As filed with the Securities and Exchange Commission on May 1, 1997
Registration Nos. 2-66388
811-2990
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 36 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 [X]
KMA Variable Account
(Exact name of Registrant)
Keyport Life Insurance Company
(Name of Depositor)
125 High Street, Boston Massachusetts 02110
(Address of Depositor's Principal Executive Offices (Zip Code)
Depositor's Telephone Number, including Area Code: 617-526-1400
James J. Klopper, Vice President & Counsel
Keyport Life Insurance Company
125 High Street, Boston, Massachusetts 02110
(Name and Address of Agent for Service)
copy to:
Joan E. Boros, Esq.
Katten Muchin & Zavis
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007
It is proposed that this filing will become effective:
(X) immediately upon filing pursuant to paragraph (b) of Rule 485
( ) on [date] pursuant to paragraph (b) of Rule 485
( ) 60 days after filing pursuant to paragraph (a) of Rule 485
( ) on [date] pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2 (17
CFR 270.24f-2) and the Rule 24f-2 Notice for Registrant's fiscal year 1996
was filed on February 28, 1997.
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Exhibit List on Page ____
CONTENTS OF REGISTRATION STATEMENT
The Facing Sheet
The Contents Page
Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
Items 24 - 32
The Signatures
Exhibits
<PAGE>
KMA VARIABLE ACCOUNT
KEYPORT LIFE INSURANCE COMPANY
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-4
N-4 Item Caption in Prospectus
1. . . . . . . . . . . Cover Page
2. . . . . . . . . . . Glossary of Special Terms
3. . . . . . . . . . . Synopsis
4. . . . . . . . . . . Condensed Financial Information
5. . . . . . . . . . . Keyport and the Variable Account
Eligible Funds
6. . . . . . . . . . . Deductions
7. . . . . . . . . . . Allocations of Purchase Payments
Transfer of Variable Account Value
Substitution of Securities
Modification of the Contract
Death Provisions for Non-Qualified Contracts
Death Provisions for Qualified Contracts
Ownership
Assignment
Surrenders
Annuity Benefits
Suspension of Payments
Inquiries by Contract Owners
8. . . . . . . . . . . Annuity Provisions
9. . . . . . . . . . . Death Provisions for Non-Qualified Contracts
Death Provisions for Qualified Contracts
Settlement Options
10. . . . . . . . . . . Purchase Payments
Variable Account Value
Valuation Periods
Net Investment Factor
Distribution of the Contract
11. . . . . . . . . . . Surrenders
Option 1: Income For a Fixed Number of Years
Texas Optional Retirement Program
Right to Revoke
12. . . . . . . . . . . Tax Status
13. . . . . . . . . . . Legal Proceedings
14. . . . . . . . . . . Table of Contents - Statement of Additional
Information
<PAGE>
Caption in Statement of Additional Information
15. . . . . . . . . . . Cover Page
16. . . . . . . . . . . Table of Contents
17. . . . . . . . . . . Keyport Life Insurance Company
18. . . . . . . . . . . Custodian, Experts
19. . . . . . . . . . . Not applicable
20. . . . . . . . . . . Principal Underwriter
21. . . . . . . . . . . Investment Performance
22. . . . . . . . . . . Variable Annuity Benefits
23. . . . . . . . . . . Financial Statements
<PAGE>
PART A
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: Cash Income Fund ("CIF"); Mortgage
Securities Income Fund ("MSIF"); Managed Assets Fund ("MAF"); Managed Growth
Stock Fund ("MGSF"); and Capital Appreciation Fund ("CAF"). The Variable
Account also invests in shares of the following Eligible Funds of Keyport
Variable Investment Trust ("Keyport Trust") at their net asset value:
Colonial-Keyport Growth and Income Fund ("CKGIF"); Colonial-Keyport Strategic
Income Fund ("CKSIF"); Colonial-Keyport Utilities Fund ("CKUF"); Colonial-
Keyport U.S. Stock Fund ("CKUSF"); Colonial-Keyport International Fund for
Growth ("CKIFG") and Newport-Keyport Tiger Fund ("NKTF").
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 May 1, 1997
<PAGE>
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 35
Appendix D_Dollar Cost Averaging 36
<PAGE>
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 Keyport Trust Annual Expenses3,4
(as a percentage of average net assets)
Management Other Total Fund
Fund Fees Expenses Operating Expenses
CIF .50% .15% .65%
MSIF .55 .15 .70 (.72)4
CKGIF .65 .14 .79
CKSIF .65 .15 .80 (.86%)3
MAF .60 .07 .67
CKUF .65 .16 .81
MGSF .65 .08 .73
CKUSF .80 .15 .95
CAF .65 .10 .75
CKIFG .90 .50 1.40
NKTF .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
CIF $ 91 $ 118 $ 154 $ 301
MSIF 92 120 157 308
CKGIF 93 123 164 324
CKSIF 93 122 162 319
MAF 91 119 155 304
CKUF 93 123 163 322
MGSF 92 120 159 312
CKUSF 94 127 171 340
CAF 92 121 160 314
CKIFG 99 141 195 395
NKTF 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
CIF $ 21 $ 69 $ 124 $ 301
MSIF 22 70 127 308
CKGIF 23 73 132 319
CKSIF 23 74 132 321
MAF 21 70 125 304
CKUF 23 74 133 322
MGSF 22 71 129 312
CKUSF 24 78 141 340
CAF 22 72 130 314
CKIFG 29 93 165 395
NKTF 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.
