As filed with the Securities and Exchange Commission on April 28, 1999
Registration Nos. 2-66388
811-2990
=========================================================================
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. 38 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 [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.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
(X) on May 3, 1999 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
Title of Securities Being Registered: Units of Interest in the Separate
Account under the Contracts
No filing fee is due because an indefintie amount of securities is deemed
to have been registered in reliance on Section 24(f) of the Investment
Company Act of 1940.
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Exhibit List on Page ____
<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. . . . . . . . . . .Definitions
3. . . . . . . . . . .Summary of Certificate Features
Fee Table
Examples
Explanation of Fee Table and Examples
4. . . . . . . . . . .Condensed Financial Information
Performance 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
Contract 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
<PAGE>
- ---------------------------------------------------------------------------
Prospectus for
The Preferred Advisor Variable Annuity
Individual Flexible Purchase Payment
Deferred Variable Annuity Contract
issued by
KMA Variable Account
and
Keyport Life Insurance Company
- --------------------------------------------------------------------------
This prospectus describes the Preferred Advisor variable annuity contract
offered by Keyport Life Insurance Company. The contract is designed to
help you in your long-term retirement planning. As of May 1, 1998, the
Contracts were no longer offered for sale.
Under the Contract, you may elect to have value accumulate on a variable or
fixed basis. You may also elect to receive periodic annuity payments on
either a variable or a fixed basis. This prospectus generally describes
only the variable features of the Contract. For a summary of the Fixed
Account and its features, see Appendix A. The Contracts are designed to
help you in your retirement planning. You may purchase them on a tax
qualified or non-tax qualified basis. Because they are offered on a
flexible payment basis, you are permitted to make multiple payments.
We will allocate your purchase payments to the investment options and the
Fixed Account in the proportions you choose. The Contract currently offers
eleven investment options, each of which is a Sub-account of KMA Variable
Account. Currently, you may choose among the following Eligible Funds.:
STEINROE VARIABLE INVESTMENT TRUST: Stein Roe Money Market Fund, Variable
Series; Stein Roe Mortgage Securities Fund, Variable Series; Stein Roe
Balanced Fund, Variable Series; Stein Roe Growth Stock Fund, Variable
Series; and Stein Roe Special Venture Fund, Variable Series
LIBERTY VARIABLE INVESTMENT TRUST (formerly named Keyport Variable
Investment Trust): Colonial Growth and Income Fund, Variable Series;
Colonial Strategic Income Fund, Variable Series; Stein Roe Global Utilities
Fund, Variable Series; Colonial U.S. Stock Fund, Variable Series; Colonial
International Fund for Growth, Variable Series and Newport Tiger Fund,
Variable Series
We may make other investment options available in the future.
If you purchased a variable annuity contract before May 1, 1992, you may
continue to make purchase payments under that contract subject to the terms
and conditions of those contracts and Appendix B on Page 28.
The purchase of a Contract involves certain risks. Investment performance
of the Eligible Funds to which you may allocate purchase payments may vary.
We do not guarantee any minimum Contract Value for amounts allocated to the
Eligible Funds.
The Variable Account may offer other contracts with different features,
fees and charges, and other Sub-accounts which may invest in different or
additional mutual funds. Separate prospectuses and statements of
additional information will describe other contracts. The agent selling
the Contracts has information concerning the eligibility for and the
availability of the other contracts.
This prospectus contains important information about the Contracts you
should know before investing. You should read it before investing and keep
it for future reference. We have filed a Statement of Additional
Information ("SAI") with the Securities and Exchange Commission. The
current SAI has the same date as this prospectus and is incorporated by
reference in this prospectus. You may obtain a free copy by writing us 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 SAI appears on page __ of this prospectus.
The date of this prospectus is May 3, 1999.
