INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
KEYPORT LIFE INSURANCE COMPANY
The variable annuity contract (form number FLEX(4), referred to as the
"Contract") described in this prospectus provides for accumulation of Contract
Values and payment of periodic annuity payments on a variable basis and,
except for Contracts issued to New Jersey and Washington residents, also on a
fixed basis. The Contract is designed for use by individuals for retirement
planning purposes.
This prospectus generally describes only the variable features of the Contract
(for a summary of the fixed features, see Appendix A on Page 25). If the
Contract Owner elects to have Contract Values accumulated on a variable basis,
purchase payments will be allocated to a segregated investment account of
Keyport Life Insurance Company ("Keyport"), designated the KMA Variable
Account ("Variable Account"). The Variable Account invests in shares of the
following Eligible Funds of SteinRoe Variable Investment Trust ("SteinRoe
Trust") at their net asset value: Stein Roe Money Market Fund, Variable Series
("SRMMF"); Stein Roe Mortgage Securities Fund, Variable Series ("SRMSF");
Stein Roe Balanced Fund, Variable Series ("SRBF"); Stein Roe Growth Stock
Fund, Variable Series ("SRGSF"); and Stein Roe Special Venture Fund, Variable
Series ("SRSVF"). The Variable Account also invests in shares of the following
Eligible Funds of Liberty Variable Investment Trust ("Liberty Trust")
(formerly named Keyport Variable Investment Trust) at their net asset value:
Colonial Growth and Income Fund, Variable Series ("CGIF"); Colonial Strategic
Income Fund, Variable Series ("CSIF"); Stein Roe Global Utilities Fund,
Variable Series ("SRGUF"); Colonial U.S. Stock Fund, Variable Series
("CUSSF"); Colonial International Fund for Growth, Variable Series ("CIFG")
and Newport Tiger Fund, Variable Series ("NTF").
Persons who have purchased Variable Account variable annuity contracts before
May 1, 1992 may continue to make purchase payments under those contracts
subject to the terms and conditions of those contracts and Appendix B on Page
28.
Keyport may also offer group variable annuity contracts issued by the Variable
Account. Any such group contract would be offered by a separate prospectus.
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 24.
The Contract may be sold by or through banks or other depository institutions.
The Contract: is not insured by the FDIC; is not a deposit or other obligation
of, or guaranteed by, the depository institution; and is 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 6
Condensed Financial Information 7
Keyport and the Variable Account 9
Purchase Payments and Applications 9
Investments of the Variable Account 10
Allocations of Purchase Payments 10
Eligible Funds 10
Dollar Cost Averaging 12
Transfer of Variable Account Value 12
Substitution of Eligible Funds and
Other Variable Account Changes 13
Deductions 13
Deductions for Contract Maintenance Charge 13
Deductions for Mortality and Expense Risk Charge 14
Deductions for Daily Sales Charge 14
Deductions for Contingent Deferred Sales Charge 14
Deductions for Transfers of Variable Account Value 15
Deductions for Premium Taxes 15
Deductions for Income Taxes 15
Total Expenses 15
The Contracts 15
Variable Account Value 15
Valuation Periods 16
Net Investment Factor 16
Modification of the Contract 16
Right to Revoke 16
Death Provisions for Non-Qualified Contracts 17
Death Provisions for Qualified Contracts 18
Ownership 18
Assignment 18
Surrenders 18
Annuity Provisions 19
Annuity Benefits 19
Income Date and Settlement Option 19
Change in Income Date and Settlement Option 19
Settlement Options 19
Variable Annuity Payment Values 20
Proof of Age, Sex, and Survival of Annuitant 20
Suspension of Payments 21
Tax Status 21
Introduction 21
Taxation of Annuities in General 21
Qualified Plans 22
Tax-Sheltered Annuities 22
Individual Retirement Annuities 23
Corporate Pension and Profit-Sharing Plans 23
Deferred Compensation Plans with Respect to
Service for State and Local Governments 23
Texas Optional Retirement Program 23
Variable Account Voting Rights 23
Distribution of the Contract 24
Legal Proceedings 24
Inquiries by Contract Owners 24
Table of Contents_Statement of Additional Information 24
Appendix A_The Fixed Account (also known as the
Guaranteed Rate Account) 25
Appendix B_Prior Contracts of the Variable Account 28
Appendix C_Telephone Instructions 34
Appendix D_Dollar Cost Averaging 35
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 Issue Date (age 75 for Qualified Contracts).
Contract Anniversary: The same month and day as the Issue Date in each
subsequent year of the Contract.
Contract Owner: The person (or persons in the case of joint ownership) who
possesses all the ownership rights under the Contract. The primary Owner may
not be over age 90 on the Issue Date (age 75 for Qualified Contracts and age
90 for a joint Owner).
Contract Value: The sum of the Variable Account Value and the Fixed Account
Value.
Contract Year: Any period of 12 months commencing with the Issue Date and each
Contract Anniversary thereafter shall be a Contract Year.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant or Contract Owner. The Designated
Beneficiary will be the first person among the following who is alive on the
date of death: primary Owner; joint Owner; primary beneficiary; contingent
beneficiary; and if no one is alive, the primary Owner's estate. If the
primary Owner and joint Owner are both alive, they will be the Designated
Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the
Variable Account.
Fixed Account: Part of Keyport's general account into which purchase payments
may be allocated.
Fixed Account Value: The value of all Fixed Account amounts accumulated under
the Contract prior to the Income Date.
In Force: The status of the Contract before the Income Date so long as it is
not totally surrendered and there has not been a death of the Annuitant or any
Contract Owner that will cause the Contract to end within at most five years
of the date of death.
Income Date: The date on which annuity payments are to begin.
Issue Date: The effective date of the Contract; it is shown on Page 3 of the
Contract.
Non-Qualified Contract: Any Contract that is not issued under a Qualified
Plan.
Office: Keyport's executive office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Contract: Contracts issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Sections 401, 403 or 408 of the Internal Revenue Code. Keyport treats Section
457 plans as Qualified Plans.
Surrender Value: The Contract Value less the deductions made upon a total
surrender of the Contract. See "Surrenders" on Page 19.
Variable Account: A separate investment account of Keyport, designated on Page
1, into which purchase payments may be allocated.
Variable Account Value: The value of all Variable Account amounts accumulated
under the Contract prior to the Income Date.
Written Request: A request written on a form satisfactory to Keyport, signed
by the Contract 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
contract in understanding the transaction and operating expenses the owner
will directly or indirectly bear under a contract. The values reflect expenses
of the Variable Account as well as the Eligible Funds. The expenses shown for
the Eligible Funds are from 1996 and the examples should not be considered a
representation of future expenses.
Contract 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 Contract Owner Transaction Expenses2
(as a percentage of purchase payments): 7%
Annual Contract Fee $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Asset-based Sales Charge: .15%
Total Variable Account Annual Expenses: 1.40%
SteinRoe Trust and Liberty Trust Annual Expenses3,4
(as a percentage of average net assets)
Management Other Total Fund
Fund Fees Expenses Operating Expenses
SRMMF .50% .15% .65%
SRMSF .55 .15 .70 (.72)4
CGIF .65 .14 .79
CSIF .65 .15 .80 (.86%)3
SRBF .60 .07 .67
SRGUF .65 .16 .81
SRGSF .65 .08 .73
CUSSF .80 .15 .95
SRSVF .65 .10 .75
CIFG .90 .50 1.40
NTF .90 .37 1.27
Example #1 _ Assuming surrender of the Contract at the end of the periods
shown.5,6
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
SRMMF $ 91 $ 118 $ 154 $ 301
SRMSF 92 120 157 308
CGIF 93 123 164 324
CSIF 93 122 162 319
SRBF 91 119 155 304
SRGUF 93 123 163 322
SRGSF 92 120 159 312
CUSSF 94 127 171 340
SRSVF 92 121 160 314
CIFG 99 141 195 395
NTF 97 137 188 379
Example #2 _ Assuming annuitization of the Contract 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
SRMMF $ 21 $ 69 $ 124 $ 301
SRMSF 22 70 127 308
CGIF 23 73 132 319
CSIF 23 74 132 321
SRBF 21 70 125 304
SRGUF 23 74 133 322
SRGSF 22 71 129 312
CUSSF 24 78 141 340
SRSVF 22 72 130 314
CIFG 29 93 165 395
NTF 27 88 158 379
Example #3 _ Assuming the Contract 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 Contract is fully
or partially surrendered. A surrender will not incur the Charge percentage
shown to the extent the amount of that surrender does not exceed the
Contract's increase in value at the time of surrender or, after the first
Contract Year, 10% of the Contract Value on the prior Contract Anniversary if
this 10% amount is greater.
2Keyport reserves the right to impose a transfer fee after prior notice to
Contract 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.
3Liberty 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: .80% for CSIF; 1.75% for CIFG and
NTF, and 1.00% for CGIF, SRGUF and CUSSF. For CSIF, the .80% shown in the
table is after expense reimbursement and the .86% shown in the parentheses is
what the total for 1996 would have been in the absence of expense
reimbursement.
4SteinRoe 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: .65% for SRMMF; .70% for SRMSF; .75%
for SRBF; and .80% for SRGSF and SRSVF. For SRMSF, the .70% shown in the table
is after expense reimbursement and the .72% shown in the parentheses is what
the total for 1996 would have been 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 Contract
and the applicable tax laws.
6The SRMMF-DCA Sub-Account is not shown because it is available under
previously issued Contracts only for automatic monthly transfers that will
deplete a Contract Owner's Sub-Account values by the end of either the first
or second Contract Year. This Sub-Account was not generally available for
Contract Owners who began automatic monthly transfers after July 31, 1993. See
Appendix D on Page 36.
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, "How the Funds are Managed" in the prospectus for SteinRoe
Variable Investment Trust, and "Trust Management Organizations" and "Expenses
of the Funds" in the prospectus for Liberty Variable Investment Trust.
SYNOPSIS
The Contract allows Contract Owners to allocate purchase payments to the
Variable Account and, except for Contracts issued to New Jersey and Washington
residents, 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 accounts maintained by
Keyport. Contract Owners may allocate payments to, and receive annuity
payments from, the Variable Account and/or Fixed Account. If the Contract
Owner allocates payments to the Variable Account, the accumulation values and
annuity payments will fluctuate according to the investment performance of the
Eligible Funds chosen. If the Contract 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. (See Appendix A on Page 25 for
more information on the Fixed Account.) If the Contract Owner allocates
payments to both Accounts, then the accumulation values and annuity payments
will be variable in part and fixed in part.
The Contract 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 "Surrenders" on Page 19). 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 Contracts. (See "Deductions for Mortality and
Expense Risk Charge" on Page 13.) Keyport also deducts a sales charge which is
equal on an annual basis to .15% of the same values. (See "Deductions for
Daily Sales Charge" on Page 14.)
Keyport deducts an annual Contract 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. (See
"Deductions for Contract Maintenance Charge" on Page 13.)
Premium taxes will be charged against Contract 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 Contract
until a distribution occurs, in the form of a lump sum payment, annuity
payments, or the making of a gift or assignment of the Contract. A federal
penalty tax (currently 10%) may also apply. (See "Tax Status" on Page 21.)
The Contract allows the Contract Owner to revoke the Contract within 10 days
of delivery (see "Right to Revoke" on Page 16). For most states, Keyport will
refund the lesser of the initial purchase payment or Contract Value. The
Contract Owner will thus bear the investment risk during the revocation
period.
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
Stein Roe Money Market $12.833 $13.288 1,937,919
1996
Fund ("SRMMF") 12.322 12.833 1,870,176
1995
(formerly named Cash 12.036 12.322 2,006,163
1994
Income Fund) 11.884 12.036 1,406,317
1993
11.646 11.884 945,998
1992
11.163 11.646 1,090,836
1991
10.492 11.163 821,676
1990
10.000 10.492 148,835
1989
Stein Roe Money Market 12.063 12.667 15,286
1996
Fund-DCA ("SRMMF-DCA") 11.423 12.063 16,825
1995
(formerly named Cash 11.004 11.423 46,801
1994
Income Fund-DCA) 10.715 11.004 384,348
1993
10.335 10.715 1,228,989
1992
10.000 10.355 513,367
1991
Stein Roe Mortgage 16.099 16.621 2,760,649
1996
Securities Fund ("SRMSF") 14.107 16.099 3,176,177
1995
(formerly named Mortgage 14.529 14.107 3,002,643
1994
Securities Income Fund) 13.865 14.529 3,692,561
1993
13.269 13.865 3,006,271
1992
11.752 13.269 1,756,957
1991
10.923 11.752 601,483
1990
10.000 10.923 57,088
1989
Colonial Growth and 13.099 15.217 3,940,484
1996
and Income Fund ("CGIF") 10.207 13.099 3,443,237
1995
(formerly named Colonial- 10.428 10.207 2,866,727
1994
Keyport Growth and 10.000 10.428 1,221,301
1993
Income Fund)
Colonial Strategic Income 11.684 12.642 3,036,543
1996
Income Fund ("CSIF") 10.014 11.684 2,910,213
1995
(formerly named Colonial- 10.000 10.014 314,502
1994
Keyport Strategic Income
Fund)
Stein Roe Balanced Fund 18.650 21.264 9,759,571
1996
("SRBF") (formerly named 15.071 18.650 10,314,629
1995
Managed Assets Fund) 15.785 15.071 8,164,856
1994
14.646 15.785 7,302,625
1993
13.811 14.646 4,438,508
1992
10.947 13.811 2,031,594
1991
11.183 10.947 1,027,228
1990
10.000 11.183 283,776
1989
Stein Roe Global 11.514 12.095 3,519,866
1996
Utilities Fund ("SRGUF") 8.638 11.514 4,018,271
1995
(formerly named Colonial- 9.762 8.638 4,028,555
1994
Keyport Utilities Fund) 10.000 9.762 4,153,150
1993
Stein Roe Growth Stock 22.780 27.242 3,719,103
1996
Fund ("SRGSF") (formerly 16.770 22.780 3,638,901
1995
named Managed Growth 18.158 16.770 3,415,076
1994
Stock Fund) 17.541 18.158 3,278,749
1993
16.681 17.541 2,574,438
1992
11.426 16.681 1,294,859
1991
11.784 11.426 468,587
1990
10.000 11.784 135,505
1989
Colonial U.S. Stock 13.263 15.935 2,382,491
1996
Fund ("CUSSF") (formerly 10.369 13.263 1,947,382
1995
named Colonial-Keyport U.S. 10.000 10.369 442,457
1994
Stock Fund and Colonial-
Keyport U.S. Fund for
Growth)
Stein Roe Special 23.357 29.237 4,567,203
1996
Venture Fund ("SRSVF") 21.192 23.357 4,164,352
1995
(formerly named Capital 21.236 21.192 4,371,837
1994
Appreciation Fund) 15.872 21.236 2,769,483
1993
14.058 15.872 1,128,248
1992
10.386 14.058 683,185
1991
11.578 10.386 216,272
1990
10.000 11.578 34,624
1989
Colonial International 9.723 10.075 1,243,679
1996
Fund for Growth ("CIFG") 9.314 9.723 1,052,842
1995
(formerly named Colonial- 10.000 9.314 872,971
1994
Keyport International
Fund for Growth)
Newport Tiger Fund 11.445 12.555 1,509,794
1996
("NTF") (formerly named 10.000 11.445 599,500
1995
Newport-Keyport Tiger
Fund)
*Accumulation Unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number. See
Appendix B (Page 28) for historical values for the contracts described in that
appendix.