3Keyport 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 CKSIF; 1.75% for CKIFG and
NKTF, and 1.00% for CKGIF, CKUF and CKUSF. For CKSIF, 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 CIF;
.70% for MSIF; .75% for MAF; and .80% for MGSF and CAF. For MSIF, 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 CIF-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 Keyport 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
Cash Income Fund $12.833 $13.288 1,937,919 1996
("CIF") 12.322 12.833 1,870,176 1995
12.036 12.322 2,006,163 1994
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
Cash Income Fund-DCA 12.063 12.667 15,286 1996
("CIF-DCA") 11.423 12.063 16,825 1995
11.004 11.423 46,801 1994
10.715 11.004 384,348 1993
10.335 10.715 1,228,989 1992
10.000 10.355 513,367 1991
Mortgage Securities 16.099 16.621 2,760,649 1996
Income Fund ("MSIF") 14.107 16.099 3,176,177 1995
14.529 14.107 3,002,643 1994
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-Keyport Growth 13.099 15.217 3,940,484 1996
and Income Fund 10.207 13.099 3,443,237 1995
("CKGIF") 10.428 10.207 2,866,727 1994
10.000 10.428 1,221,301 1993
Colonial-Keyport 11.684 12.642 3,036,543 1996
Strategic Income 10.014 11.684 2,910,213 1995
Fund ("CKSIF") 10.000 10.014 314,502 1994
Managed Assets Fund 18.650 21.264 9,759,571 1996
("MAF") 15.071 18.650 10,314,629 1995
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
Colonial-Keyport 11.514 12.095 3,519,866 1996
Utilities Fund ("CKUF") 8.638 11.514 4,018,271 1995
9.762 8.638 4,028,555 1994
10.000 9.762 4,153,150 1993
Managed Growth Stock 22.780 27.242 3,719,103 1996
Fund ("MGSF") 16.770 22.780 3,638,901 1995
18.158 16.770 3,415,076 1994
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-Keyport U.S. 13.263 15.935 2,382,491 1996
Stock Fund 10.369 13.263 1,947,382 1995
("CKUSF") 10.000 10.369 442,457 1994
Capital Appreciation 23.357 29.237 4,567,203 1996
Fund ("CAF") 21.192 23.357 4,164,352 1995
21.236 21.192 4,371,837 1994
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-Keyport 9.723 10.075 1,243,679 1996
International Fund for 9.314 9.723 1,052,842 1995
Growth ("CKIFG") 10.000 9.314 872,971 1994
Newport-Keyport 11.445 12.555 1,509,794 1996
Tiger Fund ("NKTF") 10.000 11.445 599,500 1995
*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 CIF-DCA and the six Keyport 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 CIF-DCA, CKGIF and CKUF 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 CKIFG, CKSIF, CKUSF and NKTF 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 CIF 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 CIF and CIF-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 235
Promenade Street, Providence, Rhode Island 02903 and will be relocated in
May, 1997 to 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
Cash Income Fund ("CIF") CIF and CIF-DCA
Sub-Accounts*
Mortgage Securities Income Fund ("MSIF") MSIF Sub-Account
Managed Assets Fund ("MAF") MAF Sub-Account
Managed Growth Stock Fund ("MGSF") MGSF Sub-Account
Capital Appreciation Fund ("CAF") CAF Sub-Account
Eligible Funds of Keyport Variable Investment Trust Sub-Accounts
Colonial-Keyport Growth and Income Fund ("CKGIF") CKGIF Sub-Account
Colonial-Keyport Strategic Income Fund ("CKSIF") CKSIF Sub-Account
Colonial-Keyport Utilities Fund ("CKUF") CKUF Sub-Account
Colonial-Keyport U.S. Stock Fund ("CKUSF") CKUSF Sub-Account
Colonial-Keyport International Fund for Growth ("CKIFG") CKIFG Sub-Account
Newport-Keyport Tiger Fund ("NKTF") NKTF Sub-Account
* The CIF-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 Keyport 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. 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.
Keyport Advisory Services Corp. ("KASC"), a subsidiary of Keyport, is the
manager for Keyport 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-Keyport Tiger Fund). Colonial has
provided investment advisory services since 1931. Newport Fund Management,
Inc., an affiliate of Keyport, serves as sub-adviser for the Newport-Keyport
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
Cash Income Fund
(CIF and CIF-DCA Sub-Accounts)* High current income from short-term money
market instruments while emphasizing
preservation of capital and maintaining
excellent liquidity.