The Securities and Exchange Commission has not approved or disapproved
these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page
Definitions 3
Summary of Contract Features 3
Fee Table 4
Examples
Explanation of Fee Table and Examples 6
Condensed Financial Information 7
Performance Information
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
Limits on Transfers
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 Variable Account 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
Contract 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
Year 2000 Matters
Tax Status 21
Introduction 21
Taxation of Annuities in General 21
Qualified Plans 22
Tax-Sheltered Annuities 22
Individual Retirement Annuities 23
Corporate Pension and Profit-Sharing Plans 23
Deferred Compensation Plans with Respect to
Service for State and Local Governments 23
Texas Optional Retirement Program 23
Variable Account Voting Rights 23
Distribution of the Contract 24
Legal Proceedings 24
Inquiries by Contract Owners 24
Table of Contents-Statement of Additional Information 24
Appendix A-The Fixed Account (also known as the
Guaranteed Rate Account) 25
Appendix B-Prior Contracts of the Variable Account 28
Appendix C-Telephone Instructions 34
Appendix D-Dollar Cost Averaging 35
<PAGE>
DEFINITIONS
Accumulation Unit: A unit of measurement which we use to calculate Variable
Account Value.
Annuitant: The natural person on whose life annuity benefits are based and
who will receive annuity payments starting on the Income Date.
Company ("We", "Us", "Our", "Keyport"): Keyport Life Insurance Company.
Contract Anniversary: Each anniversary of the Issue Date.
Contract Owner ("You"): The person(s) having the privileges of ownership
under the Contract.
Contract Value: The sum of the Variable Account Value and the Fixed Account
Value.
Contract Year: Each twelve-month period beginning on the Issue Date and
each Contract Anniversary thereafter.
Designated Beneficiary: The person designated to receive any death benefits
under the Contract
Eligible Funds: The underlying mutual funds in which the Variable Account
invests.
Fixed Account: Part of our general account into which purchase payments or
Contract Values may be allocated or transferred.
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 date when the Contract becomes effective.
Non-Qualified Contract: Any Contract that is not issued under a Qualified
Plan.
Office: Our executive office, which is 125 High Street, Boston,
Massachusetts 02110.
Qualified Contract: Contracts issued under Qualified Plans.
Qualified Plan: A retirement plan which receives special tax treatment
under Sections 401, 403(b), 408(b) or 408A of the Internal Revenue Code of
1986, as amended ("Code") or a deferred compensation plan for a state and
local government or other tax exempt organization under Section 457 of the
Code.
Surrender Value: The Contract Value less the deductions made upon a total
surrender of the Contract.
Variable Account: KMA Variable Account which is our separate investment
account, into which purchase payments under the Contracts may be allocated.
The Variable Account is divided into Sub-accounts which invest in shares of
an Eligible Fund.
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 us, signed by
you and a disinterested witness, and filed at our Office.
SUMMARY OF CONTRACT FEATURES
Because this is a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus and
Statement of Additional Information before deciding to invest. Further,
individual state requirements, which are different from the information in
this prospectus, are described in supplements to this prospectus or in
endorsements to the Contracts.
The Contract
The Contract is a flexible premium deferred variable annuity contract. It
is designed for retirement planning purposes. It allows you to allocate
purchase payments to and receive annuity payments from the Variable Account
and/or the Fixed Account.
The Variable Account is a separate investment account we maintain. If you
allocate payments to the Variable Account, your accumulation values and
annuity payments will fluctuate according to the investment performance of
the Eligible Funds chosen.
The Fixed Account is part of our "general account", which consists of all
our assets except the Variable Account and the assets of other separate
investment accounts we maintain. If you allocate payments to the Fixed
Account, your accumulation value will increase at guaranteed interest rates
and annuity payments will be of a fixed amount. (See Appendix A for more
information on the Fixed Account.)
If you allocate payments to both the Variable and the Fixed Accounts, then
the accumulation value and annuity payments will be variable in part and
fixed in part.