**Except for SRMMF-DCA and the six Liberty Trust Funds, each $10.00 value is
as of May 1, 1989, which is the date the Fund Sub-Account first became
available for Accumulation Units based on a 1.40% asset-based charge. The
$10.00 value for SRMMF-DCA, CGIF and SRGUF is as of the date the Fund Sub-
Account first became available: May 1, 1991; July 1, 1993; and July 1, 1993,
respectively. The unit values for the CIFG, CSIF, CUSSF and NTF Sub-Accounts
were valued at $10.00 on May 2, 1994; July 5, 1994, July 5, 1994, and May 1,
1995, respectively.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
Keyport and the Variable Account have been offering contracts for periods
prior to the commencement of the offering of the Contracts described in this
prospectus. The performance information will be based on historical results of
Eligible Funds that apply to the Contract for the specified time periods.
This performance information is not intended to indicate either past
performance under an actual Contract or future performance. Moreover, the
performance information for each SteinRoe Trust Sub-Account may reflect the
investment experience of the current Eligible Funds and Eligible Funds
previously available under the Variable Account. The Funds of the SteinRoe
Variable Investment Trust replaced these other mutual funds beginning January
1, 1989. These other funds had a different investment adviser (Keystone
Custodian Funds, Inc.) than the SteinRoe Trust (Stein Roe & Farnham,
Incorporated). See Appendix B on Page 28. Performance information for periods
prior to May 1, 1989 will reflect historical asset-based charges that are at a
lower level than the current asset-based charges.
The Sub-Accounts, other than SRMMF Sub-Account, 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 Contract
(including any Contingent Deferred Sales Charge that would apply if a Contract
Owner surrendered the Contract 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 Contract surrendered on a particular date by
a hypothetical $1,000 investment in the Sub-Account made by the Contract 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 Contract continues beyond the period when the Contingent
Deferred Sales Charge applies, consistent with the long-term investment and
retirement objectives of the Contract. 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 Contract Maintenance
Charge and premium taxes. The percentages would be lower if these charges were
included.
The SRMMF and SRMMF-DCA Sub-Accounts are money market Sub-Accounts that 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 Contract but does not take into account Contingent Deferred Sales
Charges and premium taxes. The yield would be lower if these charges were
included.
The effective yield of the 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
Contract Owners since not all of Keyport's contractual obligations relate to
payments based on those segregated assets (e.g., see "Death Provisions" on
Pages 17-18 for Keyport's obligation after certain deaths to increase the
Contract Value if it is less than the guaranteed minimum death value amount).
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 9, 1980. 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 Contracts 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 Issue Date. The minimum initial
purchase payment is $5,000. Additional purchase payments can be made at the
Contract 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 Contract 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 Contract with Accumulation
Units within two business days of receipt. If the application for a Contract
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 keeping the purchase payment until the application is complete. Once
it 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 Contract Owner the allocation of all
purchase payments and the re-allocation of values after any requested
transfer. Keyport must be notified immediately by the Contract Owner of any
processing error.
Keyport will permit others to act on behalf of an applicant in two instances.
First, Keyport will accept an application for a Contract 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 Contract 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 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 Contract with a copy
of an application completed with that information. The Contract will be
delivered to the Contract Owner with a letter from Keyport that will give the
Contract Owner an opportunity to respond to Keyport if any of the application
information is incorrect. Alternatively, Keyport's letter may request the
Contract Owner to confirm the correctness of the information by signing either
a copy of the application or a Contract 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 Contract 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 Contract Owner in the
application. Any selection must specify the percentage of the purchase payment
that is allocated to each Sub-Account. The percentage for each Sub-Account, if
not zero, must be at least 10% and must be a whole number. A Contract Owner
may change the allocation percentages without fee, penalty or other charge.
Allocation changes must be made by Written Request unless the Contract Owner
has by Written Request authorized Keyport to accept telephone allocation
instructions from the Contract Owner or from a person acting for the Contract
Owner as an attorney-in-fact under a power of attorney. By authorizing Keyport
to accept telephone changes, a Contract 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 Contract 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-account 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 SteinRoe Variable Investment Trust Sub-Accounts
Stein Roe Money Market Fund ("SRMMF") SRMMF and SRMMF-
DCA Sub-Accounts*
Stein Roe Mortgage Securities Fund ("SRMSF") SRMSF Sub-Account
Stein Roe Balanced Fund ("SRBF") SRBF Sub-Account
Stein Roe Growth Stock Fund ("SRGSF") SRGSF Sub-Account
Stein Roe Special Venture Fund ("SRSVF") SRSVF Sub-Account
Eligible Funds of Liberty Variable Investment Trust Sub-Accounts
Colonial Growth and Income Fund ("CGIF") CGIF Sub-Account
Colonial Strategic Income Fund ("CSIF") CSIF Sub-Account
Stein Roe Global Utilities Fund ("SRGUF") SRGUF Sub-Account
Colonial U.S. Stock Fund ("CUSSF") CUSSF Sub-Account
Colonial International Fund for Growth ("CIFG") CIFG Sub-Account
Newport Tiger Fund ("NTF") NTF Sub-Account
* The SRMMF-DCA Sub-Account is available only under previously issued
Contracts that allocated the initial purchase payment under Keyport's Value-
Added Dollar Cost Averaging program. This Sub-Account was not generally
available after July 31, 1993 for the allocation of any payment. See Appendix
D on Page 36.
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds of SteinRoe Variable Investment Trust, the
separate funds of Liberty Variable Investment 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 Contracts.
Stein Roe & Farnham Incorporated ("Stein Roe") is the investment adviser for
each Eligible Fund of SteinRoe Trust and is sub-adviser for Stein Roe Global
Utilities Fund of the Liberty Trust. 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.
Liberty Advisory Services Corp. ("LASC"), 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 Fund and Stein Roe Global
Utilities Fund). Colonial has provided investment advisory services since
1931. Newport Fund Management, Inc., an affiliate of Keyport, serves as sub-
adviser for the Newport Tiger Fund.
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 SteinRoe
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Stein Roe Money Market Fund,
Variable Series High current income
from short-term money
(SRMMF and SRMMF-DCA Sub-Accounts)* market instruments while emphasizing
preservation
of capital and maintaining excellent
liquidity.
Stein Roe Mortgage Securities Fund,
Variable Series
(SRMSF Sub-Account) Highest possible level of
current income consistent with safety of
principal and maintenance of liquidity
through investment primarily in mortgage-
backed securities.
Stein Roe Balanced Fund, Variable
Series (SRBF Sub-Account) High total investment return
through investment in a changing mix of
securities.
Stein Roe Growth Stock Fund,
Variable Series
(SRGSF Sub-Account) Long-term growth of capital
through
investment
primarily in common stocks.
Stein Roe Special Venture Fund,
Variable Series
(SRSVF Sub-Account) Capital growth by investing
primarily in common stocks, convertible
securities, and other securities selected
for prospective capital growth.
* The SRMMF-DCA Sub-Account was not generally available after July 31, 1993
for the allocation of an initial purchase payment. See Appendix D on Page 36.
Eligible Funds of Liberty
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Colonial Growth and Income Fund,
Variable Series
(CGIF Sub-Account) Primarily income
and long-term capital growth and,
secondarily, preservation of capital.
Colonial Strategic Income Fund,
Variable Series
(CSIF Sub-Account) A high level of
current income, as is consistent with
the prudent risk, and maximizing total
return, by diversifying investments
primarily in U.S. and foreign
government and high yield, high risk
corporate debt securities. The Fund
may invest a substantial portion of
its assets in high yield, high risk
bonds (commonly referred to as "junk
bonds").
Stein Roe Global Utilities Fund,
Variable Series
(SRGUF Sub-Account) Current income and
long-term growth of capital and
income.
Colonial U.S. Stock Fund, Variable
Series
(CUSSF Sub-Account) Long-term capital
growth by investing primarily in large
capitalization equity securities.
Colonial International Fund for Growth,
Variable Series (CIFG Sub-Account) Long-term capital growth, by
investing primarily in non-U.S. equity
securities. The Fund is non-
diversified and may invest more than
5% of its total assets in the
securities of a single issuer, thereby
increasing the risk of loss compared
to a diversified fund.
Newport Tiger Fund, Variable Series
(NTF Sub-Account) Long-term capital
growth by 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).
There is no assurance that the Eligible Funds will achieve their stated
objectives.
SteinRoe Variable Investment Trust is a funding vehicle for variable annuity
contracts and variable life insurance policies offered by separate accounts of
Keyport and of insurance companies affiliated and unaffiliated with Keyport.
Liberty Variable Investment Trust is a funding vehicle for variable annuity
contracts and variable life insurance policies offered by separate accounts of
Keyport and of insurance companies affiliated with Keyport. The risks involved
in this "mixed and shared funding" are disclosed in the Trusts' prospectuses
under the caption "The Trust".
Dollar Cost Averaging
Keyport offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the SRMMF Sub-Account or the One-Year Guarantee Period
of the Fixed Account to other Sub-Accounts selected by the Contract Owner. The
program allows a Contract Owner to invest in non-"money market" 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
Contract Value transferred into the SRMMF Sub-Account or One-Year Guarantee
Period. Under the program, Keyport makes automatic transfers on a periodic
basis out of the SRMMF 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 Contract Owner may choose but there are
currently no limits). The One-Year Guarantee Period option of the program is
not available under Contracts issued to New Jersey and Washington residents.
A transfer under the program will not be counted as a transfer for purposes of
the limitations in "Transfer of Variable Account Value" below. The automatic
transfer program does not guarantee a profit nor does it protect against loss
in declining markets. The program is described in detail in Appendix D on Page
36. Appendix D also describes the Value-Added Dollar Cost Averaging Program
(with its SRMMF-DCA Sub-Account), which was not generally available after July
31, 1993 for the allocation of an initial purchase payment.
Transfer of Variable Account Value
Contract Owners may transfer Variable Account Value from one Sub-Account to
another Sub-Account and/or to the Fixed Account.
The Contract allows Keyport to charge a transfer fee and to limit the number
of transfers that can be made in a specified time period. Contract Owners
should be aware that transfer limitations may prevent an Owner from making a
transfer on the date he or she wants to, with the result that the Owner's
future Contract Value may be lower than it would have been had the transfer
been made on the desired date.
Currently, Keyport is not charging a transfer fee but it is limiting transfers
to 12 per calendar year except as follows. For transfers under different
Contracts 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, the transfer
limitation is instead one transfer every 30 days.
Regardless of which transfer limitation is applicable, Keyport is also
limiting each transfer to a maximum of $500,000. All transfers requested for a
Contract 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 limitation of 12 transfers in a year of up to $500,000 apiece,
Keyport may treat as one transfer all transfers requested by a Contract Owner
for multiple Contracts 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 limitation of one $500,000 transfer every 30 days, Keyport
will treat as one transfer all transfers requested under different Contracts
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 Contract and, within the next 30 days, a
transfer request for another Contract 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 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 Contract Owners who are not engaging in significant transfer activity
and Contract Owners who are engaging in such activity. Keyport has determined
that the actions of Contract Owners engaging in significant transfer activity
among Sub-Accounts may cause an adverse affect on the performance of the
underlying Fund for the Sub-Account involved. The movement of Sub-Account
values from one Sub-Account to another may prevent the appropriate underlying
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 Contract Owners.
Contract 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.
Keyport does not guarantee any maximum transfer fee that it may charge, but
the fee will not exceed the cost of effecting a transfer. Contracts delivered
in Pennsylvania, South Carolina and Texas contain a stated maximum of $15 per
transfer.
Transfers must be made by Written Request unless the Contract Owner has by
Written Request authorized Keyport to accept telephone transfer requests from
the Contract Owner or from a person acting for the Contract Owner as an
attorney-in-fact under a power of attorney. By authorizing Keyport to accept
telephone transfer instructions, a Contract 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 Contract
Owners authorizing telephone transfers will be notified, in advance, of any
changes. Written transfer requests may be made by a person acting for the
Contract 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 Contract 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 Contract
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 Contract 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 Contract, Keyport may add or substitute shares
of another Eligible Fund or of another mutual fund for Eligible Fund shares
already purchased under the Contract. No substitution of Fund shares in any
Sub-Account may take place without prior approval of the Securities and
Exchange Commission and notice to Contract 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 Contracts.
DEDUCTIONS
Deductions for Contract Maintenance Charge
Keyport has responsibility for all administration of the Contracts and the
Variable Account. This administration includes, but is not limited to,
preparation of the Contracts, maintenance of Contract Owners' records, and all
accounting, valuation, regulatory and reporting requirements. Keyport makes a
Contract Maintenance Charge for such services. At the present time the
Contract Maintenance Charge is $36.00 per Contract Year. PRIOR TO THE INCOME
DATE THE CONTRACT MAINTENANCE CHARGE IS NOT GUARANTEED AND MAY BE CHANGED BY
KEYPORT. The Contract Maintenance Charge of any Contract delivered in
Pennsylvania, South Carolina, or Texas may not be changed by Keyport to exceed
$100 per year. There is no such limit under Contracts delivered in other
jurisdictions.
Prior to the Income Date, the full amount of the charge will be deducted from
the Variable Account Value on each Contract Anniversary and on the date of any
total surrender not falling on the Contract Anniversary. On the Income Date, a
pro-rata portion of the charge due on the next Contract Anniversary will be
deducted from the Variable Account Value. This pro-rata charge covers the
period from the prior Contract 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 Contract 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 Contract 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
certain total surrenders after the death of the Annuitant or Contract Owner
will not result in payments that are reduced by a Contingent Deferred Sales
Charge or in payments that are lower than the amount of purchase payments less
any prior partial surrenders. Keyport assumes an expense risk since the Con-
tract Maintenance Charge after the Income Date will stay the same and not be
affected by variations in expenses.
To compensate it for assuming these mortality and expense risks, for each
Valuation Period Keyport deducts from each Sub-Account (other than the SRMMF-
DCA Sub-Account from which no deduction is made) 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 Contracts
issued to employees of Keyport and other persons specified in "Distribution of
the Contract" on Page 24.
Deductions for Daily Sales Charge
Keyport also deducts from each Sub-Account (other than the SRMMF-DCA Sub-
Account from which no deduction is made) each Valuation Period a sales 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 Contract.
This charge will not be deducted from Sub-Account values attributable to
Contracts that have reached the maximum cumulative sales charge limit defined
in the next section and to Contracts issued to employees of Keyport and other
persons specified in "Distribution of the Contract" on Page 24. 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 Contract 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 Contract'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 Contract and the Contract Value over time.