Mortgage Securities Income Fund
(MSIF Sub-Account) Highest possible level of
current income consistent with safety of
principal and maintenance of liquidity
through investment primarily in mortgage-
backed securities.
Managed Assets Fund
(MAF Sub-Account) High total investment
return through investment in a changing
mix of securities.
Managed Growth Stock Fund
(MGSF Sub-Account) Long-term growth of capital through
investment primarily in common stocks.
Capital Appreciation Fund
(CAF Sub-Account) Capital growth by investing
primarily in common stocks, convertible
securities, and other securities selected
for prospective capital growth.
* The CIF-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 Keyport
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Colonial-Keyport Growth and Income Fund
(CKGIF Sub-Account) Primarily income
and long-term capital growth and,
secondarily, preservation of capital.
Colonial-Keyport Strategic Income
Fund (CKSIF 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").
Colonial-Keyport Utilities Fund
(CKUF Sub-Account) Primarily current
income and, secondarily, long-term
capital growth.
Colonial-Keyport U.S. Stock Fund
(CKUSF Sub-Account) Growth exceeding
over time the S&P 500 Index (Standard
& Poor's Corporation 500 Composite
Stock Price Index) performance.
Colonial-Keyport International Fund
for Growth (CKIFG 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-Keyport Tiger Fund
(NKTF Sub-Account) Long-term capital
growth by investing primarily in
equity securities of companies
located in the four Tigers of Asia
(Hong Kong, Singapore, South Korea
and Taiwan) and other mini-Tigers of
Asia (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. Keyport 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 CIF 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 CIF Sub-Account or One-Year
Guarantee Period. Under the program, Keyport makes automatic transfers on a
periodic basis out of the CIF 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 CIF-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 CIF-
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 CIF-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 totalled. 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, 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 CIF-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 Keyport 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 CIF and CIF-DCA Sub-Accounts 10
Financial Statements 11
Keyport Life Insurance Company 11
KMA Variable Account 33
<PAGE>
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.
<PAGE>
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. CKGIF, CKUF, CKIFG, CKUSF, CKSIF and NKTF 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 CIF 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. CKGIF, CKUF, CKIFG, CKUSF, CKSIF and NKTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
CIF, MSIF, MAF, MGSF and CAF 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. CKGIF, CKUF, CKIFG, CKUSF, CKSIF and NKTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
CIF, MSIF, MAF, MGSF and CAF 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. CKGIF, CKUF, CKIFG, CKUSF, CKSIF and NKTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
CIF, CIF, MAF, and CAF 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 Eligible Mutual
Funds are: Keystone Liquid Trust; and Quality Bond Fund, Diversified Bond
Fund, High Income Bond Fund, Growth and Income Fund, Mid-Cap Growth Fund, and
Small Company Growth Fund (formerly named Keystone Custodian Fund, Series B-
1, B-2, B-4, S-1, S-3, and S-4, respectively). Accumulation unit values are
shown on Pages 33-34.
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.
CKGIF, CKUF, CKIFG, CKUSF, CKSIF and NKTF were added effective 7/1/93,
7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. CIF, CIF, MGSF, ASF
and CAF 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
Cash Income Fund $16.108 $16.704 177,787 1996
15.443 16.108 204,597 1995
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-Keyport U.S. 12.871 15.488 57,589 1996
Stock Fund 10.048 12.871 73,706 1995
(formerly named Colonial- 10.000 10.048 5,259 1994
Keyport U.S. Fund for (8/11/94)
Growth)
Mortgage Securities 17.853 18.460 164,783 1996
Income Fund 15.617 17.853 189,804 1995
16.065 15.617 233,588 1994
15.307 16.065 299,033 1993
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-Keyport Growth 13.184 15.338 68,918 1996
and Income Fund 10.258 13.184 57,955 1995
10.464 10.258 66,152 1994
10.000 10.464 20,759 1993
(7/22/93)
Managed Assets Fund 30.445 34.765 595,783 1996
24.566 30.445 714,638 1995
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
Colonial-Keyport 11.50 12.107 20,126 1996
Utilities Fund 8.621 11.508 27,533 1995
9.727 8.621 31,506 1994
10.000(7/21/93) 9.727 52,776 1993
Colonial-Keyport 11.633 12.606 392,216 1996
Strategic Income 10.000(1/19/95)11.633 486,417 1995
Fund Available in 1994 but no accumulation units were purchased.
