currently 4:00
P.M. Eastern Time) will be initiated that day based on the unit value
prices calculated at the close of that day. Instructions received after the
close of trading on the NYSE will be initiated the following business day.
8. Once instructions are accepted by Keyport, they may not be canceled.
9. All transfers must be made in accordance with the terms of the
Certificate and current prospectus. If the transfer instructions are not in
good order, Keyport will not execute the transfer and will notify the
caller within 48 hours.
10. If 100% of any Sub-Account's value is transferred and the allocation
formula for Purchase Payments includes that Sub-Account, then the
allocation formula for future Purchase Payments will change accordingly
unless Keyport receives telephone instructions to the contrary. For
example, if the allocation formula is 50% to Sub-Account A and 50% to Sub-
Account B and all of Sub-Account A's value is transferred to Sub-Account B,
the allocation formula will change to 100% to Sub-Account B unless Keyport
is instructed otherwise.
Telephone Changes to Purchase Payment Allocation Percentages
Numbers 1-6 above are applicable.
Rule 497(c)
STATEMENT OF ADDITIONAL INFORMATION
GROUP FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT A
OF
KEYPORT LIFE INSURANCE COMPANY ("Keyport")
This Statement of Additional Information is not a prospectus but it relates
to, and should be read in conjunction with, the Keyport Advisor variable
annuity prospectus dated November 15, 1997. The prospectus is available, at
no charge, by writing Keyport at 125 High Street, Boston, MA 02110 or by
calling (800) 437-4466.
TABLE OF CONTENTS
Page
Keyport Life Insurance
Company.............................................2
Variable Annuity
Benefits..................................................2
Variable Annuity Payment
Values..........................................2
Re-Allocating Sub-Account
Payments.......................................4
Custodian..................................................................
4
Principal
Underwriter......................................................4
Experts....................................................................
4
Investment
Performance.....................................................5
Yields for Stein Roe Money Market Sub-
Account............................6
Financial
Statements.......................................................7
Keyport Life Insurance
Company...........................................9
Variable Account
A......................................................31
The date of this statement of additional information is November 15, 1997.
KEYPORT LIFE INSURANCE COMPANY
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line
insurance company, is the ultimate corporate parent of Keyport. Liberty
Mutual ultimately controls Keyport through the following intervening
holding company subsidiaries: Liberty Mutual Equity Corporation, LFC
Holdings Inc., Liberty Financial Companies, Inc. ("LFC") and SteinRoe
Services, Inc. Liberty Mutual, as of December 31, 1996, owned, indirectly,
approximately 83% of the combined voting power of the outstanding stock of
LFC (with the balance being publicly held). For additional information
about Keyport, see page 8 of the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each
periodic payment will be equal to: (a) the sum of all Sub-Account payments;
less (b) the pro-rata amount of the annual Certificate Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting
any applicable Certificate Maintenance Charge and any applicable state
premium taxes and then dividing the remaining value of that Sub-Account by
$1,000 and multiplying the result by the greater of: (a) the applicable
factor from the Certificate's annuity table for the particular payment
option; or (b) the factor currently offered by Keyport at the time annuity
payments begin. This current factor may be based on the sex of the payee
unless to do so would be prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by
dividing such first payment by the Sub-Account Annuity Unit value for the
Valuation Period that includes the date of the first payment. The number
of Annuity Units remains fixed for the annuity payment period. Each Sub-
Account payment after the first one will be determined by multiplying (a)
by (b), where: (a) is the number of Sub-Account Annuity Units; and (b) is
the Sub-Account Annuity Unit value for the Valuation Period that includes
the date of the particular payment.
Variable annuity payments will fluctuate in accordance with the
investment results of the underlying Eligible Funds. In order to determine
how these fluctuations affect annuity payments, Keyport uses an Annuity
Unit value. Each Sub-Account has its own Annuity Units and value per Unit.
The Annuity Unit value applicable during any Valuation Period is determined
at the end of such period.
When Keyport first purchased Eligible Fund shares on behalf of the
Variable Account, Keyport valued each Annuity Unit for each Sub-Account at
a specified dollar amount. The Unit value for each Sub-Account in any
Valuation Period thereafter is determined by multiplying the value for the
prior period by a net investment factor. This factor may be greater or
less than 1.0; therefore, the Annuity Unit may increase or decrease from
Valuation Period to Valuation Period. For each assumed annual investment
rate (AIR), Keyport calculates a net investment factor for each Sub-Account
by dividing (a) by (b), where:
(a) is equal to the net investment factor as defined in the
prospectus without any deduction for the sales charge defined in
(c)(ii) of the net investment factor formula; and
(b) is the assumed investment factor for the current Valuation
Period. The assumed investment factor adjusts for the interest
assumed in determining the first variable annuity payment. Such
factor for any Valuation Period shall be the accumulated value,
at the end of such period, of $1.00 deposited at the beginning of
such period at the assumed annual investment rate (AIR). The AIR
for Annuity Units based on the Certificate's annuity tables is 6%
per year (5% per year for Oregon and Texas Certificates). An AIR
of 3% per year is also currently available upon Written Request.
With a particular AIR, payments after the first one will increase or
decrease from month to month based on whether the actual annualized
investment return of the selected Sub-Account(s) (after deducting the
Mortality and Expense Risk Charge) is better or worse than the assumed AIR
percentage. If a given amount of Sub-Account value is applied to a
particular payment option, the initial payment will be smaller if a 3% AIR
is selected instead of a 6% AIR but, all other things being equal, the
subsequent 3% AIR payments have the potential for increasing in amount by a
larger percentage and for decreasing in amount by a smaller percentage.
For example, consider what would happen if the actual annualized investment
return (see the first sentence of this paragraph) is 9%, 6%, 3%, or 0%
between the time of the first and second payments. With an actual 9%
return, the 3% AIR and 6% AIR payments would both increase in amount but
the 3% AIR payment would increase by a larger percentage. With an actual
6% return, the 3% AIR payment would increase in amount while the 6% AIR
payment would stay the same. With an actual return of 3%, the 3% AIR
payment would stay the same while the 6% AIR payment would decrease in
amount. Finally, with an actual return of 0%, the 3% AIR and 6% AIR
payments would both decrease in amount but the 3% AIR payment would
decrease by a smaller percentage. Note that the changes in payment amounts
described above are on a percentage basis and thus do not illustrate when,
if ever, the 3% AIR payment amount might become larger than the 6% AIR
payment amount. Note though that if Option A (Income for a Fixed Number of
Years) is selected and payments continue for the entire period, the 3% AIR
payment amount will start out being smaller than the 6% AIR payment amount
but eventually the 3% AIR payment amount will become larger than the 6% AIR
payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable
annuity option will remain fixed during the entire annuity payment period
unless the payee makes a written request for a change. Currently, a payee
can instruct Keyport to change the Sub-Account(s) used to determine the
amount of the variable annuity payments unlimited times every 12 months.