A surrender in any Contract Year will be free of Contingent Deferred Sales
Charge to the extent the surrender amount does not exceed the Contract's
increase in value at that time. The increase in value is equal to: the
Contract Value at the time of surrender; less that portion of purchase
payments that are still remaining at the time of surrender.
After the first Contract Year, Keyport guarantees that a minimum amount of
Contract Value will be free of Contingent Deferred Sales Charge each year.
This amount is equal to 10% of the Contract Value at the beginning of each
Contract Year (i.e., on the Contract Anniversary). This 10% amount will be
reduced by the amount of each surrender in a year that represents the
Contract's increase in value. The portion of any surrender in excess of this
increase in value but not in excess of the remaining 10% amount will be free
of Contingent Deferred Sales Charge. This portion 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
Contract Year in excess of the Contract's increase in value at the time of
surrender; and the amount of any surrender in any later Contract Year in
excess of the Contract's increase in value at the time of surrender (or in
excess of the 10% limit if it applies). 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 Contract's maximum
cumulative sales charge will be deducted from the Contract Value in the same
manner as the surrender amount. The maximum cumulative sales charge is equal
to (a) less (b), where (a) is 8.5% of the total purchase payments made to the
Contract and (b) is the sum of all prior Contingent Deferred Sale Charge
deductions from the Contract Value and all prior Variable Account sales
charges applicable to the Contract from the 0.15% sales 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 Contract Value has grown to an assumed $13,200 when the Owner decides to
withdraw $8,000. The Contract Value at the beginning of the Contract 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 Contract's
increase in value ($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 sales 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 Contract Values under the rules specified in the
"Surrenders" section on Page 19.
The Contingent Deferred Sales Charge, when it is applicable, will be used to
cover the expenses of selling the Contract, 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 Contract can receive up to 6% of purchase
payments with additional compensation later based on the Contract Value of
those payments. During certain time periods selected by Keyport and the
Principal Underwriter, the percentage may increase to 6.25%.
The Contingent Deferred Sales Charge will be eliminated under Contracts issued
to employees of Keyport and other persons specified in "Distribution of the
Contract" on Page 24.
Keyport may reduce or change to 0% any Contingent Deferred Sales Charge
percentage under a Contract issued in an internal exchange or transfer of an
annuity contract of Keyport's general account.
Keyport may establish a program to allow a Contract Owner to request
systematic partial surrenders in the first Contract Year up to a total of 10%
of the initial purchase payment to the Contract. Under such a program, Keyport
may waive the Contingent Deferred Sales Charge on the amount of any partial
surrender that is in excess of the Contract's increase in value (defined in
the third paragraph of this section) at the time the surrender occurs. Any
such excess surrender amount will not be deducted from the initial purchase
payment under the procedure described in the fourth paragraph of this section.
This means that the waiver of Contingent Deferred Sales Charge is not a
permanent waiver and the Charge can potentially be collected by Keyport in the
event the Contract Owner later makes a non-systematic partial or total
surrender.
Deductions for Transfers of Variable Account Value
The Contract allows Keyport to charge a transfer fee. Currently no fee is
being charged. Contract Owners will be notified, in advance, of the imposition
of any fee. Keyport does not guarantee any maximum transfer fee that it may
charge, but the fee will not exceed the cost of effecting a transfer.
Contracts delivered in Pennsylvania, South Carolina and Texas contain a stated
maximum of $15 per 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 Contract offered hereby. Such premium taxes
depend, among other things, on the type of Contract (Qualified or Non-
Qualified), on the state of residence of the Contract 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 Contract Value.
Deductions for Income Taxes
Keyport will deduct from any amount payable under the Contract any income
taxes that a governmental authority requires Keyport to withhold with respect
to that amount. See "Income Tax Withholding" and "Tax-Sheltered Annuities" on
Page 22.
Total Expenses
The Variable Account's total expenses in relation to the Contract will be the
Contract 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 prospectus.
THE CONTRACTS
Variable Account Value
The Variable Account Value for a Contract is the sum of the value of each Sub-
Account to which values are allocated under a Contract. 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 Contract 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 $10. 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 1.25% per year
Mortality and Expense Risk Charge; plus
(ii) the Valuation Period equivalent of the .15% per year
sales 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.
For the SRMMF-DCA Sub-Account only, (c)(i) and (c)(ii) above are not
applicable.
If a Contract 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 Contracts issued to employees of
Keyport and other persons specified in "Distribution of the Contract" on Page
24, 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 Contracts
issued in an internal exchange or transfer (see "Deductions for Daily Sales
Charges" on Page 14).
Modification of the Contract
Only Keyport's President or Secretary may agree to alter the Contract or waive
any of its terms. Any changes must be made in writing and with the Contract
Owner's consent, except as may be required by applicable law.
Right to Revoke
The Contract Owner may return the Contract within 10 days after he or she
receives it by delivering or mailing it to Keyport's Office. The return of the
Contract by mail will be effective when the postmark is affixed to a properly
addressed and postage-prepaid envelope. The returned Contract will be treated
as if Keyport never issued it and Keyport will refund: (a) the initial
purchase payment for Contracts delivered in Connecticut, Georgia, Idaho, North
Carolina, South Carolina, Utah, Washington and West Virginia; (b) the Contract
Value for Contracts delivered in Arizona, California if the Contract Owner is
age 60 or older (see below), Kansas, Minnesota, North Dakota and Pennsylvania;
and (c) the lesser of the initial purchase payment or the Contract Value for
Contracts delivered elsewhere, including in California if the Contract Owner
is under age 60.
For Contracts delivered in California to a Contract Owner age 60 or older, the
Contract Owner may return the Contract to Keyport's Office or to the agent
from whom the Contract was purchased. If the Contract is received at Keyport's
Office or by the agent within 30 days after the Owner receives the Contract,
Keyport will refund the Contract Value.
DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant
These provisions apply if, before the Income Date while the Contract is In
Force, the primary Owner or any joint Owner dies (whether or not the decedent
is also the Annuitant) or the Annuitant dies under a Contract with a non-
natural Owner such as a trust. The Designated Beneficiary will control the
Contract after such a death.
The covered person under this paragraph shall be the primary Owner or, if
there is a non-natural Owner such as a trust, the Annuitant shall be the
covered person. If the covered person dies, the Contract Value will be
increased, as provided below, if it is less than the guaranteed minimum death
value amount ("GMDV"). Except for certain previously issued Contracts, the
GMDV is the greater of:
(a) the sum of all purchase payments made through the date of
death, less all partial surrenders made through the date of death;
and
(b) Keyport will compute an "Anniversary Value" for each Contract
Anniversary (if any) before the 81st birthday of the covered person
and Keyport will use the greatest of such "Anniversary Values". The
"Anniversary Value" for each applicable Contract Anniversary
initially equals the Contract Value on that Anniversary. It is then
increased by any purchase payments made from that Anniversary until
the date of death, and decreased by the following amount at the time
of each partial surrender made from that Anniversary until the date
of death: the partial surrender amount divided by the Contract
Value right before the surrender, multiplied by the "Anniversary
Value" right before the surrender.
The GMDV will be different for any Contract issued on or after July 1, 1993
using application form number FLEX-APP(REV)3, FLEX-APP-OH(REV)3 or FLEX-APP-
PA(REV)3, but before the later of July 5, 1994 and the date Keyport changed
the death provisions in the state of issue of a Contract (you or your agent
may call 800-437-4466 to see when the change was made in your state). The
GMDV for such a Contract is the greatest of (a) above, (b) above, and (c) the
Contract Value on the seventh Contract Anniversary, plus any purchase payments
made from that Anniversary until the date of death, less any partial
surrenders made from that Anniversary until the date of death. The GMDV for
any other Contract issued before May 1, 1996 is the greater of (a) and (c)
above.
When Keyport receives due proof of the covered person's death, Keyport will
compare, as of the date of death, the Contract Value to the GMDV. If the
Contract Value was less than the GMDV, Keyport will increase the current
Contract 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 Contract 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 Contract 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 Contract for
the Contract Value (i.e., any applicable Contingent Deferred Sales Charge will
be waived). 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, the Surrender
Value is payable instead. If the Contract is not surrendered, it will stay in
force for the time period specified below.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
primary Owner as of the decedent's date of the death. And, if the Annuitant is
the decedent, the new Annuitant will be any living contingent annuitant,
otherwise the surviving spouse. The Contract can stay in force until another
death occurs (i.e., until the death of the Annuitant, primary Owner or joint
Owner). Except for this paragraph, all of "Death Provisions" will apply to
that subsequent death.
In all other cases, the Contract can stay in force 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 Contract for its Surrender Value. If the
Contract is still in force at the end of the five-year period, Keyport will
automatically end it then by paying the Contract Value 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 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-Owner Annuitant. These provisions apply if, before the
Income Date while the Contract is In Force, (a) the Annuitant dies, (b) the
Annuitant is not an Owner, and (c) the Owner is a natural person. The Contract
will continue in force after the Annuitant's death. The new Annuitant will be
any living contingent annuitant, otherwise the primary Owner.
DEATH PROVISIONS FOR QUALIFIED CONTRACTS
Death of Annuitant. If the Annuitant dies before the Income Date while the
Contract is In Force, the Designated Beneficiary will control the Contract
after such a death. The Contract Value will be increased, as provided below,
if it is less than the guaranteed minimum death value amount ("GMDV"). The
GMDV is the amount defined on page 17. When Keyport receives due proof of the
Annuitant's death, Keyport will compare, as of the date of death, the Contract
Value to the GMDV. If the Contract Value was less than the GMDV, Keyport will
increase the current Contract 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 Contract 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
Contract 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
Contract for the Contract Value (i.e., any applicable Contingent Deferred
Sales Charge will be waived). For a surrender after the applicable 90 or 60
day period, the Surrender Value is payable instead.
If the Contract is not surrendered, it can stay in force 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
surrenders or the right to totally surrender the contract for its Surrender
Value. If the Contract is still in force at the end of the period, Keyport
will automatically end it then by paying the Contract Value 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 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.
OWNERSHIP
The Contract Owner shall be the person designated in the application. The
Contract Owner may exercise all the rights of the Contract. Joint Owners are
permitted but not contingent Owners.
The Contract Owner may by Written Request change the 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 Owner by means of a gift (i.e., a transfer without full
and adequate consideration) may be a taxable event, a Contract Owner should
consult a competent tax adviser as to the tax consequences resulting from such
a transfer.
Any Qualified Contract may have limitations on transfer of ownership. A
Contract Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
ASSIGNMENT
The Contract Owner may assign the Contract at any time. A copy of any
assignment must be filed with Keyport. The Contract Owner's rights and those
of any revocably-named person will be subject to the assignment. Any Qualified
Contract may have limitations on assignability.
Because an assignment may be a taxable event, a Contract Owner should consult
a competent tax adviser as to the tax consequences resulting from any such
assignment.
SURRENDERS
The Contract Owner may partially surrender the Contract. Keyport must receive
a Written Request and the minimum amount to be surrendered must be at least
$300 or such lesser amount as Keyport may permit in conjunction with a program
of systematic partial surrenders. If the Contract Value after a partial
surrender would be below $2,500, Keyport will treat the request as a surrender
of only the excess amount over $2,500. The amount surrendered will include any
applicable Contingent Deferred Sales Charge and therefore the amount actually
surrendered may be greater than the amount of the surrender check requested.
Unless the request specifies otherwise, the total amount surrendered will be
deducted from all Sub-Accounts of the Variable Account in the proportion 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.
The Contract Owner may totally surrender the Contract by making a Written
Request. Surrendering the Contract will end it. The Surrender Value is equal
to the Contract Value for the Valuation Period during which Keyport has
received the request less: the Contract Maintenance Charge if there is any
Variable Account Value; any applicable Contingent Deferred Sales Charge; and
any applicable premium taxes not previously deducted.
Keyport will pay the amount of any surrender within seven days of receipt of
such request. Alternatively, the Contract Owner may purchase for himself or
herself an annuity payment option with any surrender benefit of at least
$5,000. Keyport's consent is needed to choose an option if the Contract Owner
is not a natural person.
Settlement Options based on life contingencies cannot be surrendered after
annuity payments have begun. Settlement Option 1, which is not based on life
contingencies, may be surrendered as described on Pages 19-20.
Because of the potential tax consequences of a full or partial surrender, a
Contract 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 Contract is In Force,
payments will begin under the payment option or options the Contract Owner has
chosen. The amount of the payments will be determined by applying the Contract
Value (less any premium taxes not previously deducted and less any applicable
Contract Maintenance Charge) on the Income Date in accordance with the option
selected.
Income Date and Settlement Option
The Contract Owner may select an Income Date and Settlement Option at the time
of application. If the Contract Owner does not select a Settlement Option,
Option 2 will automatically be designated. If the Contract Owner does not
select an Income Date for the Annuitant, the Income Date will automatically be
the first day of the calendar month following the later of the Annuitant's
75th birthday or the 10th Contract Anniversary.
Change in Income Date and Settlement Option
The Contract Owner may choose or change a Settlement 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 variable annuity payment
options, not earlier than the second calendar month after the Issue Date
(e.g., if the Issue Date is in January, the earliest Income Date is March 1);
(b) for fixed annuity options, not earlier than the first calendar month after
the end of the first Contract Year; (c) not later than the calendar month
after the Annuitant's 90th birthday; and (d) the first day of a calendar
month.
Settlement Options
The payment options are:
Option 1: Income for a Fixed Number of Years;
Option 2: Life Income with 10 Years of Payments Guaranteed; and
Option 3: 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 the Fixed Account. Variable annuity payments will
fluctuate while fixed annuity payments will not. (See Appendix A on Page 25
for a discussion of fixed annuity payments.) Unless the Owner chooses
otherwise, Variable Account Value will be applied to a variable annuity option
and Fixed Account Value will be applied to a fixed annuity option. Whether
variable or fixed, the same Contract 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 a payment
option. Any payment 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 1: Income For a Fixed Number of Years. Keyport will pay an annuity for
a chosen number of years, not less 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 Contracts), unless 3% per
year is chosen by Written Request); 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" on Page 14). Instead of
receiving a lump sum, the payee can 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 1 payments have been made for
less 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 Contracts), unless
3% per year is chosen by Written Request.
The Mortality and Expense Risk Charge is deducted during the Option 1 payment
period but Keyport has no mortality risk during this period.
Keyport has available a "level monthly" payment option that can be chosen for
variable payments under Option 1. Under this option, the monthly payment
amount changes every 12 months instead of every month as would be the case
under the standard monthly payment frequency. The "level monthly" option
converts an annual payment amount into 12 equal monthly payments as follows.
Each annual payment will be determined as described in "Variable Annuity
Payment Values" on page 29. 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. If the payments are commuted, (1) the commutation
method described above for calculating the present value of remaining payments
applies to any remaining annual payments and (2) any unpaid monthly payments
out of the current 12 will be commuted at the interest rate that was used to
determine those 12 current monthly payments.
See "Annuity Payments" on Pages 21-22 for the manner in which Option 1 may be
taxed.
Option 2: 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 less 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 Contracts), unless
3% per year is chosen by Written Request.