Colonial-Keyport 9.747 10.114 38,348 1996
International Fund 9.323 9.747 34,733 1995
for Growth 10.000(5/3/94) 9.323 24,303 1994
Managed Growth Stock 24.378 29.198 231,419 1996
Fund 17.919 24.378 239,514 1995
19.374 17.919 294,345 1994
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
Capital Appreciation 30.953 38.805 270,844 1996
Fund (formerly named 28.043 30.953 285,923 1995
Aggressive Stock Fund) 28.059 28.043 301,017 1994
20.939 28.059 316,873 1993
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-Keyport Tiger 10.242 11.252 23,324 1996
Fund 10.000(6/8/95) 10.242 4,861 1995
*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
Cash Income Fund $15.810 $16.379 12,242 1996
15.173 15.810 16,359 1995
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-Keyport U.S. 12.065 14.503 689 1996
Stock Fund 10.000 (3/7/95) 12.065 1,642 1995
(formerly named Colonial- Available in 1994 but no accumulation units were
Keyport U.S. Fund for purchased.
Growth)
Mortgage Securities 17.783 18.369 15,996 1996
Income Fund 15.571 17.783 16,594 1995
16.033 15.571 21,047 1994
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-Keyport Available in 1993, 1994, 1995 and 1996 but no
Growth and Income Fund accumulation units were purchased.
Managed Assets Fund 29.276 33.396 30,978 1996
23.646 29.276 36,360 1995
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
Colonial-Keyport Available in 1993, 1994, 1995 and 1996 but no
Utilities Fund accumulation units were purchased.
Colonial-Keyport 11.234 12.161 26,307 1996
Strategic Income Fund 10.000 (3/14/95) 11.234 29,901 1995
Available in 1994 but no accumulation units
were purchased.
Colonial-Keyport 9.788 10.146 537 1996
International Fund 9.371 9.788 538 1995
for Growth 10.000 (5/24/94) 9.371 599 1994
Managed Growth Stock 22.337 26.727 5,077 1996
Fund 16.435 22.337 4,239 1995
17.787 16.435 6,259 1994
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
Capital Appreciation 31.595 39.571 24,773 1996
Fund (formerly named 28.653 31.595 24,833 1995
Aggressive Stock Fund) 28.059 28.653 29,605 1994
21.437 28.059 39,376 1993
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-Keyport Tiger 10.000(2/5/96) 10.371 1,762 1996
Fund Available in 1995 but no accumulation units were
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
Cash Income Fund $22.563 $23.457 885,248 1996
21.580 22.563 930,979 1995
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-Keyport 12.722 15.346 28,128 1996
U.S. Stock Fund 10.000(1/13/95) 12.722 22,589 1995
(formerly named Colonial- Available in 1994 but no accumulation units were
Keyport U.S. Fund for purchased.
Growth)
Mortgage Securities 16.740 17.352 42,934 1996
Income Fund 14.608 16.740 68,359 1995
14.990 14.608 72,190 1994
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-Keyport 13.097 15.274 16,326 1996
Growth and Income Fund 10.165 13.097 13,781 1995
10.344 10.165 10,136 1994
10.000 (8/3/93) 10.344 8,415 1993
Managed Assets Fund 30.394 34.791 266,198 1996
24.465 30.394 296,617 1995
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
Colonial-Keyport 11.577 12.209 13,770 1996
Utilities Fund 8.651 11.577 24,359 1995
9.737 8.651 18,049 1994
10.000 (7/21/93) 9.737 23,195 1993
Colonial-Keyport 11.305 12.281 446,354 1996
Strategic Income 10.000(2/28/95) 11.305 465,616 1995
Fund Available in 1994 but no accumulation units were
purchased.
Colonial-Keyport 9.842 10.238 21,566 1996
International Fund 9.390 9.842 27,992 1995
for Growth 10.000 (5/25/94) 9.390 44,610 1994
Managed Growth Stock 56.113 67.374 66,920 1996
Fund 41.147 56.113 60,347 1995
44.377 41.147 56,165 1994
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
Capital Appreciation 62.755 78.867 270,716 1996
Fund (formerly named 56.716 62.755 329,680 1995
Aggressive Stock Fund) 56.611 56.716 346,355 1994
42.142 56.611 398,198 1993
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-Keyport Tiger 10.438 11.496 15,623 1996
Fund 10.000(5/24/95) 10.438 15,701 1995
*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
Keystone Liquid $23.122 $23.930 18,450 1996
Trust 22.238 23.122 21,828 1995
21.718 22.238 21,067 1994
21.483 21.718 24,968 1993
21.102 21.483 27,163 1992
20.269 21.102 58,684 1991
19.042 20.269 76,538 1990
17.724 19.042 83,706 1989
16.780 17.724 444,750 1988
16.002 16.780 560,681 1987
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
Mid-Cap Growth Fund 44.970 46.815 3,352 1996
(formerly Keystone 33.423 44.970 3,693 1995
Custodian Fund, 35.401 33.423 6,753 1994
Series S-3) 32.874 35.401 7,178 1993
31.567 32.874 7,388 1992
22.434 31.567 20,839 1991
24.838 22.434 18,451 1990
20.108 24.838 20,928 1989
17.800 20.108 47,781 1988
17.903 17.800 70,665 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.