The payee's request must specify the percentage of the annuity payment that
is to be based on the investment performance of each Sub-Account. The
percentage for each Sub-Account, if not zero, must be at least 5% and must
be a whole number. At the end of the Valuation Period during which Keyport
receives the request, Keyport will: (a) value the Annuity Units for each
Sub-Account to create a total annuity value; (b) apply the new percentages
the payee has selected to this total value; and (c) recompute the number of
Annuity Units for each Sub-Account. This new number of units will remain
fixed for the remainder of the payment period unless the payee requests
another change.
CUSTODIAN
The custodian of the assets of the Variable Account is State Street
Bank and Trust Company, a state chartered trust company. Its principal
office is at 225 Franklin Street, Boston, Massachusetts.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport
Financial Services Corp. ("KFSC"), a wholly-owned subsidiary of Keyport.
EXPERTS
The consolidated financial statements of Keyport Life Insurance
Company at December 31, 1996 and for the year then ended, and the financial
statements of Keyport Life Insurance Company-Variable Account A as of
December 31, 1996 and for the period then ended appearing in this Statement
of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Keyport Life Insurance
Company and subsidiaries as of December 31, 1995 and for each of the years
in the two-year period ended December 31, 1995 have been included herein in
reliance on the report of KPMG Peat Marwick LLP, independent certified
public accountants, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1995 financial statements refers to a change in accounting to
adopt Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance
information concerning its various Sub-Accounts. A Sub-Account's
performance may also be compared to the performance of sub-accounts used
with variable annuities offered by other insurance companies. This
comparative information may be expressed as a ranking prepared by Financial
Planning Resources, Inc. of Miami, FL (The VARDS Report), Lipper Analytical
Services, Inc., or by Morningstar, Inc. of Chicago, IL (Morningstar's
Variable Annuity Performance Report), which are independent services that
compare the performance of variable annuity sub-accounts. The rankings are
done on the basis of changes in accumulation unit values over time and do
not take into account any charges (such as sales charges or administrative
charges) that are deducted directly from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from
1926 on capital markets in the United States. The Variable Account may
quote the performance of its Sub-Accounts in conjunction with the long-term
performance of capital markets in order to illustrate general long-term
risk versus reward investment scenarios. Capital markets tracked by
Ibbotson Associates include common stocks, small company stocks, long-term
corporate bonds, long-term government bonds, U.S. Treasury Bills, and the
U.S. inflation rate. Historical total returns are determined by Ibbotson
Associates for: Large Company Stocks, represented by the Standard and
Poor's Composite Stock Price Index (an unmanaged weighted index of 90
stocks prior to March 1957 and 500 stocks thereafter of industrial,
transportation, utility and financial companies widely regarded by
investors as representative of the stock market); Small Company Stocks,
represented by the fifth capitalization quintile (i.e., the ninth and tenth
deciles) of stocks on the New York Stock Exchange for 1926-1981 and by the
performance of the Dimensional Fund Advisors Small Company 9/10 (for ninth
and tenth deciles) Fund thereafter; Long Term Corporate Bonds, represented
beginning in 1969 by the Salomon Brothers Long-Term High-Grade Corporate
Bond Index, which is an unmanaged index of nearly all Aaa and Aa rated
bonds, represented for 1946-1968 by backdating the Salomon Brothers Index
using Salomon Brothers' monthly yield data with a methodology similar to
that used by Salomon Brothers in computing its Index, and represented for
1925-1945 through the use of the Standard and Poor's monthly High-Grade
Corporate Composite yield data, assuming a 4% coupon and a 20-year
maturity; Long-Term Government Bonds, measured each year using a portfolio
containing one U.S. government bond with a term of approximately twenty
years and a reasonably current coupon; U.S. Treasury Bills, measured by
rolling over each month a one-bill portfolio containing, at the beginning
of each month, the shortest-term bill having not less than one month to
maturity; Inflation, measured by the Consumer Price Index for all Urban
Consumers, not seasonably adjusted, since January, 1978 and by the Consumer
Price Index before then. The stock capital markets may be contrasted with
the corporate bond and U.S. government securities capital markets. Unlike
an investment in stock, an investment in a bond that is held to maturity
provides a fixed rate of return. Bonds have a senior priority to common
stocks in the event the issuer is liquidated and interest on bonds is
generally paid by the issuer before it makes any distributions to common
stock owners. Bonds rated in the two highest rating categories are
considered high quality and present minimal risk of default. An additional
advantage of investing in U.S. government bonds and Treasury bills is that
they are backed by the full faith and credit of the U.S. government and
thus have virtually no risk of default. Although government securities
fluctuate in price, they are highly liquid.
Yields for Stein Roe Money Market Sub-Account
Yield and effective yield percentages for the Stein Roe Money Market Sub-
Account are calculated using the method prescribed by the Securities and
Exchange Commission. Both yields reflect the deduction of the annual 1.40%
asset-based Certificate charges. Both yields also reflect, on an allocated
basis after 11/18/97, the Certificate's annual $36 Certificate Maintenance
Charge that is collected after the first Certificate Anniversary. Both
yields do not reflect Contingent Deferred Sales Charges and premium tax
charges. The yields would be lower if these charges were included. The
following are the standardized formulas:
Yield equals: (A - B - 1) X 365
C 7
Effective Yield Equals: (A - B)365/7 - 1
C
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = hypothetical Certificate Maintenance Charge for the 7-day
period. The assumed annual Stein Roe Money Market charge is
equal to the $36 Certificate charge multiplied by a fraction
equal to the average number of Certificates with Stein Roe Money
Market Sub-Account value during the 7-day period divided by the
average total number of Certificates during the 7-day period.
This annual amount is converted to a 7-day charge by multiplying
it by 7/365. It is then equated to an Accumulation Unit size
basis by multiplying it by a fraction equal to the average value
of one Stein Roe Money Market Accumulation Unit during the 7-day
period divided by the average Certificate Value in Stein Roe
Money Market Sub-Account during the 7-day period.
C = the Accumulation Unit value at the beginning of the 7-day
period.
The yield formula assumes that the weekly net income generated by an
investment in the Stein Roe Money Market Sub-Account will continue over an
entire year. The effective yield formula also annualizes seven days of net
income but it assumes that the net income is reinvested over the year.
This compounding effect causes effective yield to be higher than the yield.
For the 7-day period ended 12/31/96 the yield for the Stein Roe Money
Market Sub-Account was 3.71% and the effective yield was 3.78%.