Purchase Payments
You may make multiple purchase payments. The minimum initial payment is
$5,000. The minimum amount for each subsequent payment is $1,000 or a
lesser amount as we may permit from time to time which is currently $250.
(See "Purchase Payments and Applications".)
Investment Choices
You can allocate and reallocate your investment among the Sub-accounts of
the Variable Account which in turn invest in the Eligible Funds. Each
Eligible Fund holds its assets separately from the assets of the other
Eligible Funds. Each has its own investment objectives and policies
described in the accompanying prospectuses for the Eligible Funds. Under
the Contract, the Variable Account currently invests in the following:
SteinRoe Variable Investment Trust ("SteinRoe Trust")
Stein Roe Money Market Fund, Variable Series ("SRMMF Sub-account")
Stein Roe Mortgage Securities Fund, Variable Series ("SRMSF Sub-account")
Stein Roe Balanced Fund, Variable Series ("SRBF Sub-account")
Stein Roe Growth Stock Fund, Variable Series ("SRGSF Sub-account")
Stein Roe Special Venture Fund, Variable Series ("SRSVF Sub-account")
Liberty Variable Investment Trust ("Liberty Trust")
Colonial Growth and Income Fund, Variable Series ("CGIF Sub-account")
Colonial Strategic Income Fund, Variable Series ("CSIF Sub-account")
Stein Roe Global Utilities Fund, Variable Series ("SRGUF Sub-account")
Colonial U.S. Stock Fund, Variable Series ("CUSSF Sub-account")
Colonial International Fund for Growth, Variable Series ("CIFG Sub-account")
Newport Tiger Fund, Variable Series ("NTF Sub-account")
The SRMMF-DCA Sub-Account is available only under previously issued
Contracts that allocated the initial purchase payment under our Value-Added
Dollar Cost Averaging program. This Sub-account was not generally available
after July 31, 1993 for the allocation of any payment.
Fees and Charges
Contingent Deferred Sales Charge
There are no sales charges at the time of your purchase payment. We may
deduct a charge in the event of a total or partial surrender. That charge
is based on a table of charges. See page __. The charge will not exceed 7%
of that portion of the amount you surrender that represents purchase
payments you made during the seven years immediately preceding your request
for surrender. (See "Deductions for Contingent Deferred Sales Charge".)
Mortality and Expense Risk Charge
We deduct a mortality and expense risk charge at an annual rate of 1.25% of
your average daily net asset values in the Variable Account. (See
"Deductions for Mortality and Expense Risk Charge".)
Daily Sales Charge
We deduct a daily sales charge at an annual rate of .15% of your average
daily net asset values in the Variable Account. (See "Deductions for Daily
Sales charge".)
Contract Maintenance Charge
We deduct an annual $36 contract maintenance charge from Variable Account
Value for administrative expenses. Prior to the Income Date, we reserve the
right to change this charge for future years. (See "Deductions for
Contract Maintenance Charge".)
Premium Taxes
We charge premium taxes against your Contract Value. Currently such premium
taxes range from 0% to 5.0%. (See "Deductions for Premium Taxes".)
Federal Income Taxes
You will not pay federal income taxes on the increases in value of your
Contract. However, if you make a withdrawal, in the form of a lump sum
payment, annuity payment or make a gift or assignment, you will be subject
to federal income taxes on the increases in value of your Contract and may
also be subject to a 10% federal penalty tax. (See "Tax Status".)
Free Look
You may generally revoke the Contract by returning it to us within 10 days
after you receive it. For most states, we will refund the lesser of the
initial purchase payment or Contract Value as of the date we receive the
returned Contract. You will bear the investment risk during the revocation
period. You may ask us for the rules that apply to your state. (See
"Right to Revoke".)