<PAGE>
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.
<PAGE>
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 CIF 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 CIF Sub-Account or One-Year Guarantee
Period. Under the program, Keyport makes automatic transfers on a periodic
basis out of the CIF 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 CIF 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 CIF Sub-Account or One-Year Guarantee Period or by
transferring Contract Value to the CIF 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 CIF-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 CIF-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 CIF-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 CIF-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 CIF-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 CIF-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 CIF-DCA Sub-Account value to the CIF 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 CIF-DCA Sub-Account value and divided
by the applicable 1/12 or 1/24 to determine a new monthly transfer amount.
The total CIF-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.
<PAGE>
[PREFERRED ADVISOR LOGO]
KEYPORT PREFERRED ADVISOR
PROSPECTUS
MAY 1, 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 Life Insurance Company's ultimate parent is
Liberty Mutual Insurance Company
Service Hotline 800-367-3653 Keyline 800-367-3654
Keyport Logo is a registered service mark of Keyport Life Insurance Company.
KAVP 5/97
Yes. I would like to receive the Keyport 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 Keyport Variable Investment Trust
Statement of Additional Information.
Name
Address
City, State Zip
<PAGE>
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.
<PAGE>
PART B
<PAGE>
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 May 1, 1997. The prospectus is available, at no charge, by writing
Keyport at 125 High Street, Boston, MA 02110 or by calling (800) 437-4466.
TABLE OF CONTENTS
Page
Keyport Life Insurance Company ............................ 2
Variable Annuity Benefits.................................. 2
Variable Annuity Payment Values.......................... 2
Re-Allocating Sub-Account Payments....................... 4
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 CIF and CIF-DCA Sub-Accounts.................. 10
Financial Statements....................................... 11
Keyport Life Insurance Company........................... 11
KMA Variable Account..................................... 33
The date of this statement of additional information is May 1, 1997
KMA1997.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 Keyport 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 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 (MSIF,
MAF, MGSF and CAF) 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
MSIF -2.35% 4.25% 6.00% 6.09%(10/27/86) 3.23% 4.59% 6.00% 6.09%(10/27/86)
MAF 7.96 8.68 9.58 11.19(5/14/85) 13.96 8.96 9.58 11.19 (5/14/85)
MGSF 13.55 9.99 N/A 11.66(5/26/87) 19.55 10.26 N/A 11.66 (5/26/87)
CAF 19.12 15.51 12.41 12.25(5/16/85) 25.12 15.73 12.41 12.41(5/16/85)
CKUF -0.64 N/A N/A 4.55(7/1/93) 5.03 N/A N/A 5.56(7/1/93)
CKGIF 10.14 N/A N/A 11.86(7/1/93) 16.14 N/A N/A 12.72(7/1/93)
CKIFG -2.00 N/A N/A -1.44(5/3/94) 3.60 N/A N/A 0.27 (5/3/94)
CKUSF 14.13 N/A N/A 19.02(7/6/94) 20.13 N/A N/A 20.56 (7/6/94)
CKSIF 2.34 N/A N/A 8.17(7/14/94) 8.18 N/A N/A 9.95 (7/14/94)
NKTF 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 MSIF 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 MSIF 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 Keyport Trust
Funds beginning July 1, 1993; CKSIF 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
MSIF 6.10%(10/27/86) 1.84%* -0.01%* 5.79% 11.46% 7.59% 12.90%
MAF 11.21 (5/14/85) 17.56 0.88 7.87 21.16 -2.11 26.17
MGSF 11.67 (5/26/87) N/A -7.98* 4.71 29.71 -3.04 45.98
CAF 12.26 (5/16/85) 8.60 -9.06 8.71 29.45 -10.29 35.36
CKUF 5.58 (7/1/93) N/A N/A N/A N/A N/A N/A
CKGIF 12.73 (7/1/93) N/A N/A N/A N/A N/A N/A
CKIFG 0.28 (5/3/94) N/A N/A N/A N/A N/A N/A
CKUSF 20.55 (7/6/94) N/A N/A N/A N/A N/A N/A
CKSIF 9.95 (7/14/94) N/A N/A N/A N/A N/A N/A
NKTF 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
MSIF 4.49% 4.79% -2.93% 14.15% 3.24%
MAF 6.04 7.78 -4.52 23.75 14.02
MGSF 5.16 3.52 -7.64 35.84 19.59
CAF 12.90 33.80 -0.21 10.21 25.18
CKUF N/A -2.38* -11.51 33.29 5.05
CKGIF N/A 4.28* -2.12 28.34 16.16
CKIFG N/A N/A -6.86* 4.39 3.61
CKUSF N/A N/A 3.69* 27.91 20.14
CKSIF N/A N/A 0.14* 16.67 8.20
NKTF 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 MSIF 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 MSIF 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 Keyport Trust
Funds beginning July 1, 1993; CKSIF 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 CIF and CIF-DCA Sub-Accounts
Yield and effective yield percentages for the CIF and CIF-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 CIF-DCA Sub-Account
and accounts for the CIF-DCA Sub-Account yields being higher than the CIF
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 CIF charge is equal to the $36 Contract charge
multiplied by a fraction equal to the average number of Contracts
with CIF 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 CIF
Accumulation Unit during the 7-day period divided by the average
Contract Value in CIF Sub-Account during the 7-day period. The
assumed annual CIF-DCA charge is similarly calculated using CIF-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 CIF or CIF-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 CIF Sub-Account
was 3.70% and the effective yield was 3.77%. For the CIF-DCA Sub-Account the
yield was 5.10% and the effective yield was 5.23%.