FINANCIAL STATEMENTS
The financial statements of Keyport Life Insurance Company and the
Variable Account are included in the statement of additional information.
The consolidated financial statements of Keyport Life Insurance Company are
provided as relevant to its ability to meet its financial obligations under
the Certificates and should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
THIS PAGE INTENTIONALLY LEFT BLANK
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the accompanying consolidated balance sheet of Keyport
Life Insurance Company as of December 31, 1996, and the related
consolidated statements of income, stockholder's equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1996 and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1994, the Company changed its method of accounting for certain investments
in debt and equity securities.
/s/Ernst & Young LLP
February 5, 1997
Boston, Massachusetts
Independent Auditors' Report
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated financial statements of Keyport Life
Insurance Company and subsidiaries as of December 31, 1995, and for each of
the years in the two-year period ended December 31, 1995, as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Keyport
Life Insurance Company and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, effective
January 1, 1994.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31
ASSETS 1996 1995
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1996 - $10,500,431;
1995 - $9,227,834) $10,718,644 $ 9,535,948
Equity securities (cost: 1996 - $19,412;
1995 - $17,521) 35,863 25,214
Mortgage loans 67,005 74,505
Policy loans 532,793 498,326
Other invested assets 183,622 10,748
Cash and cash equivalents 767,385 777,384
Total cash and investments 12,305,312 10,922,125
Accrued investment income 146,778 132,856
Deferred policy acquisition costs 250,355 179,672
Value of insurance in force 70,819 43,939
Intangible assets 19,186 20,314
Federal income taxes recoverable 323 9,205
Other assets 40,316 12,859
Separate account assets 1,091,468 959,224
Total assets $13,924,557 $12,280,194
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $11,637,528 $10,084,392
Current federal income taxes 13,123 7,666
Deferred federal income taxes 25,747 32,823
Payable for investments purchased
and loaned 211,234 317,715
Other liabilities 38,476 46,161
Separate account liabilities 1,017,667 889,106
Total liabilities 12,943,775 11,377,863
Stockholder's equity:
Common stock, $1.25 par value; authorized
8,000 shares;issued and outstanding
2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains 73,599 85,772
Retained earnings 398,235 307,611
Total stockholder's equity 980,782 902,331
Total liabilities and stockholder's equity $13,924,557 $12,280,194
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year Ended December 31
1996 1995 1994
Revenues:
Investment income $ 790,365 $ 755,930 $ 689,575
Interest credited to policyholders (572,719) (555,725) (481,926)
Investment spread 217,646 200,205 207,649
Net realized investment gains (losses) 5,509 (3,958) (8,220)
Fee income:
Surrender charges 14,934 14,772 11,545
Separate account fees 15,987 13,154 12,495
Management fees 2,613 1,841 1,233
Total fee income 33,534 29,767 25,273
Expenses:
Policy benefits (3,477) (4,448) (4,838)
Operating expenses (43,815) (44,475) (54,295)
Amortization of deferred policy
acquisition costs (60,225) (58,541) (52,174)
Amortization of value of insurance
in force (10,196) (9,479) (16,989)
Amortization of intangible assets (1,130) (1,130) (1,130)
Total expenses (118,843) (118,073) (129,426)
Income before federal income tax
expense 137,846 107,941 95,276
Federal income tax expense (47,222) (38,331) (32,051)
Net income $ 90,624 $ 69,610 $ 63,225
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
Balance,
January 1, 1994 $ 1,508 $505,933 $ 546 $176,283 $ 684,270
Adjustment to
beginning balance
for change in
accounting
principle, net of
federal income
taxes 41,614 41,614
Net income 63,225 63,225
Common stock dividend
(1,206 shares) 1,507 (1,507)
Change in net
unrealized investment
gains (losses) (106,624) (106,624)
Balance,
December 31, 1994 3,015 505,933 (64,464) 238,001 682,485
Net income 69,610 69,610
Change in net unrealized
investment gains
(losses) 150,236 150,236
Balance,
December 31, 1995 3,015 505,933 85,772 307,611 902,331
Net income 90,624 90,624
Change in net unrealized
investment gains
(losses) (12,173) (12,173)
Balance,
December 31, 1996 $ 3,015 $505,933 $ 73,599 $398,235 $ 980,782
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
1996 1995 1994
Cash flows from operating
activities:
Net income $ 90,624 $ 69,610 $ 63,225
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to
policyholders 572,719 555,725 481,926
Net realized investement
(gains) losses (5,509) 3,958 8,220
Amortization of value of
insurance in force and
intangible assets 11,326 10,609 18,120
Net amortization on
investements (29,088) 9,688 12,215
Change in deferred
policy acquisition costs (24,403) (24,630) (38,852)
Change in current and
deferred federal income
taxes 4,938 1,953 7,731
Net change in other assets
and liabilities (42,634) (62,375) (16,718)
Net cash provided by
operating activities 577,973 564,538 535,867
Cash flow from investing activities:
Investments purchased -
held to maturity -- -- (277,626)
Investments purchased -
available for sale (4,363,074) (2,851,013) (2,624,493)
Investments sold -
held to maturity -- 14,930 10,637
Investments sold -
available for sale 1,714,023 605,197 950,885
Investments matured -
held to maturity -- 317,773 576,021
Investments matured -
available for sale 1,387,664 906,522 854,441
Increase in policy loans (34,467) (21,033) (35,143)
Decrease in mortgage loans 7,500 54,947 26,520
Other assets purchased, net (130,087) -- --
Value of business acquired,
net of cash (30,865) -- (961)
Net cash used in
investing activities (1,449,306) (972,677) (519,719)
Cash flows from financing
activities:
Withdrawals from
policyholder accounts (1,154,087) (933,785) (1,034,464)
Deposits to policyholder
accounts 2,134,504 1,116,975 1,202,076
Securities lending (119,083) 317,715 --
Net cash provided by
financing activities 861,334 500,905 167,612
Change in cash and cash equivalents (9,999) 92,766 183,760
Cash and cash equivalents at
beginning of year 777,384 684,618 500,858
Cash and cash equivalents at end
of year $767,385 $777,384 $684,618
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed,
indexed, and variable annuity products designed to serve the growing
retirement saving market. These annuity products are sold through a wide
ranging network of banks, agents, and securities dealers.
The Company is a wholly owned subsidiary of Stein Roe Services
Incorporated ("Stein Roe"). Stein Roe is a wholly owned subsidiary of
Liberty Financial Companies, Incorporated ("Liberty Financial") which is a
majority owned, indirect subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual").