The amount of the annuity payments will depend on the age of the payee at the
time annuity payments are to begin and it may also depend on the payee's sex.
Option 3: 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 at the
time annuity payments are to begin 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 THE PAYEES BOTH 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% (5% for Oregon Contracts), 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 Contract Maintenance Charge. A
payee can instruct Keyport to change the Sub-Account(s) used to determine the
amount of the variable annuity payments. Any change requested must be at least
six months after a prior selection.
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 Contract 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 Contract
Value, on annuity payments, and on the economic benefit to the Contract Owner,
Annuitant or Designated Beneficiary depends on the type of retirement plan for
which the Contract 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 Contract until a distribution
occurs, in the form of a full surrender, a partial surrender, an assignment or
gift of the Contract, or annuity payments. A trust or other entity owning a
Non-Qualified Contract other than as an agent for an individual is taxed
differently; increases in the value of a Contract are taxed yearly whether or
not a distribution occurs.
Surrenders, Assignments and Gifts. A Contract Owner who fully surrenders his
or her Contract is taxed on the portion of the payment that exceeds his or her
cost basis in the Contract. For Non-Qualified Contracts, the cost basis is
generally the amount of the purchase payments made for the Contract and the
taxable portion of the surrender payment is taxed as ordinary income. For
Qualified Contracts, 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 Owner is taxed on the portion of
the amount that exceeds the Contract Owner's cost basis in the Contract. 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 Contracts, 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 surrenders received under Non-Qualified Contracts prior to
annuitization are first included in gross income to the extent Contract Value
exceeds purchase payments. Then, to the extent the Contract Value does not
exceed purchase payments, such surrenders are treated as a non-taxable return
of principal to the Contract Owner. For partial surrenders under a Qualified
Contract, 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 Contracts is generally zero, partial surrender amounts will
generally be fully taxed as ordinary income.
A Contract Owner who assigns or pledges a Non-Qualified Contract 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 surrenders. A Contract Owner who
gives away the Contract (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 Contract.
A special computational rule applies if Keyport issues to the Contract Owner,
during any calendar year, (a) two or more Contracts or (b) one or more
Contracts and one or more of Keyport's other annuity contracts. Under this
rule, the amount of any distribution includable in the Contract 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 contract will be includable in gross income to
the extent that at the time of distribution the sum of the values for all the
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 Contract 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 Contract
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 Contracts, 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 under commutable options 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 "level monthly" payment option available under Option 1,
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 Owners, Annuitants, and Designated
Beneficiaries under Contracts 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 Contract Owner (or,
where the 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 Contract's annuity payment option that provides for a series of
substantially equal payments, provided only one purchase payment is made to
the Contract, the Contract is not issued as a result of a Section 1035
exchange, and the first annuity payment begins in the first Contract Year.
Income Tax Withholding. Keyport is required to withhold federal income taxes
on taxable amounts paid under Contracts 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) on page 22
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 Contract 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
Contract will be subject to the distribution-at-death rules described in
"Death Provisions for Non-Qualified Contracts" on Page 17; (b) purchase
payments made between 8/14/82 and 1/18/85 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 8/14/82 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 surrenders 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 Contract as those requirements may change from time to
time. If the diversification requirements are not satisfied, the Contract
would not be treated as an annuity contract. As a consequence to the Contract
Owner, income earned on a Contract would be taxable to the Contract 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 Contract
Owner's control of the investments of a segregated asset account may cause the
Contract 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 Contract. Keyport, however, has reserved certain
rights to alter the Contract 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, Contract Owners are
urged to consult with their own tax advisers.
Qualified Plans
The Contract 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 Contract with the various types of Qualified Plans. Participants
under such Qualified Plans as well as Contract 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 Contract
issued in connection therewith. Following are brief descriptions of the
various types of Qualified Plans and of the use of the Contract in connection
therewith. Purchasers of the Contract should seek competent advice concerning
the terms and conditions of the particular Qualified Plan and use of the
Contract 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 Contract 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 Contract Owner who has requested a distribution from a
Contract 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 Contract 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 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 Contract 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 Contract 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.
Texas Optional Retirement Program
If Keyport is an approved carrier under the Texas Optional Retirement Program
("ORP"), any Contract issued to an ORP participant will contain an ORP
endorsement that will amend the Contracts in two ways. First, if for any
reason a second year of ORP participation is not begun, the total amount of
the State of Texas' first-year contribution will be returned to the
appropriate institution of higher education upon its request. Second, no
benefits will be payable, through surrender of the Contract or otherwise,
unless the participant dies, accepts retirement, or terminates employment in
all Texas institutions of higher education. The value of the Contract may,
however, be transferred to other contracts or carriers during the period of
ORP participation.
VARIABLE ACCOUNT VOTING RIGHTS
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 Contract shall be the Contract
Owner. The number of shares held in each Sub-Account which are attributable to
each Contract Owner is determined by dividing the Contract Owner's interest in
each Sub-Account by the net asset value of the applicable share of the
Eligible Fund. The person having the voting interest 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 which a person has a right to vote 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.
DISTRIBUTION OF THE CONTRACT
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Contract described in this prospectus. The Contract 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.
Different Contracts are sold (1) to a person who is an officer, director, or
employee of Keyport, a trustee or officer of SteinRoe Variable Investment
Trust or Liberty Variable Investment Trust, an employee of the investment
adviser or sub-investment adviser of either Trust, or an employee of a company
that is under contract with either Trust to provide management or
administrative services or (2) to any Qualified Plan established for such a
person. Such Contracts are different from the Contracts sold to others in that
(1) they are not subject to the deduction for the Contract 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 CONTRACT OWNERS
Contract Owners with questions about their Contracts can 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 4
Principal Underwriter 4
Custodian 4
Experts 4
Investment Performance 5
Average Annual Total Return for a Contract
that is Surrendered and for a Contract that Continues 6
Change in Accumulation Unit Value 8
Yields for SRMMF and SRMMF-DCA Sub-Accounts 10
Financial Statements 12
Keyport Life Insurance Company 12
KMA Variable Account 33
APPENDIX A
THE FIXED ACCOUNT (ALSO KNOWN AS THE GUARANTEED RATE ACCOUNT)
Introduction
This Appendix describes the Fixed Account option available under the Contract.
The Fixed Account is not available under either the Contract (form number
FLEX(4)V) that is issued to New Jersey residents or the Contract (form number
FLEX(4)/WA) that is issued to Washington residents.
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, are
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 Contract 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 10%. The Contract Owner may change the allocation percentages
without fee, penalty or other charge. Allocation changes must be made by
Written Request unless the Contract Owner has by Written Request authorized
Keyport to accept telephone allocation instructions from the Contract Owner.
By authorizing Keyport to accept telephone changes, a Contract 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
Contract 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 Contracts, 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 Contract Value.
Keyport offers a Capital Protection Plus program that a Contract Owner may
request. Under this program, Keyport will allocate part of the purchase
payment to the Guarantee Period selected by the Contract Owner so that such
part, based on that Guarantee Period's Maturity Rate in effect on the date of
allocation, will equal at the end of the Guarantee Period the total payment
amount. The rest of the purchase payment will be allocated to the Sub-
Account(s) of the Variable Account based on the Contract 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 payment
of $10,000 when the Maturity 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
Contract 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 earned on those payments; plus
(b) any Variable Account Value transferred to the Fixed Account plus the
interest subsequently earned on the transferred value; less
(c) any prior partial surrenders from the Fixed Account; 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. Each Guarantee Period will have a Basic Interest Rate and a
Maturity Interest Rate. During the Guarantee Period, Keyport will credit
interest at the Basic Rate. At the end of the Guarantee Period, Keyport will
credit an additional interest amount so that the original allocation amount
remaining at that time will have earned interest at the Maturity Rate for the
entire Guarantee Period. For certain post-death surrenders occurring before
the end of the Guarantee Period (see the last paragraph of this section),
Keyport will credit an additional interest amount so that the original
allocation amount remaining at the time of surrender will have earned interest
at the Maturity Rate through the time of surrender.
Under this method of crediting interest (unless the post-death surrender
exception applies): (a) the Maturity Rate will be credited only on amounts
held for the entire Guarantee Period; and (b) if the Contract Owner or a
Designated Beneficiary surrenders or transfers any part of an allocated amount
before the end of a Guarantee Period, only the Basic Rate will be credited on
that part.
Any Basic and Maturity Interest Rates set by Keyport will be at least 3.5% per
year.
Keyport's method of crediting interest means that Fixed Account Value might be
subject to different rates for each Guarantee Period the Contract 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.
With certain deaths, "Death Provisions for Non-Qualified Contracts" and "Death
Provisions for Qualified Contracts" provide that the Designated Beneficiary
may surrender the Contract within 90 days of the date of death for the
Contract Value. In the event such a surrender occurs before the end of the
Guarantee Period, Keyport will credit immediately before the surrender an
additional interest amount so that the original allocation amount remaining at
that time will have earned interest at the Maturity Rate throughout the
Guarantee Period. For a surrender after 90 days, no additional interest amount
will be credited.
Transfers when Guarantee Periods End
The total accumulated amount at the end of a Guarantee Period will be
transferred to the new Guarantee Period(s) and/or Sub-Account(s) of the
Variable Account that the Contract Owner has selected by Written Request. If
the Contract Owner has not made a selection, Keyport will automatically
transfer the total accumulated amount at the end of the Guarantee Period to
the CIF Sub-Account. If the Guarantee Period selected exceeds the time
remaining to the Income Date but does not exceed the time remaining to the
latest Income Date allowable under the Contract, the Income Date will
automatically change to the latest allowable date, thereby allowing the
selected Guarantee Period to go into effect. The Contract Owner may not
otherwise select a Guarantee Period that would end after the Income Date.
Transfers of Fixed Account Value
The Contract Owner may transfer Fixed Account Value from one Guarantee Period
to another or to one or more Sub-Accounts of the Variable Account. If the
Fixed Account Value represents multiple Guarantee Periods, the transfer
request must specify from which values the transfer is to be made.
The Contract 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 12 transfers per calendar year with a
$500,000 per transfer dollar limit. See "Transfer of Variable Account Value"
on Page 12. These limitations will not apply to any transfer made at the end
of a Guarantee Period. Contract 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 Contract Owner has
authorized Keyport by Written Request to accept telephone transfer
instructions from the Contract Owner or from a person acting for the Contract
Owner as an attorney-in-fact under a power of attorney. By authorizing Keyport
to accept telephone transfer instructions, a Contract 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 Contract
Owners authorizing telephone transfers will be notified, in advance, of any
changes. Written transfer requests may be made by a person acting for the
Contract 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 Contract 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.
Reductions of Guarantee Period Values After a Transfer or Surrender
As stated elsewhere in the prospectus, a transfer request must specify from
which Guarantee Period's values the transfer is to be made and a partial
surrender request may, at the Contract Owner's option, similarly specify the
Guarantee Period. The specified amount will be deducted from both the
allocated purchase amount and its associated interest in the proportion that
each bear to their total sum. For example, if $600 is to be deducted from a
$800 payment that was allocated for a three-year Guarantee Period and the
interest earned up to the date of transfer is $200 (for a total value of
$1,000), $480 will be deducted from the payment allocation [($800/$1,000) x
$600] and $120 will be deducted from the interest [($200/$1,000) x $600]. The
$400 remaining after the transfer or surrender would thus represent $320 of
payment allocation and $80 of interest. This $320, if it remains until the end
of the Guarantee Period, would receive the Maturity Interest Rate credit
described in "Interest Credits" on Page 26.
If a partial surrender request does not specify any Guarantee Period, the
ordering rule in "Surrenders" on Page 19 may result in a certain amount of
Fixed Account Value being automatically deducted. Any amount determined under
that rule will be deducted from each Guarantee Period's values in the
proportion that each bears to the total Fixed Account Value. For example, if
$500 is to be deducted from two Guarantee Periods' values of $4,000 and
$1,000, $400 will be deducted from the first Guarantee Period's values
[($4,000/$5,000) x $500] and $100 will be deducted from the second
[($1,000/$5,000) x $500]. Each of these amounts (the $400 and the $100 in the
example) will then be deducted from the allocated purchase amount and its
associated interest in the manner stated in the preceding paragraph.
The above rules automatically determine the amount of the allocated purchase
payment and its associated interest that still remains after any transfer or
surrender. The rules do not, however, determine in any way the amount of
Contingent Deferred Sales Charge that may be due since that Charge is based on
different rules and different records.
Fixed Annuity Payment Values
The dollar amount of each fixed annuity payment will be determined by
deducting any applicable premium taxes not previously deducted and then
dividing the remaining Fixed Account Value by $1,000 and multiplying the
result by the greater of: (a) the applicable factor shown in the appropriate
table in the Contract; 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.
APPENDIX B
PRIOR CONTRACTS OF THE VARIABLE ACCOUNT
Persons who purchased the variable annuity contracts identified below before
May 1, 1992 may continue to make purchase payments under those contracts
subject to the terms and conditions of those contracts and this Appendix. All
contracts are subject to the transfer limitations and procedures described in
"Transfer of Variable Account Value" on Page 12. Persons who purchased non-
qualified contracts between April 9, 1981 and September 25, 1981 are not
permitted to make any additional purchase payments under those contracts. Such
non-qualified contracts are not included in number 4 below.
1. KEYFLEX Contracts (Form #FLEX(4)). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. Accumulation
unit values are shown on Page 7. The Dollar Cost Averaging program for use
with the SRMMF Sub-Account or the One-Year Guarantee Period of the Fixed
Account is available (see "Dollar Cost Averaging" on Page 11).
2. KEYFLEX Contracts (Form #FLEX-I). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. SRMMF, SRMSF,
SRBF, SRGSF and SRSVF were substituted on 1/1/89 for, respectively, the former
eligible mutual funds: Cash Income Trust; Mortgage Securities Income Trust;
Managed Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust.
Accumulation unit values are shown on Page 29.
3. FLEX 2 Contracts (Form #FLEX-II). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. SRMMF, SRMSF,
SRBF, SRGSF and SRSVF were substituted on 1/1/89 for, respectively, the former
eligible mutual funds: Cash Income Trust; Mortgage Securities Income Trust;
Managed Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust.
Accumulation unit values are shown on Page 30.
4. All K-100 and KeySource Contracts (Form #VA-1-81) Other than those
Identified in Numbers 5 and 6 below. The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added effective
7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. SRMMF, SRMMF,
SRBF, and SRSVF were substituted on 1/1/89 for, respectively, the former
eligible mutual funds: Cash Income Trust; Money Market/Options Investments,
Inc.; Managed Assets Trust; and Aggressive Stock Trust. Accumulation unit
values are shown on Pages 31-32.
5. K-100 Qualified Contracts (Form #VA-1-81) Issued Before May 1, 1986
Pursuant to Section 457 of the Internal Revenue Code. The current Eligible
Mutual Funds are: Quality Bond Fund, Diversified Bond Fund, High Income Bond
Fund, Growth and Income Fund, and Small Company Growth Fund (formerly named
Keystone Custodian Fund, Series B-1, B-2, B-4, S-1, and S-4, respectively).