FEE TABLE
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of purchase payments): 7%
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 Expenses
(as a percentage of purchase payments): 7%
Annual Maintenance Charge $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Daily Sales Charge: .15%
Total Variable Account Annual Expenses: 1.40%
SteinRoe Trust and Liberty Trust Annual Expenses1
(as a percentage of average net assets)
Management Other Total Fund
Fees (After Expenses Operating
Any Waiver (After Any Expenses (After
and/or Waiver and/or Any Waiver and/or
Fund Reimbursement)2 Reimbursement)2 Reimbursement)2
CGIF .65% .11% .76%
CIFG .90% .34% 1.24%
CSIF .65% .13% .78%
CUSSF .80% .10% .90%
NTF .90% .40% 1.30%
SRGUF .65% .17% .82%
SRBF .45% .20% .65%
SRGSF .50% .20% .70%
SRMMF .35% .27% .62%
SRMSF .40% .30% .70%
SRSVF .50% .25% .75%
1 All Trust expenses are for 1998 and reflect such Trust's adviser's
agreement to reimburse expenses above certain limits (See footnote 2).
2 Liberty Trust's manager has agreed until April 30, 2000 to reimburse all
expenses, including management fees, but excluding interest, taxes,
brokerage, and other expenses which are capitalized in accordance with
generally accepted accounting procedures, and extraordinary expenses, in
excess of the following percentage of average net assets of each Eligible
Fund in the Liberty Variable Investment Trust, 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 of 1986, as
amended: .80% for CSIF; 1.75% for CIFG and NTF, and 1.00% for CGIF, SRGUF
and CUSSF. The Liberty Trust's manager was not required to reimburse
expenses as of the date of this prospectus.
SteinRoe Trust's Manager has agreed until April 30, 2000 to reimburse all
expenses, including management fees, in excess of the following percentage
of the average annual net assets of each Eligible Fund: .65% for SRMMF;
.70% for SRMSF; .75% for SRBF; and .80% for SRGSF and SRSVF. SteinRoe
Trust's Manager was not required to reimburse expenses as of the date of
this prospectus.
EXAMPLES
Example #1 - If you surrender your Contract at the end of the periods shown
you would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
SRMMF $ 91 $ 117 $ 153 $ 298
SRMSF 92 120 157 309
CGIF 92 122 161 316
CSIF 93 122 162 319
SRBF 91 118 154 302
SRGUF 93 123 164 324
SRGSF 92 120 157 309
CUSSF 94 126 168 334
SRSVF 92 121 160 315
CIFG 97 136 187 376
NTF 98 138 190 384
Example #2 - If you annuitize or if you do not surrender your Contract at
the end of the periods shown, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
SRMMF $ 21 $ 68 $ 123 $ 298
SRMSF 22 71 127 309
CGIF 22 73 131 316
CSIF 23 73 132 319
SRBF 21 69 124 302
SRGUF 23 75 134 324
SRGSF 22 71 127 309
CUSSF 24 77 138 334
SRSVF 22 72 130 315
CIFG 27 88 157 376
NTF 28 90 160 384
EXPLANATION OF FEE TABLE AND EXAMPLES
The purpose of the fee table is to illustrate the expenses you may directly
or indirectly bear under a contract. The table reflects expenses of the
Variable Account as well as the Eligible Funds. You should read
"Deductions" in this prospectus and the sections relating to expenses of
the Eligible Funds in their prospectuses. The examples do not include any
taxes or tax penalties you may be required to pay if you surrender your
Contract.
We deduct contingent deferred sales charges only if you totally or
partially surrender the Contract. You will not incur a surrender charge in
the following instances:
o In the first Contract Year, you may withdraw an aggregate amount up
to the Contract's earnings. Earnings equal the Contract Value at the
time of withdrawal less the portion of the purchase payments not
previously withdrawn.
o In the second and later Contract Years you may withdraw the greater
of:
(i) earnings, or
(ii) an amount up to 10% of the Contract Value as of the preceding
Contract Anniversary.
The examples assume you did not make any transfers. We reserve the right
to impose a transfer fee after we notify you. Currently, we do not impose
any transfer fee. Premium taxes are not shown. We deduct the amount of
any premium taxes (which range from 0% to 5%) from Contract Value upon full
surrender, death or annuitization.