Principles of Consolidation
The consolidated financial statements include Keyport Life Insurance
Company and its wholly owned subsidiaries, Independence Life and Annuity
Company ("Independence Life"), Keyport Advisory Services Corporation, and
Keyport Financial Services Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). Investments in debt and equity
securities classified as available for sale are carried at fair value, and
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) are reported as a
separate component of stockholder's equity. Realized investment gains and
losses are calculated on a first-in, first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company made a one-time reclassification of certain fixed
maturity securities from held to maturity to available for sale. The
amortized cost of those securities at the time of transfer was $1.4
billion, and the unrealized gain of $13.9 million was recorded net of taxes
in stockholder's equity.
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried
at the unpaid principal balances plus accrued interest.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which
vary with, and are primarily related to, the production of new business.
Such costs include commissions, costs of policy issuance, underwriting,
and selling expenses. These costs are deferred and amortized in relation
to the present value of estimated gross profits from mortality, investment,
and expense margins. Deferred policy acquisition costs are adjusted for
amounts relating to unrealized gains and losses on fixed maturity
securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized gains
or losses that is credited or charged directly to stockholder's equity.
Deferred policy acquisition costs have been decreased by $103.7 million at
December 31, 1996, and decreased by $151.4 million at December 31, 1995 for
this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined
present value of projected future gross profits from policies in force at
the date of their acquisition. This amount is amortized in proportion to
the projected emergence of profits over periods not exceeding 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.30%, 5.58% and 5.49% for the
years ended December 31, 1996, 1995 and 1994, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized gains or losses
that is credited or charged directly to stockholder's equity. Value of
insurance in force has decreased by $26.0 million at December 31, 1996, and
decreased by $32.5 million at December 31, 1995 for this adjustment.
Estimated net amortization expense of the value of insurance in force as
of December 31, 1996 is as follows (in thousands): 1997 - $14,237; 1998 -
$12,206; 1999 - $11,236; 2000 - $10,034; 2001 - $8,582; and thereafter -
$40,506.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the policyholders, and therefore, do not affect the operating results of
the Company. The Company provides administrative services and bears the
mortality risk related to these contracts. As of December 31, 1996 and
1995, Keyport also classified as separate account assets $73.8 million and
$72.5 million, respectively, of its investments in certain mutual funds
sponsored by affiliates of the Company.
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Keyport Life Insurance Company, Keyport Advisory Services Corporation,
and Keyport Financial Services Corp. are included in the consolidated
federal income tax return filed by Liberty Mutual. Income taxes have been
provided using the liability method in accordance with SFAS No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns. Independence Life is required under tax law
to file its own federal income tax return.
Cash Equivalents
Short-term investments having an original maturity of three months or
less are classified as cash equivalents.
Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective after December 31, 1997. It is not
expected that the adoption of SFAS 125 will have a material effect on the
Company's consolidated financial position or results of operations.
2. Acquisitions
On August 9, 1996, Keyport entered into a 100 percent coinsurance
agreement for a $954.0 million block of single premium deferred annuities
issued by Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under
this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all
policy obligations. This transaction increased investments by $923.1
million and value of insurance in force by $30.9 million.
3. Investments
Fixed Maturities
As of December 31, 1996 and 1995, the Company did not hold any
investments in fixed maturities that were classified as held to maturity or
trading securities. The amortized cost, gross unrealized gains and losses
and fair value of fixed maturity securities are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996
U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and
agencies 1,666,094 41,401 (8,569) 1,698,926
Obligations of states
and political
subdivisions 23,895 382 (49) 24,228
Debt securities issued
by foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed
securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290
Total fixed maturities $10,500,431 $ 270,180 $ (51,967) $10,718,644
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995
U.S. Treasury securities $ 360,157 $ 9,020 $ (209) $ 368,968
Mortgage backed securities
of U.S. government
corporations and
agencies 1,585,538 58,795 (5,250) 1,639,083
Obligations of states
and political
subdivisions 26,688 1,324 - 28,012
Debt securities issued
by foreign governments 57,446 4,258 - 61,704
Corporate securities 3,479,584 224,332 (7,309) 3,696,607
Other mortgage backed
securities 1,951,480 66,530 (71,754) 1,946,256
Asset backed securities 1,543,891 29,823 (1,446) 1,572,268
Senior secured loans 223,050 - - 223,050
Total fixed maturities $9,227,834 $ 394,082 $ (85,968) $ 9,535,948
At December 31, 1996, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $29.9 million, and gross unrealized losses aggregated $5.3
million, respectively. At December 31, 1995, gross unrealized gains on
equity securities, interest rate cap agreements and investments in separate
accounts aggregated $16.9 million, and gross unrealized losses aggregated
$9.3 million, respectively.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1996 are as follows (in thousands):
Amortized Fair
Cost Value
December 31, 1996
Due in one year or less $ 487,373 $ 489,136
Due after one year through five years 1,522,400 1,559,816
Due after five years through ten years 2,013,432 2,084,939
Due after ten years 662,100 704,078
4,685,305 4,837,969
Mortgage and asset backed securities 5,815,126 5,880,675
$10,500,431 $10,718,644
Actual maturities will differ in some cases from those shown above
because borrowers may have the right to call or prepay obligations.
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31
1996 1995 1994
Fixed maturities $ 737,372 $ 681,998 $635,947
Mortgage loans and other invested assets 11,422 12,881 15,416
Policy loans 30,188 28,485 26,295
Equity securities 4,494 4,807 2,132
Cash and cash equivalents 36,138 41,643 20,727
Gross investment income 819,614 769,814 700,517
Investment expenses (12,708) (10,837) (10,118)
Amortization of options and interest
rate caps (16,541) (3,047) (824)
Net investment income $ 790,365 $ 755,930 $689,575
There were no non-income producing fixed maturity investments as of
December 31, 1996 or 1995.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
1996 1995 1994
Year Ended December 31
Fixed maturities held to maturity:
Gross gains $ - $ 1,306 $ 3,493
Gross losses - (64) (755)
Fixed maturities available for sale:
Gross gains 24,304 8,156 26,043
Gross losses (17,814) (15,982) (26,831)
Equity securities 916 1,279 (845)
Interest rate swaps - (860) (28)
Other (208) (13) (809)
Impairment write-downs - - (11,514)
Gross realized investment gains (losses) 7,198 (6,178) (11,246)
Amortization adjustments of deferred
policy acquisition costs and value of
insurance inforce (1,689) 2,220 3,026
Net realized investment gains (losses) $ 5,509 $ (3,958) $ (8,220)
Proceeds from sales of fixed maturities available for sale were $1.7
billion, $565.4 million and $927.8 million, for the years ended December
31, 1996, 1995, and 1994, respectively. The sale of fixed maturities held
to maturity during 1995 and 1994 relate to certain securities, with
amortized cost of $15.0 million and $10.6 million, respectively, which were
sold specifically due to a decline in the issuers' credit quality.