Accumulation unit values are shown on Pages 33-34. As of July 1997, Keystone
Liquid Trust and Mid-Cap Growth Fund (formerly named Keystone Custodian Fund,
Series S-3) were no longer eligible funds available for investment.
6. All Other K-100 Qualified Contracts (Form #VA-1-81) Issued Before September
25, 1981. The current Eligible Funds are those listed on Page 11. CGIF,
SRGUF, CIFG, CUSSF, CSIF and NTF were added effective 7/1/93, 7/1/93, 5/2/94,
7/5/94, 7/5/94 and 5/1/95, respectively. SRMMF, SRMMF, SRGSF, SRSVF and SRSVF
were substituted on 1/1/89 for, respectively, the former eligible mutual
funds: Keystone Liquid Trust; Money Market/Options Investments, Inc.; and
Growth and Income Fund, Mid-Cap Growth Fund, and Small Company Growth Fund
(formerly named Keystone Custodian Fund, Series S-1, S-3, and S-4,
respectively). Accumulation unit values for 1989-1996 are shown on Page 32 and
values for 1987-1988 are shown on Pages 33-34.
ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER TWO
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year
Year
Stein Roe Money Market $16.108 $16.704 177,787
1996
Fund (formerly named 15.443 16.108 204,597
1995
Cash Income Fund) 15.062 15.443 475,023
1994
14.849 15.062 514,598
1993
14.530 14.849 582,150
1992
13.906 14.530 907,810
1991
13.052 13.906 1,756,598
1990
12.118 13.052 1,993,108
1989
Cash Income Trust 11.459 12.118 2,740,761
1988
10.917 11.459 2,543,770
1987
Colonial U.S. Stock Fund 12.871 15.488 57,589
1996
(formerly named Colonial- 10.048 12.871 73,706
1995
Keyport U.S. Stock Fund 10.000 (8/11/94) 10.048 5,259
1994
and Colonial-Keyport
U.S. Fund for Growth)
Stein Roe Mortgage 17.853 18.460 164,783
1996
Securities Fund 15.617 17.853 189,804
1995
(formerly named 16.065 15.617 233,588
1994
Mortgage Securities 15.307 16.065 299,033
1993
Income Fund) 14.627 15.307 381,266
1992
12.936 14.627 443,240
1991
12.005 12.936 503,751
1990
10.773 12.005 601,466
1989
Mortgage Securities 10.183 10.773 541,052
1988
Income Trust 10.184 10.183 634,675
1987
Colonial Growth and 13.184 15.338 68,918
1996
and Income Fund 10.258 13.184 57,955
1995
(formerly named 10.464 10.258 66,152
1994
Colonial-Keyport Growth 10.000 (7/22/93) 10.464 20,759
1993
and Income Fund)
Stein Roe Balanced Fund 30.445 34.765 595,783
1996
(formerly named Managed 24.566 30.445 714,638
1995
Assets Fund) 25.692 24.566 861,315
1994
23.802 25.692 1,055,478
1993
22.412 23.802 1,241,344
1992
17.737 22.412 1,462,279
1991
18.092 17.737 1,633,069
1990
14.959 18.092 1,882,766
1989
Managed Assets Trust 13.867 14.959 1,902,679
1988
13.747 13.867 2,544,739
1987
Stein Roe Global 11.508 12.107 20,126
1996
Utilities Fund 8.621 11.508 27,533
1995
(formerly named 9.727 8.621 31,506
1994
Colonial-Keyport 10.000 (7/21/93) 9.727 52,776
1993
Utilities Fund)
Colonial Strategic 11.633 12.606 392,216
1996
Income Fund (formerly 10.000 (1/19/95) 11.633 486,417
1995
named Colonial-Keyport Available in 1994 but no accumulation units were
Strategic Income Fund) purchased.
Colonial International 9.747 10.114 38,348
1996
Fund for Growth 9.323 9.747 34,733
1995
(formerly named 10.000 (5/3/94) 9.323 24,303
1994
Colonial-Keyport
International Fund for
Growth)
Stein Roe Growth Stock 24.378 29.198 231,419
1996
Fund (formerly named 17.919 24.378 239,514
1995
Managed Growth Stock 19.374 17.919 294,345
1994
Fund) 18.687 19.374 327,760
1993
17.744 18.687 377,851
1992
12.137 17.744 346,524
1991
12.498 12.137 409,288
1990
9.635 12.498 525,196
1989
Managed Growth Stock 9.202 9.635 511,030
1988
Trust 10.000 (5/26/87) 9.202 539,305
1987
Stein Roe Special Venture 30.953 38.805 270,844
1996
Fund (formerly named 28.043 30.953 285,923
1995
Capital Appreciation 28.059 28.043 301,017
1994
Fund and Aggressive 20.939 28.059 316,873
1993
Stock Fund) 18.519 20.939 404,666
1992
13.662 18.519 424,426
1991
15.206 13.662 730,255
1990
11.751 15.206 667,685
1989
Aggressive Stock Trust 10.810 11.751 675,561
1988
11.887 10.810 884,826
1987
Newport Tiger Fund 10.242 11.252 23,324
1996
(formerly named Newport- 10.000 (6/8/95) 10.242 4,861
1995
Keyport Tiger Fund)
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER THREE
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year
Year
Stein Roe Money Market $15.810 $16.379 12,242
1996
Fund (formerly named 15.173 15.810 16,359
1995
Cash Income Fund) 14.813 15.173 25,550
1994
14.617 14.813 16,027
1993
14.317 14.617 28,411
1992
13.717 14.317 43,912
1991
12.886 13.717 63,361
1990
11.976 12.886 50,088
1989
Cash Income Trust 11.336 11.976 73,710
1988
10.811 11.336 65,700
1987
Colonial U.S. Stock 12.065 14.503 689
1996
Fund (formerly named 10.000 (3/7/95) 12.065 1,642
1995
Colonial-Keyport U.S. Available in 1994 but no accumulation units were
Stock Fund and Colonial- purchased
Keyport U.S. Fund for
for Growth)
Stein Roe Mortgage 17.783 18.369 15,996
1996
Securities Fund (formerly 15.571 17.783 16,594
1995
named Mortgage Securities 16.033 15.571 21,047
1994
Income Fund) 15.292 16.033 23,129
1993
14.627 15.292 18,834
1992
12.949 14.627 19,947
1991
12.029 12.949 20,699
1990
10.804 12.029 831
1989
Mortgage Securities 10.223 10.804 1,315
1988
Income Trust 10.000 (5/8/87) 10.223 1,180
1987
Colonial Growth and Available in 1993, 1994, 1995 and 1996 but no
Income Fund (formerly accumulation units were purchased.
named Colonial-Keyport
Growth and Income Fund)
Stein Roe Balanced Fund 29.276 33.396 30,978
1996
(formerly named Managed 23.646 29.276 36,360
1995
Assets Fund) 24.754 23.646 44,913
1994
22.956 24.754 54,901
1993
21.636 22.956 59,345
1992
17.140 21.636 72,706
1991
17.501 17.140 77,976
1990
14.484 17.501 86,066
1989
Managed Assets Trust 13.440 14.484 78,797
1988
13.336 13.440 93,727
1987
Stein Roe Global Available in 1993, 1994, 1995 and 1996 but no
Utilities Fund (formerly accumulation units were purchased.
named Colonial-Keyport
Utilities Fund)
Colonial Strategic Income 11.234 12.161 26,307
1996
Fund (formerly 10.000 (3/14/95) 11.234 29,901 1995
named Colonial-Keyport Available in 1994 but no accumulation units
Strategic Income Fund) were purchased.
Colonial International 9.788 10.146 537
1996
Fund for Growth (formerly 9.371 9.788 540
1995
named Colonial-Keyport 10.000 (5/24/94) 9.371 599
1994
International Fund for
Growth)
Stein Roe Growth Stock 22.337 26.727 5,077
1996
Fund (formerly named 16.435 22.337 4,239
1995
Managed Growth Stock 17.787 16.435 6,259
1994
Fund) 17.173 17.787 6,593
1993
16.323 17.173 8,430
1992
11.176 16.323 3,630
1991
11.520 11.176 3,545
1990
8.889 11.520 5,212
1989
Managed Growth Stock 8.497 8.889 2,999
1988
Trust 10.000 (6/18/87) 8.497 2,355
1987
Stein Roe Special Venture 31.595 39.571 24,773
1996
Fund (formerly named 28.653 31.595 24,833
1995
Capital Appreciation Fund 28.059 28.653 29,605
1994
and Aggressive Stock 21.437 28.059 39,376
1993
Fund) 18.978 21.437 47,198
1992
14.014 18.978 40,776
1991
15.614 14.014 40,304
1990
12.078 15.614 50,936
1989
Aggressive Stock Trust 11.121 12.078 44,345
1988
12.241 11.121 53,129
1987
Newport Tiger Fund 10.000(2/5/96) 10.371 1,762
1996
(formerly named Newport- Available in 1995 but no accumulation units were
Keyport Tiger Fund) purchased
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
1989-1996 ACCUMULATION UNIT VALUES FOR CONTRACTS
DESCRIBED IN NUMBERS FOUR AND SIX
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year
Year
Stein Roe Money Market $22.563 $23.457 885,248
1996
Fund (formerly named 21.580 22.563 930,979
1995
Cash Income Fund) 20.996 21.580 1,184,102
1994
20.648 20.996 1,384,339
1993
20.155 20.648 1,697,243
1992
19.243 20.155 2,138,976
1991
18.016 19.243 2,936,979
1990
16.686 18.016 3,493,117
1989
Colonial U.S. Stock 12.722 15.346 28,128
1996
Fund (formerly named 10.000 (1/13/95) 12.722 22,589
1995
Colonial-Keyport U.S. Available in 1994 but no accumulation units were
Stock Fund and Colonial- purchased.
Keyport U.S. Fund for
Growth)
Stein Roe Mortgage 16.740 17.352 42,934
1996
Securities Fund 14.608 16.740 68,359
1995
(formerly named Mortgage 14.990 14.608 72,190
1994
Securities Income Fund) 14.248 14.990 114,507
1993
13.582 14.248 85,079
1992
11.983 13.582 78,913
1991
11.093 11.983 60,390
1990
10.000 (1/13/89) 11.093 12,608
1989
Colonial Growth and 13.097 15.274 16,326
1996
Income Fund (formerly 10.165 13.097 13,781
1995
named Colonial-Keyport 10.344 10.165 10,136
1994
Growth and Income Fund) 10.000 (8/3/93) 10.344 8,415
1993
Stein Roe Balanced Fund 30.394 34.791 266,198
1996
(formerly named Managed 24.465 30.394 296,617
1995
Assets Fund) 25.524 24.465 299,672
1994
23.589 25.524 348,975
1993
22.156 23.589 339,963
1992
17.492 22.156 372,220
1991
17.799 17.492 356,575
1990
14.681 17.799 459,250
1989
Stein Roe Global 11.577 12.209 13,770
1996
Utilities Fund (formerly 8.651 11.577 24,359
1995
named Colonial-Keyport 9.737 8.651 18,049
1994
Utilities Fund) 10.000 (7/21/93) 9.737 23,195
1993
Colonial Strategic 11.305 12.281 446,354
1996
Income Fund (formerly 10.000 (2/28/95) 11.305 465,616
1995
named Colonial-Keyport Available in 1994 but no accumulation units were
Strategic Income Fund) purchased.
Colonial International 9.842 10.238 21,566
1996
Fund for Growth 9.390 9.842 27,992
1995
(formerly named Colonial- 10.000 (5/25/94) 9.390 44,610
1994
Keyport International
Fund for Growth)
Stein Roe Growth Stock 56.113 67.374 66,920
1996
Fund (formerly named 41.147 56.113 60,347
1995
Managed Growth Stock 44.377 41.147 56,165
1994
Fund) 42.701 44.377 66,644
1993
40.447 42.701 67,611
1992
27.598 40.447 54,873
1991
28.349 27.598 43,639
1990
21.801 28.349 38,197
1989
Stein Roe Special Venture 62.755 78.867 270,716
1996
Fund (formerly named 56.716 62.755 329,680
1995
Capital Appreciation 56.611 56.716 346,355
1994
Fund and Aggressive Stock 42.142 56.611 398,198
1993
Fund) 37.181 42.142 446,136
1992
27.361 37.181 466,795
1991
30.380 27.361 581,842
1990
23.420 30.380 611,392
1989
Newport Tiger Fund 10.438 11.496 15,623
1996
(formerly named Newport- 10.000 (5/24/95) 10.438 15,701
1995
Keyport Tiger Fund)
*The date after each $10.00 value is when Keyport first purchased mutual fund
shares for that Sub-Account of the Variable Account.
Accumulation unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
1987-1988 ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER FOUR
(QUALIFIED CONTRACTS ONLY)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year of Year of Year
Year
Cash Income $15.741 $16.686 1,632,674 1988
Trust 14.960 15.741 1,885,426
1987
Managed Assets 13.576 14.681 219,163 1988
Trust 13.425 13.576 293,796
1987
Aggressive Stock 21.491 23.420 409,556 1988
Trust 23.575 21.491 571,229
1987
1987-1988 ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER FOUR
(NON-QUALIFIED CONTRACTS ONLY)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year of Year of Year
Year
Cash Income $15.747 $16.692 2,498,152 1988
Trust 14.966 15.747 3,219,029
1987
Managed Assets 13.636 14.746 312,640 1988
Trust 13.484 13.636 382,205
1987
Aggressive Stock 18.951 20.651 414,759 1988
Trust 20.788 18.951 711,443
1987
Accumulation unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1987-1996) AND NUMBER SIX (1987-1988)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year of Year of Year
Year
Quality Bond Fund 36.552 36.562 999
1996
(formerly Keystone 31.679 36.552 959
1995
Custodian Fund, 33.702 31.679 2,523
1994
Series B-1) 31.286 33.702 2,731
1993
30.422 31.286 2,563
1992
26.897 30.422 2,880
1991
25.457 26.897 2,688
1990
22.978 25.457 2,541
1989
21.834 22.978 27,480
1988
22.649 21.834 29,482
1987
Diversified Bond 35.378 36.980 708
1996
Fund (formerly 31.149 35.378 558
1995
Keystone Custodian 33.798 31.149 414
1994
Fund, Series B-2) 29.983 33.798 254
1993
27.600 29.983 149
1992
23.489 27.600 714
1991
24.242 23.489 851
1990
23.330 24.242 1,392
1989
21.238 23.330 26,902
1988
21.429 21.238 38,962
1987
High Income Bond 30.569 33.468 481
1996
Fund (formerly 28.120 30.569 527
1995
Keystone Custodian 32.345 28.120 514
1994
Fund, Series B-4) 25.880 32.345 579
1993
22.132 25.880 571
1992
15.763 22.132 3,596
1991
20.364 15.763 4,427
1990
21.699 20.364 5,688
1989
19.605 21.699 36,779
1988
20.605 19.605 53,498
1987
(Accumulation unit values continue on the next page)
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1987-1996) AND NUMBER SIX (1987-1988)
(CONTINUED)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year of Year of Year
Year
Growth and Income 43.376 50.864 2,664 1996
Fund (formerly 33.202 43.376 4,179 1995
Keystone Custodian 35.621 33.202 5,248 1994
Fund, Series S-1) 32.763 35.621 6,382 1993
33.076 32.763 7,180 1992
25.924 33.076 14,956 1991
27.459 25.924 18,927 1990
21.801 27.459 21,757 1989
20.301 21.801 49,631 1988
19.774 20.301 63,034 1987
Small Company Growth 42.685 41.893 10,123
1996
Fund (formerly 32.263 42.685 9,696 1995
Keystone Custodian 32.527 32.263 12,813 1994
Fund, Series S-4) 26.208 32.527 13,929 1993
24.094 26.208 16,338 1992
14.071 24.094 53,908 1991
15.122 14.071 61,931 1990
12.355 15.122 70,739 1989
11.166 12.355 133,891 1988
11.969 11.166 177,623 1987
Accumulation unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
The full financial statements for the Variable Account and Keyport are in the
Statement of Additional Information.