<PAGE>
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.
Ernst & Young LLP
February 5, 1997
Boston, Massachusetts
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
Independent Auditors' Report
The Contract Owners of
Keyport Life Insurance company's
KMA variable Account
We have audited the accompanying statement of operations and changes in net
assets of the sub-accounts comprising Keyport Life Insurance Company's KMA
Variable Account for the year, or other periods as applicable, ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express and opinion on these 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 financial statement referred to above present fairly, in
all material respects, the results or operations and changes in net assets of
the sub-accounts comprising Keyport Life Insurance Company's KMA Variable
Account for the year, or other periods as applicable, ended December 31, 1995
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 5, 1996
<PAGE>
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 $ - $ 1,913,903
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
transaction - (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. 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.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part B:
Keyport Life Insurance Company
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Income Statements for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
KMA Variable Account:
Statements of Assets and Liabilities - December 31, 1996 and 1995
Statements of Operations and Changes in Net Equity for the periods
ended December 31, 1996 and 1995
Notes to Financial Statements
(b) Exhibits:
(1) Resolution of the Board of Directors is incorporated by
reference to Post-Effective Amendment No. 27 to Form N-4 (File
No. 2-66388).
(2) Incorporated by reference to Post-Effective Amendment No.
8 to Form S-6 (File No. 2-66388).
(3) Principal Underwriter Agreement is incorporated by
reference to Post-Effective Amendment 26 to Form N-4 (File No. 2-
66388). Specimen agreement between Principal Underwriter and
dealer is incorporated by reference to Post-Effective Amendment
No. 25 to Form N-4 (File No. 2-66388).
(4) Contract FLEX(4) is incorporated by reference to Post-
Effective Amendment No. 23 to Form N-4 (File No. 266388).
Endorsement END.A(52) for FLEX(4) is incorporated by reference to
Post-Effective Amendment No. 25 to Form N-4 (File No. 2-66388).
Contract FLEX(4)V with Endorsement END.A(52) is incorporated by
reference to Post-Effective Amendment No. 25 to Form N-4 (File
No. 2-66388). Contract FLEX(4)/WA is incorporated by reference to
Post-Effective Amendment No. 27 to Form N-4 (File No. 2-66388).
Endorsement END.A(90) for Contracts issued July 1, 1993 to July
4, 1994 and Endorsement END.A(89), a replacement for END.A(52),
for Contracts issued on or after July 5, 1994 are incorporated by
reference to Post-Effective Amendment No. 32 to Form N-4 (File
No. 2-66388).
(5) Application Form FLEX-APP(REV)3 is incorporated by
reference to Post-Effective Amendment No. 31 to Form N-4 (File
No. 2-66388).
(6) Articles of Incorporation are incorporated by reference
to Registrant's Form N-8B-2 (File No. 811-2290). Amendment to
the Articles of Incorporation and the By-Laws incorporated by
reference to Post-Effective Amendment No. 25 to Form N-4 (File
No. 2-66388).
(7) Not applicable.
(8) Participation Agreement is incorporated by reference to
Post-Effective Amendment No. 24 to Form N-4 (File No. 2-66388).
(9) Opinion and Consent of Counsel is Exhibit 24(b)(9).
(10) Consents of independent auditors are Exhibit
24(b)(10).
(11) Not applicable.
(12) Not applicable.
(13) Schedule for computations of performance quotations
is incorporated by reference to Post-Effective Amendment No. 27
to Form N-4 (File No. 2-66388). Contract maintenance charge
formulas for Total Return Calculation for Sub-Accounts other than
CIF Sub-Account are incorporated by reference to Post-Effective
Amendment #33 to Form N-4 (File No. 2-66388).
(14) Powers of Attorney are incorporated by reference to
Post-Effective Amendment No. 35 to Form N-4 (File No. 2-66388).
(27) Financial Data Schedule
Item 25. Directors and Officers of the Depositor.
Name and Principal Positions and Offices
Business Address* with Depositor
Kenneth R. Leibler, President Chairman of the Board
Liberty Financial Companies Inc.