Deferred tax liabilities for the Company's unrealized holding gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $39.5 million and $46.2 million at December 31,
1996 and 1995, respectively.
No investment in any person or its affiliates (other than bonds issued
by agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1996.
At December 31, 1996, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic
location.
At December 31, 1996, $987.0 million of fixed maturities were below
investment grade.
4. Off Balance Sheet Financial Instruments
The Company's primary objective in acquiring off balance sheet financial
instruments is the management of interest rate risk. Interest rate risk
results from a mismatch in the timing and amount of invested asset and
policyholder liability cash flows. The Company seeks to manage this risk
through various asset/liability management strategies such as the setting
of renewal rates and by investment portfolio actions designed to address
the interest rate sensitivity of asset cash flows in relation to liability
cash flows. Portfolio actions used to manage interest rate risk primarily
include managing the effective duration of portfolio securities and
utilizing interest rate swaps and caps. Outstanding off balance sheet
financial instruments, shown in notional amounts along with their carrying
value and fair values, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1996 1995 1996 1996 1995 1995
Interest rate
cap agreements $ 450,000 $ 450,000 $ 6,192 $ 1,363 $ 8,755 $ 1,461
Indexed call
options - - 109,561 109,561 7,785 7,785
Interest rate
swaps 2,275,000 1,975,000 (8,753) (8,753) (64,124) (64,124)
The interest rate cap agreements, which expire in 1997 through 2000,
entitle the Company to receive payments from the counterparties on
specified future dates, contingent on future interest rates. For each cap,
the amount of such payment, if any, is determined by the excess of a market
interest rate over a specified cap rate times the notional amount. The
premium paid for the interest rate caps is included in other invested
assets and is being amortized over the terms of the agreements and is
included in net investment income. Interest rate contracts relating to
investments designated as available for sale are adjusted to fair value
with the resulting unrealized gains and losses included in stockholder's
equity. Fair values for these contracts are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions.
The Company uses indexed call options for purposes of hedging its equity-
indexed products. The call options hedge the interest credited on these 1
and 5 year term products, which is based on the changes in the Standard &
Poor's 500 Composite Stock Price Index ("S&P Index"). Premiums paid on the
call options are amortized to interest expense over the terms of the
underlying equity-indexed products using the straight line method. Gains
and losses, if any, resulting from the early termination of the call option
are deferred and amortized to interest credited over the remaining term of
the underlying equity-indexed products.
At December 31, 1996 the Company had approximately $73.1 million of
unamortized premium in call option contracts. The call options' maturities
range from 1997 to 2001. The Company carries its S&P Index call options at
market value.
Deferred losses of $7.9 million and $10.6 million as of December 31,
1996 and 1995, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.
The Company is exposed to potential credit loss in the event of
nonperformance by counterparties on interest rate cap agreements and
interest rate swaps. Nonperformance is not anticipated and, therefore, no
collateral is held or pledged. The credit risk associated with these
agreements is minimized by purchasing such agreements from investment-grade
counterparties.
5. Income Taxes
Income tax expense is summarized as follows (in thousands):
Year Ended December 31 1996 1995 1994
Current $52,369 $37,746 $18,118
Deferred (5,147) 585 13,933
$47,222 $38,331 $32,051
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31 1996 1995 1994
Expected income tax expense $ 48,246 $ 37,779 $ 33,347
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,216) (1,737) (2,099)
Amortization of goodwill 396 396 396
Other, net (204) 1,893 407
Income tax expense $ 47,222 $ 38,331 $ 32,051
The components of deferred federal income taxes are as follows (in
thousands):
December 31 1996 1995
Deferred tax assets:
Policy liabilities $171,327 $140,971
Guaranty fund expense 6,260 7,679
Deferred gain on interest rate swaps -- 312
Net operating loss carryforwards 2,667 3,041
Other 3,915 1,039
Total deferred tax assets 184,169 153,042
Deferred tax liabilities:
Deferred policy acquisition costs (63,076) (44,468)
Value of insurance in force and
intangible assets (20,539) (7,152)
Excess of book over tax basis of
investments (118,403) (127,991)
Separate account asset (4,557) (2,539)
Deferred loss on interest rate swaps (2,765) (3,715)
Other (576) --
Total deferred tax liabilities (209,916) (185,865)
Net deferred tax liability $ (25,747) $ (32,823)
As of December 31, 1996, the Company had approximately $7.6 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits. The
Company believes that it is more likely than not that it will realize the
benefit of its deferred tax assets.
Income taxes paid were $46.9 million, $44.7 million and $28.8 million in
1996, 1995 and 1994, respectively.
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are
eligible to participate in the Liberty Financial Companies, Inc. Pension
Plan (the "Plan"). It is the Company's practice to fund amounts for the
Plan sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. Under the Plan, all
employees are vested after five years of service. Benefits are based on
years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the
employee's estimated social security retirement benefit. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.
The Company also has an unfunded non-qualified Supplemental Pension Plan
("Supplemental Plan") collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code.
The following table sets forth the Plans' funded status. Substantially
all the Plans' assets are invested in mutual funds sponsored by the
Company.
December 31
(Dollars in thousands) 1996 1995
Actuarial present value of benefit
obligations:
Vested benefit obligations $ 7,172 $ 6,082
Accumulated benefit obligation $ 7,963 $ 6,915
Projected benefit obligation $10,559 $ 9,185
Plan assets at fair value (6,399) (5,703)
Projected benefit obligation in excess of
the Plans' assets 4,160 3,482
Unrecognized net actuarial loss (1,496) (1,740)
Prior service cost not yet recognized in
net periodic pension cost (183) (206)
Accrued pension cost $ 2,481 $ 1,536
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Year Ended December 31 1996 1995 1994
Pension cost includes the following
components:
Service cost benefits earned during the
period $ 717 $ 541 $ 532
Interest cost on projected benefit
obligation 725 603 534
Actual return on Plan assets (732) (999) 63
Net amortization and deferred amounts 357 600 (338)
Total net periodic pension cost $1,067 $ 745 $ 791
Discount rate 7.50% 7.25% 8.25%
Rate of increase in compensation level 5.25% 5.25% 5.25%
Expected long-term rate of return on
assets 8.50% 8.50% 8.50%
The Company provides various other funded and unfunded defined
contribution plans, which include savings and investment plans and
supplemental savings plans. For each of the years ended December 31, 1996,
1995 and 1994, expenses related to these defined contribution plans totaled
(in thousands) $589.7, $595.0 and $533.5, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used
to determine the fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturities not actively traded, the fair
values are determined using values from independent pricing
services, or, in the case of private placements, are determined
by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
securities. The fair values for equity securities are based on
quoted market prices.