APPENDIX C
TELEPHONE INSTRUCTIONS
Telephone Transfers of Contract Values
1. If there are joint Contract Owners, both must authorize Keyport to accept
telephone instructions but either Owner can 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
Contract Owner thus bears the risk that an unauthorized or fraudulent
instruction that is executed may cause the Contract 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 Contract may allow a Contract 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 Contract Owner. Either Keyport or the
authorized person may cease to honor the power by sending written notice to
the Contract Owner at the Contract 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 Contract Owner's written revocation, (b) Keyport discontinues the
privilege, or (c) Keyport receives written evidence that the Contract 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 Contract
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.
APPENDIX D
DOLLAR COST AVERAGING
Keyport offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the SRMMF Sub-Account or the One-Year Guarantee Period
of the Fixed Account to other Sub-Accounts selected by the Contract Owner. The
program allows a Contract Owner to invest in non-"money market" 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
Contract Value transferred into the SRMMF Sub-Account or One-Year Guarantee
Period. Under the program, Keyport makes automatic transfers on a periodic
basis out of the SRMMF 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 Contract Owner may choose but there are
currently no limits). The automatic transfer program does not guarantee a
profit nor does it protect against loss in declining markets. The One-Year
Guarantee Period option of the program is not available under Contracts issued
to New Jersey and Washington residents.
The Contract Owner by Written Request must specify the SRMMF Sub-Account or
One-Year Guarantee Period from which the transfers are to be made, the monthly
amount to be transferred (minimum $150) 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 Contract
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
Contract Owner may extend the program by allocating additional purchase
payments to the SRMMF Sub-Account or One-Year Guarantee Period or by
transferring Contract Value to the SRMMF Sub-Account or One-Year Guarantee
Period. The Contract 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 Contract Owner a notice one month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 5:00 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 below
and Contract Owners in a dollar cost averaging program will be notified, in
advance, of any changes.
1. If there are joint Contract Owners, either Owner can give Keyport
telephone transfer 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
Contract Owner thus bears the risk that an unauthorized or fraudulent
instruction that is executed may cause the Contract 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. Telephone authorization shall continue in force until (a) Keyport
receives the Contract Owner's written revocation, (b) Keyport discontinues the
privilege, or (c) Keyport receives written evidence that the Contract Owner
has entered into a market timing or asset allocation agreement with an
investment adviser or with a broker/dealer.
6. Telephone instructions must be received by Keyport at 800-367-3653 before
the end (currently 5:00 P.M. Eastern Time) of the business day preceding the
next scheduled transfer in order to be in effect for that transfer.
7. Once instructions are accepted by Keyport, they may not be canceled. New
telephone instructions may be given on the following business day.
8. All instructions must be made in accordance with the terms of the
Contract and current prospectus. If the instructions are not in good order,
Keyport will not execute them and will notify the caller within 48 hours.
Keyport previously offered a Value-Added Dollar Cost Averaging Program for
initial purchase payments made under Contracts issued generally before August
1, 1993. The remainder of this Appendix describes that program for the benefit
of Contract Owners who are still participating in it.
The Value-Added Dollar Cost Averaging program uses the SRMMF-DCA Sub-Account
and was available only for the initial purchase payment (and for subsequent
payments under Qualified Contracts meeting the conditions described below).
The SRMMF-DCA Sub-Account is the only Sub-Account with no deduction for the
Contract's 1.40% asset-based charge.
A Contract Owner was able to allocate all or part of the initial purchase
payment to the SRMMF-DCA Sub-Account for automatic transfers over either 12
months or 24 months. The Contract Owner allocated at least $1,800 if 12 months
was selected and at least $3,600 if 24 months was selected. Based on the
period the Owner selected, Keyport transfers each month either 1/12 or 1/24 of
the original allocated amount from the SRMMF-DCA Sub-Account to the Sub-
Account(s) chosen by the Owner. The first transfer occurred at the close of
the Valuation Period that included the 30th day after the Issue Date of the
Contract. Each succeeding transfer occurs one month later (e.g., if the 30th
day after the Issue Date is April 8, the second transfer occurred at the close
of the Valuation Period that included May 8). The last transfer (the 12th or
24th transfer, as applicable) will be of all the remaining value in the SRMMF-
DCA Sub-Account. Before this final transfer, the Contract Owner may, by
Written Request or by telephone, change the Sub-Account(s) to which the
transfers are to be made or end the program (see the fourth paragraph of this
Appendix). If the Contract Owner transfers any SRMMF-DCA Sub-Account value
outside the program, the program will automatically end. The program will also
automatically end if the Income Date occurs. If the program ends for any
reason, Keyport, in the absence of instructions to the contrary, will transfer
any remaining SRMMF-DCA Sub-Account value to the SRMMF Sub-Account. Once the
program ends, a Contract Owner may not restart it.
If a Qualified Contract application stated the Value-Added Dollar Cost
Averaging program was to apply to multiple transfer or rollover payments that
would all be made to Keyport within a reasonable time, the program began as
stated above with the first transfer or rollover payment received by Keyport.
Then, as each subsequent transfer or rollover payment was received, that
payment was added to the then-current SRMMF-DCA Sub-Account value and divided
by the applicable 1/12 or 1/24 to determine a new monthly transfer amount. The
total SRMMF-DCA Sub-Account value will then be transferred out monthly for the
applicable 12 or 24 transfers. Each monthly transfer continues to occur on the
monthly transfer date established for the first payment allocated to the
program.
[PREFERRED ADVISOR LOGO]
KEYPORT PREFERRED ADVISOR
PROSPECTUS
NOVEMBER 15, 1997
NOT May lose value
FDIC No bank guarantee
INSURED
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[KEYPORT LIFE LOGO]
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Keyport Logo is a registered service mark of Keyport Life Insurance Company.
KAVP 5/97
Yes. I would like to receive the Keyport Preferred Advisor Variable
Annuity Statement of Additional Information.
Yes. I would like to receive the SteinRoe Variable Investment Trust
Statement of Additional Information.
Yes. I would like to receive the Liberty Variable Investment Trust
Statement of Additional Information.
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.
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
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 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....................... 3
Principal Underwriter...................................... 4
Custodian.................................................. 4
Experts.................................................... 4
Investment Performance..................................... 4
Average Annual Total Return for a Contract that is
Surrendered and for a Contract that Continues.......... 6
Change in Accumulation Unit Value........................ 7
Yields for SRMMF and SRMMF-DCA Sub-Accounts.............. 8
Financial Statements....................................... 11
Keyport Life Insurance Company........................... 11
KMA Variable Account..................................... 33
The date of this statement of additional information is November 15, 1997
KMANOV1997.SAI
KEYPORT LIFE INSURANCE COMPANY
Liberty Mutual Insurance Company ("Liberty Mutual"), a multi-line
insurance and financial services institution, 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, at
least 80% of the combined voting power of the outstanding voting stock of LFC
(with the balance being publicly held). As of 12/31/96, Keyport owned in its
own name (not for the benefit of Contract Owners) 6.71% of the total assets of
the Variable Account. Prior to January 1, 1991, Keyport's name was Keystone
Provident Life Insurance Company. For additional information about Keyport,
see page 9 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 Contract Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting
any applicable Contract 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
Contract'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 Unit
value applicable during any Valuation Period is determined at the end of such
period.
When Keyport first purchased the Eligible Fund shares of SteinRoe
Variable Investment Trust and Liberty Variable Investment Trust on behalf of
the Variable Account, Keyport valued each Annuity Unit for each Sub-Account at
$10. 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 defined on page 16 of the
prospectus without any deduction for the sales charge defined in
(c)(ii) on that page; 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 Contract's annuity tables is 6% per year
(5% per year for Oregon contracts.) 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 1 (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. Any change requested
must be at least six months after a prior selection. 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 10% 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.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport
Financial Services Corp. ("KFSC"), a wholly-owned subsidiary of Keyport.
During the fiscal years ended December 31, 1996, 1995 and 1994, Keyport paid
KFSC underwriting commissions for the Contract of $0.00, $0.00, and $0.00,
respectively.
CUSTODIAN
The custodian of the assets of the KMA Variable Account is State Street
Bank and Trust Company, a state chartered trust company. Its principal office
is at 225 Franklin Street, Boston, Massachusetts.
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-KMA Variable Account as of
December 31, 1996 and for the year 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.
The financial statements of Keyport Life Insurance Company's KMA Variable
Account for the year, or other period as applicable, ended December 31, 1995
have been included herein in reliance on the report of KMPG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm
as experts in accounting and auditing.
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) 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: Common
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.
The tables below provide performance results for each Sub-Account through
December 31, 1996. The results shown in this section are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Contract Owner. Moreover, the
performance information for four of the Sub-Accounts (SRMSF, SRBF, SRGSF and
SRSVF) reflects the investment experience of the Eligible Funds previously
available under the Variable Account. The Funds of the SteinRoe Trust replaced
these other mutual funds as the Eligible Funds beginning January 1, 1989.
These other funds had a different investment adviser (Keystone Custodian
Funds, Inc.) than the SteinRoe Trust (Stein Roe & Farnham, Incorporated). See
Appendix B of the prospectus. The performance information for the same four
Sub-Accounts also reflects historical asset-based charges for the period
before May 1, 1989 that are at a lower level than the current asset-based
charges.
Average Annual Total Return for a Contract that is Surrendered and for a
Contract that Continues
The first section of the following table was calculated using the method
prescribed by the Securities and Exchange Commission. It illustrates each Sub-
Account's average annual total return over the periods shown assuming a single
$1,000 initial purchase payment and the surrender of the contract at the end
of each period. The Sub-Account's average annual total return is the annual
rate that would be necessary to achieve the ending value of an investment kept
in the Sub-Account for the period specified.
Each calculation assumes that the $1,000 initial purchase payment was
allocated to only one Sub-Account and no transfers or additional purchase
payments were made. The rate of return reflects all charges assessed against a
Contract and the Sub-Account except for any premium taxes that may be payable.
The charges reflected are: a Contingent Deferred Sales Charge that applies
when the hypothetical Contract is surrendered; the annual 1.25% Mortality and
Expense Risk Charge; for any period on or after May 1, 1989, the annual 0.15%
sales charge; and, on an allocated basis, the Contract's Contract Maintenance
Charge that is deducted at the end of each year and upon surrender. The
Contingent Deferred Sales Charge used in the calculations for a particular Sub-
Account is equal to the percentage charge in effect at the end of the period
multiplied by: the assumed $1,000 payment less any amount of that payment that
is free of Contingent Deferred Sales Charge under the Contract's surrender
provisions. The percentage charge declines from 7% to 1% over 7 years by 1%
per year. The Contract Maintenance Charge used in the calculations for a
particular Sub-Account is equal to a dollar and time-weighted average for that
Sub-Account based on a yearly charge of $30 for the portion of the period
shown that is before 7/1/94 and $36 for any later portion of that period. A
particular Sub-Account's prorated portion is then equated to a $1,000 basis by
multiplying it by a fraction equal to $1,000 divided by the average Contract
Value in that Sub-Account during the period shown.
The second section of the table was calculated in the same manner as the
first except no Contingent Deferred Sales Charge was deducted since it is
assumed the Contract continues through the end of each period.
If the current charges under the Contracts had been in effect during the
period before May 1, 1989, any total return percentage that includes a period
before May 1, 1989 would be lower than the percentage shown since current
Accumulation Unit values reflect additional asset-based charges of .15% (i.e.,
total asset-based charges of 1.40% rather than 1.25%).
Average Annual Total Return for a Average Annual Total Return for a
Contract Surrendered on 12/31/96 Contract Still in force on 12/31/96
Hypothetical $1,000 Purchase Payment* Hypothetical $1,000 Purchase Payment*
Length of Investment Period Length of Investment Period
Sub- One Five Ten Since Contract One Five Ten Since Contract
Account Year Years Years Inception Shown Year Years Years Inception Shown
SRMSF -2.35% 4.25% 6.00% 6.09%(10/27/86) 3.23% 4.59% 6.00% 6.09%(10/27/86)
SRBF 7.96 8.68 9.58 11.19(5/14/85) 13.96 8.96 9.58 11.19 (5/14/85)
SRGSF 13.55 9.99 N/A 11.66(5/26/87) 19.55 10.26 N/A 11.66 (5/26/87)
SRSVF 19.12 15.51 12.41 12.25(5/16/85) 25.12 15.73 12.41 12.41(5/16/85)
SRGUF -0.64 N/A N/A 4.55(7/1/93) 5.03 N/A N/A 5.56(7/1/93)
CGIF 10.14 N/A N/A 11.86(7/1/93) 16.14 N/A N/A 12.72(7/1/93)
CIFG -2.00 N/A N/A -1.44(5/3/94) 3.60 N/A N/A 0.27 (5/3/94)
CUSF 14.13 N/A N/A 19.02(7/6/94) 20.13 N/A N/A 20.56 (7/6/94)
CSIF 2.34 N/A N/A 8.17(7/14/94) 8.18 N/A N/A 9.95 (7/14/94)
NTF 3.76 N/A N/A 11.28(5/1/95) 9.68 N/A N/A 14.60 (5/1/95)
* Expense reimbursement was applicable to SRMSF beginning January 1, 1989 to
the extent expenses, including management fees, exceeded 1.00% of average
annual assets. See footnote 4 on page 5 of the prospectus for the expense
reimbursement percentages applicable to SRMSF and the other Funds of the
SteinRoe Trust beginning May 1, 1993. See footnote 3 on page 5 of the
prospectus for the expense reimbursement applicable to the Liberty Trust Funds
beginning July 1, 1993; CSIF was at 1.00% before May 1, 1995 when it decreased
to .80%. The return percentages shown would be lower without this expense
reimbursement.
Change in Accumulation Unit Value
The following performance information illustrates the average annual
change and the actual annual change in Accumulation Unit values for each Sub-
Account and is computed differently than the standardized average annual total
return information.