One Financial Center, 24th Floor
600 Atlantic Avenue
Boston, MA 02110
Frederick R. Ballou Director
B. A. Ballou & Company, Inc.
800 Waterman Avenue
East Providence, RI 02914
Frederick Lippitt Director
The Providence Plan
740 Hospital Trust Building
15 Westminster Street
Providence, Rhode Island 02903
Robert C. Nyman Director
Nyman Manufacturing Company
275 Ferris Avenue
E. Providence, RI 02910-1001
John W. Rosensteel President, Chief
Executive Officer and Director
Paul H. LeFevre, Jr. Executive Vice
President and Chief Financial Officer
John E. Arant, III Senior Vice
President and Chief Sales Officer
Bernard R. Beckerlegge Senior Vice President and
General Counsel
Stephen B. Bonner Senior Vice President -
Income Markets
Stewart R. Morrison Senior Vice
President and Chief Investment
Officer
Francis E. Reinhart Senior Vice President and Chief
Information Officer
Bruce J. Crozier Vice President
and Chief Actuary
William L. Dixon Vice President-
Compliance and Assistant Secretary
James P. Greaton Vice President and
Corporate Actuary
Jacob M. Herschler Vice President -
Variable Products
Kenneth M. Hughes Vice President,
National Director of Bank Sales
James J. Klopper Vice President,
Counsel and Secretary
Leslie J. Laputz Vice President,
Strategic Planning
Jeffrey J. Lobo Vice President - Risk
Management
Suzanne E. Lyons Vice President -
Human Resources
Deborah A. Re Vice President
Administrative Operations
Mark R. Tully Vice President
National Director of
Traditional Sales
Jeffery J. Whitehead Vice President
and Treasurer
Peter E. Berkeley Assistant Vice President-
Human Resource
Development
John G. Bonvouloir Assistant Vice
President & Assistant Treasurer
Judith A. Brookins Assistant Vice
President, Sales Promotion
Clifford O. Calderwood Assistant Vice
President, Network Systems
Paul R. Coady Assistant
Vice President, Marketing Systems
Alan R. Downey Assistant
Vice President
Jeremy C. Jaffe Assistant Vice President-
Strategic Planning
Kenneth M. LeClair Assistant Vice President
Gregory L. Lapsley Assistant Vice
President, Administrative Services
(Rhode Island Operations)
Edward P. Mangini Assistant Vice President
Scott E. Morin Assistant
Vice President and Controller
Michael J. Mulkern Assistant Vice President-
Variable Products
Sean O'Brien Assistant Vice President-
Administrative Operations
Robert J. Scheinerman Assistant Vice President
Edward M. Shea Assistant Vice President
And Counsel
Teresa M. Shumila Assistant Vice
President- Administrative Operations
Daniel T. Smyth Assistant Vice President
Donald A. Truman Assistant Vice President
And Counsel
Ellen L. Wike Assistant
Vice President
Daniel Yin Assistant Vice President- Investments
Frederick Lippitt Assistant Secretary
*125 High Street, Boston, Massachusetts 02110, unless noted otherwise.
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant.
The Depositor controls the Registrant, Variable Account A, Keyport 401
Variable Account, Keyport Variable Account I, and Keyport Variable Account
II, under the provisions of Rhode Island law governing the establishment of
these separate accounts of the Company.
The Depositor controls Keyport Financial Services Corp. (KFSC), a
Massachusetts corporation functioning as a broker/dealer of securities,
through 100% stock ownership. KFSC files separate financial statements.
The Depositor controls Keyport Advisory Services Corp. (KASC), a
Massachusetts corporation functioning as an investment adviser, through 100%
stock ownership. KASC files separate financial statements.
The Depositor controls Keyport America Life Insurance Company (Keyport
America), a Rhode Island corporation functioning as a life insurance company,
through 100% stock ownership. Keyport America files separate financial
statements.
The chart for the affiliations of the Depositor is incorporated by
reference to Post-Effective amendment No. 33 to Form N-4 (File No. 2-66388).
Item 27. Number of Contract Owners.
At April 22, 1997, there were 12,317 Qualified Contract Owners and 13,105
Non-Qualified Contract Owners.
Item 28. Indemnification.
Directors and officers of the Depositor and the principal underwriter are
covered persons under Directors and Officers/Errors and Omissions liability
insurance policies issued by ICI Mutual Insurance Company, Federal Insurance
Company, Firemen's Fund Insurance Company, CNA and Lumberman's Mutual
Casualty Company. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors and officers under such
insurance policies, or otherwise, the Depositor has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Depositor of expenses incurred or
paid by a director or officer in the successful defense of any action, suit
or proceeding) is asserted by such director or officer in connection with the
variable annuity contracts, the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 29. Principal Underwriters.
Keyport Financial Services Corp. is also principal underwriter of the
SteinRoe Variable Investment Trust and Keyport Variable Investment Trust,
which offer eligible funds for variable annuity and variable life insurance
contracts.