Mortgage loans: The fair value of mortgage loans are
determined by discounting future cash flows to the present at
current market rates, using expected prepayment rates.
Policy loans: The carrying value of policy loans approximates
fair value.
Other invested assets, cash: The carrying value for assets
classified as other invested assets and cash in the accompanying
balance sheets approximates their fair value.
Policy liabilities: Deferred annuity contracts are assigned
fair value equal to current net surrender value. Annuitized
contracts are valued based on the present value of the future
cash flows at current pricing rates.
The fair values and carrying values of the Company's financial
instruments are as follows (in thousands):
December 31 1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $10,718,644 $10,718,644 $ 9,535,948 $ 9,535,948
Equity securities 35,863 35,863 25,214 25,214
Mortgage loans 67,005 73,424 74,505 79,697
Policy loans 532,793 532,793 498,326 498,326
Other invested assets 183,622 183,622 10,748 10,748
Cash and cash
equivalents 767,385 767,385 777,384 777,384
Liabilities:
Policy liabilities 11,637,528 11,127,352 10,084,392 9,650,113
8. Quarterly Financial Data, in thousands (unaudited)
Quarter Ended 1996 March 31 June 30 September 30 December 31
Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized investment
gains (losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704
Quarter Ended 1995 March 31 June 30 September 30 December
31
Investment income $ 183,784 $ 189,496 $ 189,652 $ 192,998
Interest credited to
policyholders (130,919) (139,226) (143,317) (142,263)
Investment spread 52,865 50,270 46,335 50,735
Net realized investment
gains (losses) (5,652) (719) 1,430 983
Fee income 7,308 7,919 7,217 7,323
Pretax income 23,348 29,452 28,395 26,746
Net income 15,370 18,675 18,251 17,314
9. Statutory Information
Keyport is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the Department of Business Regulation of the
State of Rhode Island. Statutory surplus differs from stockholder's equity
reported in accordance with GAAP primarily because policy acquisition costs
are expensed when incurred, investment reserves and policy liabilities are
based on different assumptions, and income tax expense reflects only taxes
paid or currently payable. Keyport's statutory surplus and net income are
as follows (in thousands):
Year Ended December 31 1996 1995 1994
Statutory surplus $ 567,735 $ 535,179 $ 546,440
Statutory net income 40,237 38,264 23,385
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1996, 1995
and 1994. These reimbursements included corporate, general, and
administrative expenses, corporate overhead, such as executive and legal
support, and investment management services. The total amounts reimbursed
were $7.8 million, $7.6 million and $7.3 million for the years ended
December 31, 1996, 1995 and 1994 , respectively. In addition, certain
affiliated companies distribute the Company's products and were paid $6.4
million, $7.6 million and $15.3 million by the Company for the years ended
December 31, 1996, 1995, and 1994, respectively.
Keyport has mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual has
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1996 and 1995, the amounts outstanding were $39.5 million.
Dividend payments to Liberty Financial from the Company are governed
by insurance laws which restrict the maximum amount of dividends that may
be paid without prior approval of the Department of Business Regulation of
the State of Rhode Island. As of December 31, 1996, the maximum amount of
dividends (based on statutory surplus and statutory net gains from
operations) which may be paid by Keyport was approximately $42.5 million.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and
certain office facilities from others under operating leases expiring in
various years through 2001. Rental expense (in thousands) amounted to
$3,213, $3,221 and $3,011 for the years ended December 31, 1996, 1995 and
1994, respectively. For each of the next five years, and in the aggregate,
as of December 31, 1996, the following are the minimum future rental
payments under noncancelable operating leases having remaining terms in
excess of one year (in thousands):
Year Payments
1997 $ 2,641
1998 2,992
1999 2,815
2000 2,731
2001 2,715
$ 13,894
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: Under existing guaranty fund laws in all states,
insurers licensed to do business in those states can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The actual amount of such assessments will depend upon the final
outcome of rehabilitation proceedings and will be paid over several years.
In 1996, 1995 and 1994, Keyport was assessed $10.0 million, $8.1 million,
and $7.7 million, respectively. During 1996, 1995 and 1994, Keyport
recorded $1.0 million, $2.0 million, and $7.2 million respectively, of
provisions for state guaranty fund association expense. At December 31,
1996 and 1995, the reserve for such assessments was $12.9 million and $21.9
million, respectively.
THIS PAGE INTENTIONALLY LEFT BLANK
Report of Independent Auditors
To the Board of Directors of Keyport Life Insurance Company
and Contract Owners of Variable Account A
We have audited the accompanying statement of assets and liabilities of
Keyport Life Insurance Company - Variable Account A as of December 31,
1996, and the related statement of operations and changes in net assets for
the period from January 30, 1996 (commencement of operations) to December
31, 1996. These financial statements are the responsibility of Keyport
Life Insurance Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Keyport Life Insurance
Company - Variable Account A at December 31, 1996 and the results of its
operations and changes in net assets for the period from January 30, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
March 14, 1997 /s/ERNST & YOUNG LLP
Boston, Massachusetts
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments at market value:
Alger American Fund
Alger American Growth Portfolio - 2,574 shares
(cost $89,593) $ 88,377
Alger American Small Capitalization Portfolio - 1,663
shares (cost $67,665) 68,038
Alliance Variable Products Series Fund, Inc.
Alliance Global Bond Portfolio - 3,150 shares (cost $36,918) 36,985
Alliance Premier Growth Portfolio - 3,304 shares (cost $52,286) 51,880
MFS Variable Insurance Trust
MFS Emerging Growth Series - 4,151 shares (cost $56,072) 54,956
MFS Research Series 8,516 shares (cost $113,236) 111,820
Manning & Napier Insurance Fund, Inc.