The SRMMF-DCA Sub-Account is not shown because it is available under
previously issued Contracts only for automatic monthly transfers that will
deplete your 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 fee table and examples should not be considered a representation of
past or future expenses and charges of the Sub-accounts. Your actual
expenses may be greater or less than those shown. Similarly, the 5% annual
rate of return assumed in the example 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 Trust, and "Trust
Management Organizations" and "Expenses of the Funds" in the prospectus for
Liberty Trust.
CONDENSED FINANCIAL INFORMATION
Accumulation Unit Values*
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year** of Year of Year Year
Stein Roe Money $13.780 $14.284 2,099,133 1998
Market Fund 13.288 13.780 2,011,620 1997
("SRMMF") 12.833 13.288 1,937,919 1996
(formerly named 12.322 12.833 1,870,176 1995
Cash Income Fund) 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
Stein Roe Money 13.320 14.000 19,490 1998
Market Fund-DCA 12.667 13.320 21,487 1997
("SRMMF-DCA") 12.063 12.667 15,286 1996
(formerly named Cash 11.423 12.063 16,825 1995
Income Fund-DCA) 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
Stein Roe Mortgage 17.874 18.826 2,099,027 1998
Securities Fund 16.621 17.874 2,466,957 1997
("SRMSF") (formerly 16.099 16.621 2,760,649 1996
named Mortgage 14.107 16.099 3,176,177 1995
Securities Income 14.529 14.107 3,002,643 1994
Fund) 13.865 14.529 3,692,561 1993
13.269 13.865 3,006,271 1992
11.752 13.269 1,756,957 1991
10.923 11.752 601,483 1990
10.000 10.923 57,088 1989
Colonial Growth and 19.354 21.211 3,788,331 1998
and Income Fund 15.217 19.354 4,494,000 1997
("CGIF") (formerly 13.099 15.217 3,940,484 1996
named Colonial-Keyport 10.207 13.099 3,443,237 1995
Growth and Income Fund 10.428 10.207 2,866,727 1994
10.000 10.428 1,221,301 1993
Colonial Strategic 13.616 14.237 3,020,397 1998
Income Fund ("CSIF") 12.642 13.616 3,802,498 1997
(formerly named 11.684 12.642 3,036,543 1996
Colonial-Keyport 10.014 11.684 2,910,213 1995
Strategic Income Fund) 10.000 10.014 314,502 1994
Stein Roe Balanced 24.497 27.188 7,821,031 1998
Fund ("SRBF") 21.264 24.497 8,702,195 1997
(formerly named 18.650 21.264 9,759,571 1996
Managed Assets Fund) 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
Stein Roe Global 15.358 17.923 2,640,178 1998
Utilities Fund 12.095 15.358 2,934,611 1997
("SRGUF") (formerly 11.514 12.095 3,519,866 1996
named Colonial-Keyport 8.638 11.514 4,018,271 1995
Utilities Fund) 9.762 8.638 4,028,555 1994
10.000 9.762 4,153,150 1993
Stein Roe Growth Stock 35.538 44.829 3,344,812 1998
Fund ("SRGSF") 27.242 35.538 3,592,225 1997
(formerly named 22.780 27.242 3,719,103 1996
Managed Growth 16.770 22.780 3,638,901 1995
Stock Fund) 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 U.S. Stock 20.780 24.622 2,759,395 1998
Fund ("CUSSF") 15.935 20.780 2,927,067 1997
(formerly named 13.263 15.935 2,382,491 1996
Colonial-Keyport U.S. 10.369 13.263 1,947,382 1995
Stock Fund and 10.000 10.369 442,457 1994
Colonial-Keyport U.S.