A Sub-Account's average annual change in Accumulation Unit values is the
annualized rate at which the value of a Unit changes over the time period
illustrated. A Sub-Account's actual annual change in Accumulation Unit values
is the rate at which the value of a Unit changes over each 12-month period
illustrated. These rates of change in Accumulation Unit values reflect the
Contract's annual 1.25% Mortality and Expense Risk Charge and for any period
on or after May 1, 1989, the annual .15% sales charge. They do not reflect
deductions for any Contingent Deferred Sales Charge, Contract Maintenance
Charge, and premium taxes. The rates of change would be lower if these charges
were included.
If the current charges under the Contract had been in effect during the
period before May 1, 1989, any change percentage that includes a period before
May 1, 1989 would be lower than the percentage shown since current
Accumulation Unit values reflect additional asset-based charges of .15% (i.e.,
total asset-based charges of 1.40% rather than 1.25%).
Average Annual Change
In Accumulation Unit 12-Month Period Change
Value From Contract in Accumulation Unit Value**
Sub- Inception Shown
Account through 12/31/96** 1986 1987 1988 1989 1990 1991
SRMSF 6.10%(10/27/86) 1.84%* -0.01%* 5.79% 11.46% 7.59% 12.90%
SRBF 11.21 (5/14/85) 17.56 0.88 7.87 21.16 -2.11 26.17
SRGSF 11.67 (5/26/87) N/A -7.98* 4.71 29.71 -3.04 45.98
SRSUF 12.26 (5/16/85) 8.60 -9.06 8.71 29.45 -10.29 35.36
SRGUF 5.58 (7/1/93) N/A N/A N/A N/A N/A N/A
CGIF 12.73 (7/1/93) N/A N/A N/A N/A N/A N/A
CIFG 0.28 (5/3/94) N/A N/A N/A N/A N/A N/A
CUSF 20.55 (7/6/94) N/A N/A N/A N/A N/A N/A
CSIF 9.95 (7/14/94) N/A N/A N/A N/A N/A N/A
NTF 14.59 (5/1/95) N/A N/A N/A N/A N/A N/A
Sub- 12-Month Period Change in Accumulation Unit Value**
Account 1992 1993 1994 1995 1996
SRMSF 4.49% 4.79% -2.93% 14.15% 3.24%
SRBF 6.04 7.78 -4.52 23.75 14.02
SRGSF 5.16 3.52 -7.64 35.84 19.59
SRSUF 12.90 33.80 -0.21 10.21 25.18
SRGUF N/A -2.38* -11.51 33.29 5.05
CGIF N/A 4.28* -2.12 28.34 16.16
CIFG N/A N/A -6.86* 4.39 3.61
CUSF N/A N/A 3.69* 27.91 20.14
CSIF N/A N/A 0.14* 16.67 8.20
NTF N/A N/A N/A 14.45* 9.70
* Percentage of change is for less than 12 months; it is for the period from
the inception date shown in the second column to the end of the year.
** Expense reimbursement was applicable to SRMSF beginning January 1, 1989 to
the extent expenses, including management fees, exceeded 1.00% of average
annual assets. See footnote 4 on page 5 of the prospectus for the expense
reimbursement percentages applicable to SRMSF and the other Funds of the
SteinRoe Trust beginning May 1, 1993. See footnote 3 on page 5 of the
prospectus for the expense reimbursement applicable to the Liberty Trust Funds
beginning July 1, 1993; CSIF was at 1.00% before May 1, 1995 when it decreased
to .80%. The return percentages shown would be lower without this expense
reimbursement.
Yields for SRMMF and SRMMF-DCA Sub-Accounts
Yield and effective yield percentages for the SRMMF and SRMMF-DCA Sub-Accounts
are calculated using the method prescribed by the Securities and Exchange
Commission. Both yields reflect the deduction of the annual 1.40% asset-based
Contract charges (this deduction is not applicable to the SRMMF-DCA Sub-
Account and accounts for the SRMMF-DCA Sub-Account yields being higher than
the SRMMF yields). Both yields also reflect, on an allocated basis, the
Contract's annual $36 Contract Maintenance Charge. Both yields do not reflect
Contingent Deferred Sales Charges and premium taxes. 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 Contract Maintenance Charge for the 7-day period.
The assumed annual SRMMF charge is equal to the $36 Contract charge
multiplied by a fraction equal to the average number of Contracts
with SRMMF Sub-Account value during the 7-day period divided by the
average total number of Contracts 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 SRMMF
Accumulation Unit during the 7-day period divided by the average
Contract Value in SRMMF Sub-Account during the 7-day period. The
assumed annual SRMMF-DCA charge is similarly calculated using SRMMF-
DCA data.
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 SRMMF or SRMMF-DCA 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 SRMMF Sub-Account
was 3.70% and the effective yield was 3.77%. For the SRMMF-DCA Sub-Account the
yield was 5.10% and the effective yield was 5.23%.
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 KMA Variable Account
We have audited the accompanying statement of assets and liabilities of
Keyport Life Insurance Company - KMA Variable Account as of December 31, 1996,
and the related statement of operations and changes in net assets for the year
then ended. 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 - KMA Variable Account at December 31, 1996 and the results of its
operations and changes in net assets for the year then ended, in conformity
with generally accepted accounting principles.
March 14, 1997 /s/Ernst & Young LLP
Boston, Massachusetts
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments at market value:
Keystone Custodian Funds
Keystone Liquid Trust - 492,750 shares (cost $492,750) $ 492,750
Quality Bond Fund (B-1) - 3,004 shares (cost $43,183) 45,541
Diversified Bond Fund (B-2) - 1,728 shares (cost $27,191) 26,323
High Income Bond Fund (B-4) - 4,202 shares (cost $27,465) 17,857
Growth and Income Fund (S-1) - 9,411 shares (cost $168,108) 236,865
Mid-Cap Growth Fund (S-3) - 16,189 shares (cost $112,889) 140,683
Small Company Growth Fund (S-4) - 66,597 shares (cost $478,703) 560,748
SteinRoe Variable Investment Trust
Cash Income Fund - 50,833,625 shares (cost $50,833,625) 50,833,625
Capital Appreciation Fund - 8,340,265 shares
(cost $133,500,186) 172,893,689
Managed Assets Fund - 15,500,674 shares (cost $198,554,659) 252,350,972
Mortgage Securities Income Fund - 5,201,696 shares (cost
$53,242,228) 51,184,690
Managed Growth Stock Fund - 4,067,018 shares
(cost $73,960,354) 116,357,395
Keyport Variable Investment Trust
Colonial-Keyport Growth and Income Fund - 6,448,944
shares (cost $71,016,886) 90,027,259
Colonial-Keyport Utilities Fund - 4,265,765 shares (cost
$43,112,194) 45,643,692
' Colonial-Keyport International Fund for Growth -
13,148,115 shares (cost $26,000,917) 25,638,825
Colonial-Keyport Strategic Income Fund - 4,644,736 shares
(cost $51,228,243) 51,231,445
Colonial-Keyport U.S. Stock Fund - 4,229,347 shares
(cost $49,312,625) 60,141,317
Newport-Keyport Tiger Fund - 13,442,178 shares (cost
$29,901,460) 33,874,286
Total assets $951,697,962
Net Assets
Variable annuity contracts (Note 5) $845,379,306
Annuity reserves (Note 2) 40,842,923
Due to Keyport Life Insurance Company (Note 2) 1,661,524
Retained by Keyport Life Insurance Company (Note 2) 63,814,209
Total net assets $951,697,962
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Keystone Quality Bond
Liquid Trust Fund (B-1)
1996 1995 1996 1995
Income
Dividends $ 25,070 $ 28,479 $ 2,111 $ 5,091
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 6,705 7,042 495 883
Net investment income
(expense) 18,365 21,437 1,616 4,208
Realized gain (loss) - - (16) 2,607
Unrealized appreciation
(depreciation) during
the period - - (1,596) 5,123
Net increase (decrease)
in net assets from
operations 18,365 21,437 4 11,938
Purchase payments from
contract owners 1,846 2,794 1,238 4,446
Transfers between
accounts 256 51,705 40 123
Contract terminations
and annuity
payouts (134,958) (65,458) (1,461) (61,318)
Other transfers (to)
from Keyport Life
Insurance Company (276) 12,257 76 -
Net increase (decrease)
in net assets
from contract
transactions (133,132) 1,298 (107) (56,749)
Net assets at
beginning
of period 607,517 584,782 45,644 90,455
Net assets at
end of period $492,750 $607,517 $ 45,541 $ 45,644
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Diversified Bond High Income Bond
Fund (B-2) Fund (B-4)
1996 1995 1996 1995
Income
Dividends $ 1,251 $ 1,265 $ 2,586 $ 4,788
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 236 173 397 555
Net investment income
(expense) 1,015 1,092 2,189 4,233
Realized gain (loss) - - (17,408) 3
Unrealized appreciation
(depreciation) during
the period 32 915 16,932 (513)
Net increase (decrease)
in net assets from
operations 983 2,007 1,713 3,723
Purchase payments from
contract owners 5,192 4,807 306 444
Transfers between
accounts 371 11 151 (1)
Contract terminations
and annuity
payouts - - (32,116) -
Other transfers (to)
from Keyport Life
Insurance Company 43 - 33 -
Net increase (decrease)
in net assets
from contract
transactions 5,606 4,818 (31,626) 443
Net assets at
beginning
of period 19,734 12,909 47,770 43,604
Net assets at
end of period $ 26,323 $ 19,734 $ 17,857 $ 47,770
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Growth and Income Mid-Cap Growth
Fund (S-1) Fund (S-3)
1996 1995 1996 1995
Income
Dividends $ 1,246 $ 26,879 $ - $ 46,976
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 2,460 2,277 1,968 2,562
Net investment income
(expense) (1,214) 24,602 (1,968) 44,414
Realized gain (loss) 384 8,363 4,031 11,363
Unrealized appreciation
(depreciation)
during
the period 12,728 19,439 (9,022) 8,332
Net increase (decrease)
in net assets
from
operations 11,898 52,404 (6,959) 64,109
Purchase payments from
contract owners 4,847 4,661 5,509 8,982
Transfers between
accounts 27,357 7,664 - (44,697)
Contract terminations
and annuity
payouts (9,074) (55,086) (24,672) (89,787)
Other transfers (to)
from Keyport Life
Insurance Company 387 - 282 -
Net increase (decrease)
in net assets
from contract
transactions 23,517 (42,761) (18,881) (125,502)
Net assets at
beginning
of period 201,450 191,807 166,523 227,916
Net assets at
end of period $236,865 $201,450 $140,683 $166,523
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Small Company Growth Cash Income
Fund (S-4) Fund
1996 1995 1996 1995
Income
Dividends $ 60,556 $ 62,494 $2,448,190 $2,835,190
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 6,382 6,673 660,490 667,110
Net investment income
(expense) 54,174 55,821 1,787,700 2,168,080
Realized gain (loss) (1,058) 20,262 - -
Unrealized appreciation
(depreciation)
during
the period (56,065) 98,073 - -
Net increase (decrease)
in net assets
from
operations (2,949) 174,156 1,787,700 2,168,080
Purchase payments from
contract owners 16,974 8,396 2,435,745 2,622,342
Transfers between
accounts - (46,276) 6,170,662 (1,168,571)
Contract terminations
and annuity
payouts (16,158) (99,703) (9,139,703)
(13,524,359)
Other transfers (to)
from Keyport Life
Insurance Company 923 - 95,702
(11,671)
Net increase (decrease)
in net assets
from contract
transactions 1,739 (137,583) (437,594)
(12,082,259)
Net assets at
beginning
of period 561,958 525,385 49,483,519 59,397,698
Net assets at
end of period $560,748 $561,958 $50,833,625 $49,483,519
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Capital Appreciation Managed Assets
Fund Fund
1996 1995 1996 1995
Income
Dividends $ - $ 1,119,833 $ - $ 18,232,566
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 2,197,895 1,811,814 3,561,706 2,707,560
Net investment income
(expense) (2,197,895) (691,981) (3,561,706) 15,525,006
Realized gain (loss) 1,297,668 444,883 1,893,171 1,699,944
Unrealized
appreciation
(depreciation)
during
the period 34,299,880 12,421,795 33,208,577 21,102,576
Net increase
(decrease)
in net assets
from
operations 33,399,653 12,174,697 31,540,042 38,327,526
Purchase payments
from contract
owners 12,519,068 12,359,075 14,675,759 9,601,078
Transfers between
accounts 8,336,612 (3,848,840) (2,221,448) 45,077,131
Contract
terminations
and annuity
payouts (12,583,612) (13,006,701) (24,869,936)
(18,567,356)
Other transfers
(to) from Keyport
Life Insurance
Company 379,541 - 573,596 -
Net increase (decrease)
in net assets
from contract
transactions 8,651,609 (4,496,466) (11,842,029) 36,110,853
Net assets at
beginning
of period 130,842,427 123,164,196 232,652,959 158,214,580
Net assets at
end of perod $172,893,689 $130,842,427 $252,350,972 $232,652,959
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Mortgage Securities Income Managed Growth Stock
Fund Fund
1996 1995 1996 1995
Income
Dividends $ 3,838,053 $ 3,084,525 $ - $ 5,090,894
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 796,797 748,107 1,543,206 1,183,227
Net investment income
(expense) 3,041,256 2,336,418 (1,543,206) 3,907,667
Realized gain (loss) (636,162) 208,764 225,415 754,285
Unrealized
appreciation
(depreciation)
during
the period (904,485) 3,958,635 19,969,963 19,501,353
Net increase
(decrease) in
net assets from
operations 1,500,609 6,503,817 18,652,172 24,163,305
Purchase payments
from contract
owners 1,653,710 2,132,895 9,412,798 6,486,389
Transfers between
accounts (3,646,194) 5,988,023 2,537,031 5,423,688
Contract terminations
and annuity
payouts (5,538,470) (5,095,184) (8,857,274)
(7,536,917)
Other transfers (to)
from Keyport
Life Insurance
Company (16,963,899) 17,149,572 281,741 -
Net increase
(decrease)
in net assets
from contract
transactions (24,494,853) 20,175,306 3,374,296 4,373,160
Net assets at
beginning
of period 74,178,934 47,499,811 94,330,927 65,794,462
Net assets at
end of period $51,184,690 $74,178,934 $116,357,395 $94,330,927
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Strategic Managed Assets Managed Income
Fund Fund
1996 1995 1996 1995
Income
Dividends $ - $ 6,888,371 $ - $ 1,913,930
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges - 596,912 - 359,114
Net investment income
(expense) - 6,291,459 - 1,554,816
Realized gain (loss) - (1,881,972) - (1,684,383)
Unrealized
appreciation
(depreciation)
during
the period - 3,760,239 - 4,815,684
Net increase
(decrease)
in net assets
from operations - 8,169,726 - 4,686,117
Purchase payments
from contract
owners - 623,379 - 117,683
Transfers between
accounts - (60,806,436) - (37,247,795)