Manning & Napier Small Cap Portfolio - 246 shares (cost $2,515) 2,638
Manning & Napier Equity Portfolio - 241 shares (cost $2,526) 2,541
SteinRoe Variable Investment Trust
Cash Income Fund - 21,617 shares (cost $21,617) 21,617
Capital Appreciation Fund - 2,847 shares (cost $59,019) 59,019
Managed Assets Fund - 7,993 shares (cost $130,134) 130,134
Mortgage Securities Income Fund - 11,738 shares (cost $124,830) 115,503
Managed Growth Stock Fund - 830 shares (cost $23,750) 23,750
Keyport Variable Investment Trust
Colonial-Keyport Growth and Income Fund - 18,668 shares
(cost $276,989) 260,609
Colonial-Keyport Utilities Fund - 2,566 shares (cost $28,678) 27,452
Colonial-Keyport International Fund for Growth - 68,841 shares
(cost $142,468) 134,240
Colonial-Keyport Strategic Income Fund - 19,593 shares
(cost $236,124) 216,107
Colonial-Keyport U.S. Stock Fund - 9,539 shares
(cost $143,606) 135,641
Newport-Keyport Tiger Fund - 38,340 shares (cost $97,675) 96,618
Total assets $ 1,637,925
Net assets
Variable annuity contracts (Note 5) $ 1,636,074
Due to Keyport Life Insurance Company (Note 2) 1,851
Total net assets $ 1,637,925
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Alger American
Capitalization
Alger American Small Alliance Global
Growth Portfolio Portfolio Bond Portfolio
1996 1996 1996
Income
Dividends $ - $ - $ -
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 50 31 16
Net investment income (expense) (50) (31) (16)
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (1,217) 373 67
Net increase (decrease) in
net assets from operations (1,267) 342 51
Purchase payments from
contract owners 89,502 67,825 36,537
Transfers between accounts 142 (129) 381
Contract terminations and
annuity payouts (50) (31) -
Other transfers from Keyport
Life Insurance Company 50 31 16
Net increase in net assets
from contract transactions 89,644 67,696 36,934
Net assets at beginning of
period - - -
Net assets at end of period $ 88,377 $ 68,038 $ 36,985
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Alliance Premier MFS Emerging MFS
Growth Portfolio Growth Series Research Series
1996 1996 1996
Income
Dividends $ - $ - $ -
Expenses (Note 3)
Mortality and expense risk
and administrative charges 25 26 55
Net investment income (expense) (25) (26) (55)
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (406) (1,116) (1,416)
Net increase (decrease) in
net assets from operations (431) (1,142) (1,471)
Purchase payments from
contract owners 51,575 56,838 111,137
Transfers between accounts 710 (766) 2,100
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 26 26 54
Net increase in net assets
from contract transactions 52,311 56,098 113,291
Net assets at beginning of
period - - -
Net assets at end of period $ 51,880 $ 54,956 $ 111,820
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Manning & Napier
Small Cap Manning & Napier Cash
Portfolio Equity Portfolio Income Fund
1996 1996 1996
Income
Dividends $ - $ - $ 86
Expenses (Note 3)
Mortality and expense
risk and administrative
charges - - 12
Net investment income (expense) - - 74
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period 123 15 -
Net increase (decrease)
in net assets from
operations 123 15 74
Purchase payments from
contract owners 2,500 2,500 21,129
Transfers between accounts 15 26 402
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company - - 12
Net increase in net assets
from contract transactions 2,515 2,526 21,543
Net assets at beginning of
period - - -
Net assets at end of period $ 2,638 $ 2,541 $ 21,617
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Capital Mortgage
Appreciation Managed Securities
Fund Assets Fund Income Fund
1996 1996 1996
Income
Dividends $ - $ - $ 9,327
Expenses (Note 3)
Mortality and expense risk
and administrative charges 34 76 67
Net investment income (expense) (34) (76) 9,260
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period - - (9,327)
Net increase (decrease) in
net assets from
operations (34) (76) (67)
Purchase payments from
contract owners 59,199 129,902 114,880
Transfers between accounts (180) 232 623
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 34 76 67
Net increase in net assets
from contract transactions 59,053 130,210 115,570
Net assets at beginning of
period - - -
Net assets at end of period $ 59,019 $ 130,134 $ 115,503
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Colonial-Keyport
Managed Growth Growth and Colonial-Keyport
Stock Fund Income Fund Utilities Fund
1996 1996 1996
Income
Dividends $ - $ 16,380 $ 1,226
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 14 152 16
Net investment income(expense) (14) 16,228 1,210
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period - (16,380) (1,226)
Net increase (decrease)
in net assets from
operations (14) (152) (16)
Purchase payments from
contract owners 23,757 259,571 26,950
Transfers between accounts (7) 1,038 502
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 14 152 16
Net increase in net assets
from contract transactions 23,764 260,761 27,468
Net assets at beginning of
period - - -
Net assets at end of period $ 23,750 $ 260,609 $ 27,452
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Colonial-Keyport Colonial-Keyport
International Fund Strategic Colonial-Keyport
for Growth Income Fund U.S. Stock Fund
1996 1996 1996
Income
Dividends $ 8,228 $ 20,017 $ 7,965
Expenses (Note 3)
Mortality and expense
risk and administrative
charges 78 125 79
Net investment income(expense) 8,150 19,892 7,886
Realized gain (loss) - - -
Unrealized appreciation
(depreciation) during
the period (8,228) (20,017) (7,965)
Net increase (decrease)
in net assets from
operations (78) (125) (79)
Purchase payments from
contract owners 134,121 214,591 135,230
Transfers between accounts 119 1,516 411
Contract terminations and
annuity payouts - - -
Other transfers from Keyport
Life Insurance Company 78 125 79
Net increase in net assets
from contract transactions 134,318 216,232 135,720
Net assets at beginning of
period - - -
Net assets at end of period $134,240 $ 216,107 $ 135,641
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Statement of Operations and Changes in Net Assets
For the Period from January 30, 1996 (commencement of
operations) to December 31, 1996
Newport-Keyport
Tiger Fund Total
1996 1996
Income
Dividends $ 1,057 $ 64,286
Expenses (Note 3)
Mortality and expense risk
and administrative charges 57 913
Net investment income (expense) 1,000 63,373
Realized gain (loss) - -
Unrealized appreciation
(depreciation) during
the period (1,057) (67,777)
Net increase (decrease) in net
assets from operations (57) (4,404)
Purchase payments from
contract owners 96,510 1,634,254
Transfers between accounts 108 7,243
Contract terminations and annuity
payouts - (81)
Other transfers from Keyport Life
Insurance Company 57 913
Net increase in net assets
from contract transactions 96,675 1,642,329
Net assets at beginning of period - -
Net assets at end of period $ 96,618 $ 1,637,925
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - VARIABLE ACCOUNT A
Notes to Financial Statements
December 31, 1996
1. Organization
Variable Account A (the "Variable Account"), was established on January 30,
1996 as a segregated investment account of Keyport Life Insurance Company
(the "Company"). The Variable Account is registered with the Securities
and Exchange Commission as a Unit Investment Trust under the Investment
Company Act of 1940 and invests in shares of eligible funds. The Variable
Account is a funding vehicle for group and individual variable annuity
contracts. The Variable Account currently offers two contracts,
distinguished principally by the level of expenses, surrender charges, and
eligible fund options. The two contracts and their respective eligible
fund options are as follows:
Keyport Advisor Variable Annuity Manning & Napier Variable Annuity
Alger American Fund: Manning & Napier Insurance Fund, Inc:
Alger American Growth Portfolio Manning & Napier Small Cap Portfolio
Alger American Small Capitalization
Portfolio Manning & Napier Equity Portfolio
Manning & Napier Moderate Growth
Portfolio
MFS Variable Insurance Trust: Manning & Napier Growth Portfolio
MFS Emerging Growth Series Manning & Napier Maximum Horizon
Portfolio
MFS Research Series Manning & Napier Bond Portfolio
SteinRoe Variable SteinRoe Variable Investment
Investment Trust (SRVIT): Trust (SRVIT):
Cash Income Fund Cash Income Fund
Capital Appreciation Fund
Managed Assets Fund
Mortgage Securities Income Fund
Managed Growth Stock Fund
Keyport Variable Investment Trust (KVIT):
Colonial-Keyport Growth and Income Fund
Colonial-Keyport Utilities Fund
Colonial-Keyport International Fund for Growth
Colonial-Keyport Strategic Income Fund
Colonial-Keyport U.S. Stock Fund
Newport-Keyport Tiger Fund
Alliance Variable Products Series Fund, Inc:
Alliance Global Bond Portfolio
Alliance Premier Growth Portfolio
On December 6, 1996, the fund name Colonial-Keyport U.S. Fund for Growth
was changed to Colonial-Keyport U.S. Stock Fund.