The directors and officers are:
Name and Principal Position and Offices
Business Address* with Underwriter
John W. Rosensteel Chairman of the Board and President
Francis E. Reinhart Director and Vice President -
Administration
John E. Arant III Director and Vice President - Sales
Officer
William L. Dixon Vice President--Compliance Officer
Rogelio P. Japlit Treasurer
James J. Klopper Clerk
Donald A. Truman Assistant Clerk
*125 High Street, Boston, Massachusetts 02110.
Item 30. Location of Accounts and Records.
Keyport Life Insurance Company, 125 High Street, Boston, Massachusetts
02110.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Incorporated by reference to Post-Effective Amendments Nos. 19 and 23 to
Form N-4 (File No. 2-66388).
Representation
Depositor represents that the fees and charges deducted under the
contract, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Depositor. Further, this representation applies to each form of the contract
described in a prospectus and statement of additional information included in
this registration statement.
<PAGE>
THE SIGNATURES
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to
be signed on its behalf, in the City of Boston and State of Massachusetts, on
this 30th day of April, 1997.
KMA Variable Account
Registrant)
BY: Keyport Life Insurance Company
(Depositor)
BY: JOHN W. ROSENSTEEL*
John W. Rosensteel, President & CEO
* James J. Klopper has signed this document on the indicated date on
behalf of Mr. Rosensteel pursuant to power of attorney duly executed by
him and included as part of Exhibit 14 in Post-Effective Amendment No.
35 to the Registration Statement on Form N-4 filed on or about May 1,
1996 (File Nos. 2-66388; 811-2990).
<PAGE>
As required by the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
KENNETH R. LEIBLER* JOHN W. ROSENSTEEL*
KENNETH R. LEIBLER JOHN W. ROSENSTEEL
Chairman of the Board President
(Principal Executive Officer)
FREDERICK R. BALLOU* PAUL H. LEFEVRE, JR.*
FREDERICK R. BALLOU PAUL H. LEFEVRE, JR.
Director Executive Vice President
(Chief Financial Officer)
FREDERICK LIPPITT*
FREDERICK LIPPITT
Director
ROBERT C. NYMAN*
ROBERT C. NYMAN
Director
JOHN W. ROSENSTEEL*
JOHN W. ROSENSTEEL
Director
*BY: /s/James J. Klopper 4/30/97
James J. Klopper Date
Attorney-in-Fact
* James J. Klopper has signed this document on the indicated date on
behalf of each of the above Directors and Officers of the Depositor
pursuant to powers of attorney duly executed by such persons and
included as Exhibit 14 in Post-Effective Amendment No. 35 to the
Registration Statement on Form N-4 filed on or about May 1, 1996 (File
Nos. 2-66388; 811-2990).
<PAGE>
EXHIBIT INDEX
Item Page
24(b)(9) Opinion and Consent of Counsel.......................
24(b)(10) Consents of Independent Auditors.....................
24(b)(27) Financial Data Schedule..............................
<PAGE>
EXHIBIT 24(b)(9)
OPINION AND CONSENT OF COUNSEL
<PAGE>
April 30, 1997
John W. Rosensteel, President
Keyport Life Insurance Company
125 High Street
Boston, MA 02110
RE: OPINION OF COUNSEL - KMA VARIABLE ACCOUNT
Dear Mr. Rosensteel:
You have requested my opinion concerning the legality of the variable
annuity contracts being registered with the Securities and Exchange
Commission by Post-Effective Amendment No. 36.
I have made such examination of the law and have examined such records and
documents as in my judgment was necessary or appropriate to enable me to
render the opinion expressed below.
I am of the opinion that the contracts will be legally issued and will
represent binding obligations of the depositor (Keyport Life Insurance
Company).
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
Sincerely,
/s/James J. Klopper
James J. Klopper, Esq.
<PAGE>
EXHIBIT 24(b)(10)
CONSENTS OF INDEPENDENT AUDITORS
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Statement of Additional Information and to the use of our reports dated
February 5, 1997, with respect to the consolidated financial statements of
Keyport Life Insurance Company, and March 14, 1997, with respect to the
financial statements of Keyport Life Insurance Company - KMA Variable
Account, included in this Post-Effective Amendment No. 36 to the Registration
Statement (Form N-4, No. 2-66388).
Boston, Massachusetts /s/Ernst & Young LLP
April 29, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Keyport Life Insurance Company:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the Statement of Additional
Information.
Our report dated February 16, 1996 contains an explanatory paragraph that
refers to a change in accounting by the Company to adopt the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 30, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TheContract Owners of
Keyport Life Insurance Company's
KMA Variable Account
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the Statement of Additional
Information.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 30, 1997
<PAGE>
EXHIBIT 24(b)(27)
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 782,013,666
<INVESTMENTS-AT-VALUE> 951,697,962
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 951,697,962
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
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</TABLE>