Contract terminations
and annuity
payouts - (4,025,653) - (3,674,434)
Other transfers (to)
from Keyport
Life Insurance
Company - - - (4,355,032)
Net increase (decrease)
in net assets
from contract
transactions - (64,208,710) - (45,159,578)
Net assets at
beginning
of period - 56,038,984 - 40,473,461
Net assets at
end of period - - - -
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Colonial-Keyport Colonial-Keyport
Growth and Income Fund Utilities Fund
1996 1995 1996 1995
Income
Dividends $ 5,437,898 $ 1,623,990 $ 2,000,039 $
2,061,056
Expenses (Note 3)
Mortality and
expense risk and
administrative
charges 855,588 581,425 687,683
627,774
Net investment income
(expense) 4,582,310 1,042,565 1,312,356 1,433,282
Realized gain (loss) (6,263) 53,942 510,333
179,659
Unrealized
appreciation
(depreciation)
during
the period 7,675,038 8,431,489 264,846
10,472,204
Net increase
(decrease) in
net assets from
operations 12,251,085 9,527,996 2,087,535 12,085,145
Purchase payments
from contract
owners 10,442,376 7,708,398 2,036,482
3,561,384
Transfers between
accounts 3,787,007 3,549,431 (4,045,355) 1,260,097
Contract
terminations
and annuity
payouts (5,233,156) (3,526,945) (3,684,733)
(3,994,781)
Other transfers (to)
from Keyport
Life Insurance
Company 150,271 4,710,224 105,587 -
Net increase
(decrease)in net
assets from
contract
transactions 9,146,498 12,441,108 (5,588,019)
826,700
Net assets at
beginning
of period 68,629,676 46,660,572 49,144,176 36,232,331
Net assets at end
of period 90,027,259 68,629,676 45,643,692 49,144,176
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Colonial-Keyport
Colonial-Keyport International
U.S. Government Fund Fund for Growth
1996 1995 1996 1995
Income
Dividends $ - $ 406,224 $ 1,484,698 $
122,192
Expenses (Note 3)
Mortality and
expense risk
and administrative
charges - 112,397 201,486
151,837
Net investment income
(expense) - 293,827 1,283,212 (29,645)
Realized gain (loss) - (487,572) 11,779
(23,625)
Unrealized
appreciation
(depreciation)
during
the period - 1,180,567 (325,559)
632,521
Net increase
(decrease) in
net assets from
operations - 986,822 969,432 579,251
Purchase payments
from contract
owners - 328,844 3,326,931
4,477,512
Transfers between
accounts - (12,956,156) 763,093 (364,008)
Contract terminations
and annuity
payouts - (1,050,768) (1,589,143)
(1,567,181)
Other transfers (to)
from Keyport
Life Insurance
Company - (15,024,888) 33,715
550,000
Net increase
(decrease)in net
assets from
contract
transactions - (28,702,968) 2,507,596
3,096,323
Net assets at
beginning
of period - 27,716,146 22,161,797 18,486,223
Net assets at
end of period $ - $ - $25,638,825
$22,161,797
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Colonial-Keyport Colonial-Keyport
Strategic Income Fund U.S. Stock Fund
1996 1995 1996 1995
Income
Dividends $ 4,370,545 $ 2,361,382 $ 3,390,848 $
2,095,010
Expenses (Note 3)
Mortality and
expense risk
and administrative
charges 681,792 236,072 542,968
252,806
Net investment income
(expense) 3,688,753 2,125,310 2,847,880 1,842,204
Realized gain (loss) 13,958 25,084 110,359
26,657
Unrealized
appreciation
(depreciation)
during
the period 72,275 21,898 6,776,444
1,706,939
Net increase
(decrease)
in net
assets from
operations 3,774,986 2,172,292 9,734,683 3,575,800
Purchase payments
from contract
owners 5,784,837 6,346,799 9,452,774
11,127,729
Transfers between
accounts (582,012) 36,913,338 2,924,266 12,112,957
Contract terminations
and annuity
payouts (4,363,821) (2,157,749) (4,733,235)
(2,592,867)
Other transfers (to)
from Keyport
Life Insurance
Company 113,160 (10,109,673) 98,174
3,100,340
Net increase
(decrease)in net
assets from
contract
transactions 952,164 30,992,715 7,741,979
23,748,159
Net assets at
beginning
of period 46,504,295 13,339,288 42,664,655 15,340,696
Net assets at
end of period $ 51,231,445 $ 46,504,295 $ 60,141,317 $42,664,655
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Periods ended December 31, 1996 and 1995
Newport-Keyport
Tiger Fund* Total Total
1996 1995 1996 1995
Income
Dividends $ 365,072 $ 63,385 $ 23,428,163 $
48,074,520
Expenses (Note 3)
Mortality and
expense risk
and administrative
charges 233,843 30,834 11,982,097
10,087,154
Net investment income
(expense) 131,229 32,551 11,446,066 37,987,366
Realized gain (loss) (8,804) (10,024) 3,397,387
(651,760)
Unrealized
appreciation
(depreciation)
during the period 2,226,191 295,754 103,226,115 88,433,023
Net increase
(decrease)
in net assets from
operations 2,348,616 318,281 118,069,568 125,768,629
Purchase payments
from contract
owners 8,195,980 3,514,580 79,972,372
71,042,617
Transfers between
accounts 6,028,623 3,875,764 20,053,460 (2,222,848)
Contract terminations
and annuity
payouts (1,719,303) (285,983) (82,530,825)
(80,978,230)
Other transfers (to)
from Keyport
Life Insurance
Company 46,847 11,550,881 (15,084,097)
7,572,010
Net increase
(decrease)in net
assets from
contract
transactions 12,552,147 18,655,242 2,410,910
(4,586,451)
Net assets at
beginning
of period 18,973,523 - 831,217,484 710,035,306
Net assets at
end of period $ 33,874,286 $ 18,973,523 $951,697,962 $831,217,484
*Commencement of operations - May 1, 1995
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements
December 31, 1996
1. Organization
KMA Variable Account (the "Variable Account") is a separate investment account
established by Keyport Life Insurance Company (the "Company") to receive and
invest premium payments under flexible purchase payment deferred and immediate
variable annuity contracts issued by the Company. The Variable Account
operates as a Unit Investment Trust under the Investment Company Act of 1940
and invests in eligible mutual funds.
With the exception of K-100 contractholders, there are currently two funding
vehicles available to the Variable Account, the SteinRoe Variable Investment
Trust ("SRVIT") and the Keyport Variable Investment Trust ("KVIT"). A third
trust, Keystone Custodian Funds, is only available to existing K-100
contractholders. This contract series was issued prior to May 1, 1986. There
are currently eleven available subaccounts within the Variable Account to
which contract funds may be allocated. The Newport-Keyport Tiger Fund was
made available to contractholders on May 1, 1995.
On October 13, 1995, the Securities and Exchange Commission approved the
substitution of shares from the Strategic Managed Assets Fund, the Managed
Income Fund, and the Colonial-Keyport U.S. Government Fund to shares in the
Managed Assets Fund, the Colonial-Keyport Strategic Income Fund, and the
Mortgage Securities Income Fund, respectively. On December 6, 1996, the fund
name Colonial-Keyport U.S. Fund for Growth was changed to Colonial-Keyport
U.S. Stock Fund.
On May 1, 1995, the following fund names were changed:
From To
Keystone Custodian Fund, Series B-1 Quality Bond Fund (B-1)
Keystone Custodian Fund, Series B-2 Diversified Bond Fund (B-2)
Keystone Custodian Fund, Series B-4 High Income Bond Fund (B-4)
Keystone Custodian Fund, Series S-1 Growth and Income Fund (S-1)
Keystone Custodian Fund, Series S-3 Mid-Cap Growth Fund (S-3)
Keystone Custodian Fund, Series S-4 Small Company Growth Fund (S-4)
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 SRVIT and KVIT 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.
Annuity reserves are computed for contracts in the income stage according to
the 1983a Individual Annuity Mortality Table. The assumed investment rate is
either 3.0%, 4.0%, 5.0% or 6.0% unless the annuitant elects otherwise, in
which case the rate may vary from 3.0% to 6.0%, as regulated by the laws of
the respective states. The mortality risk is fully borne by the Company and
may result in additional amounts being transferred into the Variable Account
by the Company.
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 net assets retained by the Company represent seed money shares invested in
certain sub-accounts required to commence operations. The seed money is
stated at market value (shares multiplied by net asset value per share).
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
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 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. The effective annual rates are:
Prior contract series Flex I: effective annual rate of 1.25% of contract
value.
Prior contract series Flex II: effective annual rate of 1.35% of contract
value.
Prior contract series K100: effective annual rate of 1.00% of contract value.
Contract series Preferred Advisor: effective annual rate of 1.25% of contract
value. A daily sales charge is also deducted at an effective annual rate of
0.15% of contract value.
Contract series Preferred Advisor Employee: 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 1995 and
the accumulation units and dollar value outstanding at December 31, 1996 are
as follows:
1995 1996
UNIT UNIT 1996 1996
VALUE VALUE UNITS DOLLARS
Keystone Liquid Trust
K100 Qualified $ 23.121660 $23.930015 18,449.9258 $ 441,507
K100 Non-Qualified 22.835022 23.633250 1,107.3805 26,171
Quality Bond Fund (B-1)
K100 Qualified 36.552435 36.562403 998.5941 36,511
Diversified Bond Fund (B-2)
K100 Qualified 35.378201 36.980138 708.3262 26,194
High Income Bond Fund (B-4)
K100 Qualified 30.568654 33.468248 481.3816 16,111
K100 Non-Qualified 31.321421 31.778113 - -
Growth and Income Fund (S-1)
K100 Qualified 43.375544 50.863891 4,173.7664 212,294
Mid-Cap Growth Fund (S-3)
K100 Qualified 44.970109 46.815302 2,663.7017 124,702
K100 Non-Qualified 50.799485 52.728207 0.5879 31
Small Company Growth Fund (S-4)
K100 Qualified 42.685132 41.893273 10,122.9856 424,085
K100 Non-Qualified 48.516956 47.617105 2,850.5513 135,735
Cash Income Fund
K100 22.563269 23.456562 885,248.1877 20,764,879
Flex I 16.107692 16.704172 177,787.1420 2,969,787
Flex II 15.809845 16.379016 12,242.4937 200,520
Preferred Advisor 12.833328 13.288493 1,937,918.9198 25,752,022
Dollar Cost Averaging 12.062820 12.666995 15,286.1038 193,629
Employee 10.975629 11.484715 23.2483 267
Capital Appreciation Fund
K100 62.754578 78.867463 270,715.7957 21,350,668
Flex I 30.953346 38.805202 270,844.0224 10,510,157
Flex II 31.595455 39.570863 24,772.9750 980,288
Preferred Advisor 23.356516 29.237169 4,567,202.5222 133,532,072
Employee 13.898002 17.580533 18,304.9058 321,810
Managed Assets Fund
K100 30.393516 34.791356 266,198.4201 9,261,404
Flex I 30.445015 34.764525 595,783.4315 20,712,128
Flex II 29.276014 33.396484 30,977.7820 1,034,549
Preferred Advisor 18.649799 21.263714 9,759,570.6940 207,524,720
Employee 12.284776 14.154200 7,310.7629 103,478
Mortgage Securities Income Fund
K100 16.740391 17.352353 42,933.7739 745,002
Flex I 17.853370 18.460439 164,782.9177 3,041,965
Flex II 17.782813 18.369227 15,995.8282 293,831
Preferred Advisor 16.098763 16.621076 2,760,649.4309 45,884,964
Managed Growth Stock Fund
K100 56.112683 67.373508 66,920.0422 4,508,638
Flex I 24.377573 29.197651 231,419.1988 6,756,897
Flex II 22.336918 26.726946 5,077.0485 135,694
Preferred Advisor 22.779503 27.242475 3,719,102.7247 101,317,563
Employee 14.002023 16.921822 13,583.0527 229,850
Colonial-Keyport Growth and Income Fund
K100 13.096753 15.273930 16,325.9227 249,361
Flex I 13.184205 15.338063 68,918.3504 1,057,074
Preferred Advisor 13.099465 15.216529 3,940,483.9303 59,960,488
Employee 13.354147 15.675839 10,122.6480 158,681
Colonial-Keyport Utilities Fund
K100 11.576591 12.209059 13,769.7754 168,116
Flex I 11.507703 12.106506 20,126.2858 243,659
Preferred Advisor 11.514290 12.095187 3,519,865.5465 42,573,432
Employee 11.680586 12.399240 - -
Colonial-Keyport Strategic Income Fund
K100 11.304782 12.280504 446,353.7490 5,481,449
Flex I 11.632780 12.605710 392,215.5912 4,944,156
Flex II 11.233998 12.161493 26,307.0496 319,933
Preferred Advisor 11.684000 12.642128 3,036,542.9776 38,388,365
Employee 11.783226 12.883876 1,255.2123 16,172
Colonial-Keyport International Fund for Growth
K100 9.841542 10.237727 21,566.3106 220,790
Flex I 9.747047 10.114467 38,348.1403 387,871
Flex II 9.787562 10.146418 536.9383 5,448
Preferred Advisor 9.723230 10.074536 1,243,679.0141 12,529,489
Employee 10.146906 10.624367 4,420.4045 46,964
Colonial-Keyport U.S. Stock Fund
K100 12.722369 15.346006 28,127.9702 431,652
Flex I 12.871427 15.487598 57,589.2401 891,919
Flex II 12.065252 14.503145 688.5403 9,986
Preferred Advisor 13.263322 15.935084 2,382,491.0493 37,965,195
Employee 13.523864 16.419346 8,304.5939 136,356
Newport-Keyport Tiger Fund
K100 10.437921 11.495550 15,622.5670 179,590
Flex I 10.241649 11.251612 23,324.4801 262,438
Flex II 10.000000 10.371251 1,762.2754 18,277
Preferred Advisor 11.445356 12.555053 1,509,793.8655 18,955,542
Employee 11.524093 12.774711 16,186.6675 206,780
42,746,937.7215 $845,379,306
6. Purchases and Sales of Securities
The cost of shares purchased and proceeds from shares sold by the Variable
Account during the year ended December 31,1996 are shown below:
Purchases Sales
Keystone Liquid Trust $ 22,037 $ 136,804
Quality Bond Fund (B-1) 3,359 1,850
Diversified Bond Fund (B-2) 6,779 158
High Income Bond Fund (B-4) 2,984 32,421
Growth and Income Fund (S-1) 33,132 10,829
Mid-Cap Growth Fund (S-3) 5,194 26,043
Small Company Growth Fund (S-4) 71,950 16,037
Cash Income Fund 36,512,569 35,162,463
Capital Appreciation Fund 26,947,299 20,493,585
Managed Assets Fund 8,654,874 24,058,609
Mortgage Securities Income Fund 5,306,895 26,760,492
Managed Growth Stock Fund 11,091,465 9,260,375
Colonial-Keyport Growth and Income Fund 17,992,416 4,263,608
Colonial-Keyport Utilities Fund 5,041,611 9,317,274
Colonial-Keyport International Fund for Growth 5,515,503 1,724,695
Colonial-Keyport Strategic Income Fund 15,450,418 10,809,501
Colonial-Keyport U.S. Stock Fund 16,183,754 5,593,895
Newport-Keyport Tiger Fund 16,496,227 3,812,851
$165,338,466 $151,481,490
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.