2. Significant Accounting Policies
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported therein. Although
actual results could differ from these estimates, any such differences are
expected to be immaterial to the Variable Account.
Shares of the eligible funds are sold to the Variable Account at the
reported net asset values. Transactions are recorded on the trade date.
Income from dividends is recorded on the ex-dividend date. Realized gains
and losses on sales of investments are computed on the basis of identified
cost of the investments sold.
Amounts due to Keyport Life Insurance Company represent mortality and
expense risk charges earned by the Company in 1996 but not transferred to
the Company until January 1997.
The operations of the Variable Account are included in the federal income
tax return of the Company, which is taxed as a Life Insurance Company under
the provisions of the Internal Revenue Code. The Company anticipates no
tax liability resulting from the operations of the Variable Account.
Therefore, no provision for income taxes has been charged against the
Variable Account.
3. Expenses
Keyport Advisor Variable Annuity
There are no deductions made from purchase payments for sales charges at
the time of purchase. In the event of a contract termination, a contingent
deferred sales charge, based on a graded table of charges, is deducted. An
annual contract maintenance charge of $36 to cover the cost of contract
administration is deducted from each contractholder's account on the
contract anniversary date. Daily deductions are made from each sub-account
for assumption of mortality and expense risk at an effective annual rate of
1.25% of contract value. A daily deduction is also made for distribution
costs incurred by the Company at an effective annual rate of 0.15% of
contract value.
Manning & Napier Variable Annuity
There are no deductions from purchase payments for sales charges at the
time of purchase. There are also no contingent deferred sales charges or
distribution charges. An annual contract maintenance charge of $35 to
cover the cost of contract administration is deducted from each
contractholder's account on the contract anniversary date. Daily
deductions are made from each sub-account for assumption of mortality and
expense risk at an effective annual rate of 0.35% of contract value.
4. Affiliated Company Transactions
Administrative services necessary for the operation of the Variable Account
are provided by the Company. The Company has absorbed all organizational
expenses including the fees of registering the Variable Account and its
contracts for distribution under federal and state securities laws.
SteinRoe & Farnham, Inc., an affiliate of the Company, is the investment
advisor to the SRVIT. Keyport Advisory Services Corporation, a wholly-
owned subsidiary of the Company, is the investment advisor to the KVIT.
Colonial Management Associates, Inc., an affiliate of the Company, is the
investment sub-advisor to the KVIT. Keyport Financial Services
Corporation, a wholly-owned subsidiary of the Company, is the principal
underwriter for SRVIT and KVIT. The investment advisors' compensation is
derived from the mutual funds.
5. Unit Values
A summary of the accumulation unit values at December 31, 1996 and the
accumulation units and dollar value outstanding at December 31, 1996 are as
follows:
Unit
Value Units Dollars
Alger American Growth Portfolio $ 9.900001 8,926.9688 $88,377
Alger American Small Capitalization
Portfolio 10.064832 6,759.9737 68,038
Alliance Global Bond Portfolio 9.882608 3,744.0522 37,001
Alliance Premier Growth Portfolio 10.197991 5,012.1637 51,114
MFS Emerging Growth Series 9.716229 5,713.8423
55,517
MFS Research Series 9.978211 11,119.8290
110,956
Manning & Napier Small Cap Portfolio 10.713837 246.1303
2,637
Manning & Napier Equity Portfolio 10.553923 240.6688 2,540
Cash Income Fund 13.288493 1,619.3710 21,519
Capital Appreciation Fund 29.237169 2,017.4662 58,985
Managed Assets Fund 21.263714 6,116.4291
130,058
Mortgage Securities Income Fund 16.621076 6,945.1581 115,436
Managed Growth Stock Fund 27.242475 871.2865 23,736
Colonial-Keyport Growth and Income
Fund 15.216529 17,116.7156 260,457
Colonial-Keyport Utilities Fund 12.095187 2,268.3403 27,436
Colonial-Keyport International Fund
for Growth 10.074536 13,316.9408 134,162
Colonial-Keyport Strategic Income
Fund 12.642128 17,084.3073 215,982
Colonial-Keyport U.S. Stock Fund 15.935084 8,507.1406 135,562
Newport-Keyport Tiger Fund 12.555053 7,691.0070
96,561
125,317.7913 $1,636,074
6. Purchases and Sales of Securities
The cost of shares purchased by the Variable Account during 1996 are shown
below:
Purchases
Alger American Growth Portfolio $ 89,593
Alger American Small Capitalization Portfolio 67,665
Alliance Global bond Portfolio 36,918
Aliance Premier Growth Portfolio 52,286
MFS emerging Growth Series 56,072
MFS Research Series 113,236
Manning & Napier Small Cap Portfolio 2,515
Manning & Napier Equity Portfolio 2,526
Cash Income Fund 21,617
Capital Appreciation Fund 59,019
Managed Assets Fund 130,134
Mortgage Securities Income Fund 124,830
Managed Growth Stock Fund 23,750
Colonial-Keyport Growth and Income Fund 276,989
Colonial-Keyport Utilities Fund 28,678
Colonial-Keyport International Fund for Growth 142,468
Colonial-Keyport Strategic Income Fund 236,124
Colonial-Keyport U.S. Stock Fund 143,606
Newport-Keyport Tiger Fund 97,675
$1,705,701
There were no shares sold by the Variable Account during 1996.
7. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue 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 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 Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. Keyport Life Insurance Company believes that the Variable
Account satisfies the current requirements of the regulations, and it
intends that the Variable Account will continue to meet such requirements.