Fund for Growth
Stein Roe Special 31.085 25.351 3,260,203 1998
Venture Fund ("SRSVF") 29.237 31.085 3,987,861 1997
(formerly named 23.357 29.237 4,567,203 1996
Capital Appreciation 21.192 23.357 4,164,352 1995
Fund) 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 International 9.660 10.761 1,145,641 1998
Fund for Growth 10.075 9.660 2,226,761 1997
("CIFG")(formerly 9.723 10.075 1,243,679 1996
named Colonial-Keyport 9.314 9.723 1,052,842 1995
International Fund 10.000 9,314 872,971 1994
for Growth)
Newport Tiger Fund 8.526 7.867 1,119,721 1998
("NTF") (formerly 12.555 8.526 1,524,488 1997
named Newport-Keyport 11.445 12.555 1,509,794 1996
Tiger Fund) 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 SRMMF-DCA and the six Liberty Trust Funds, each $10.00 value
is as of May 1, 1989, which is the date the Eligible Fund Sub-account first
became available for Accumulation Units based on a 1.40% asset-based
charge. The $10.00 value for SRMMF-DCA, CGIF and SRGUF is as of the date
the Eligible Fund Sub-account first became available: May 1, 1991; July 1,
1993; and July 1, 1993, respectively. The unit values for the CIFG, CSIF,
CUSSF and NTF Sub-accounts were valued at $10.00 on May 2, 1994; July 5,
1994, July 5, 1994, and May 1, 1995, respectively.
Our full financial statements and those of the Variable Account are in the
Statement of Additional Information.
PERFORMANCE INFORMATION
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-accounts.
Performance information is not intended to indicate either past performance
or future performance of an actual Contract.
The Sub-accounts, other than SRMMF Sub-account, may advertise total return
information for various periods of time. Total return performance
information is based on the overall percentage change in value of a
hypothetical investment in the Sub-account over a given period of time.
Average annual total return information shows the average annual
compounding percentage applied to the value of an investment in the Sub-
account from the beginning of the measuring period to the end of that
period. This average annual total return reflects all historical investment
results, less all Sub-account and Contract charges and deductions. This
would include any contingent deferred sales charge that would apply if you
surrendered the Contract at the end of the period indicated. Average total
return is not reduced by any premium taxes. Average total return would be
less if these taxes were deducted.
In order to calculate average annual total return, we divide 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. We then annualize the
resulting total rate for the period to obtain the average annual
compounding percentage change during the period.
The Sub-accounts may present additional total return information computed
on a different basis:
o First, the Sub-accounts may present total return information as
described above, except for the deduction for 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. This is consistent with
the long-term investment and retirement objectives of the Contract
The total return percentage will be higher under this method than
the standard method described above.
o Second, the Sub-accounts may present total return information as
described above, except there are no deductions for the contingent
deferred sales charge, contract maintenance charge and premium
taxes. Because there are no charges deducted, the calculation is
simplified. We divide 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 twelve-month change rate. For longer
periods, it is a total rate for the period. We annualize the total
rate in order to obtain the average annual percentage change in the
Accumulation Unit value for that period. The percentages would be
lower if these charges were included.
o Third, certain of the Eligible Funds have been available for other
annuity contracts prior to the beginning of the offering of the
Contracts described in this prospectus. Any performance
information for such periods will be based on historical results
of Eligible Funds that apply to the Contract for the specified
time periods.
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 SRMMF and SRMMF-DCA Sub-accounts are money market Sub-accounts that may
advertise yield and effective yield information. The yield of the Sub-
account refers to the income generated by an investment in the Sub-account
over a specifically identified seven-day period. We annualize this income
by assuming that the amount of income generated by the investment during
that week is generated each week over a fifty-two week period. It is shown
as a percentage. The yield reflects the deduction of all charges assessed
against the Sub-account and a Contract but does not include contingent
deferred sales charges and premium taxes. The yield would be lower if these
charges were included.
We calculate the effective yield of the Sub-account in a similar manner
but, when annualizing such yield, we assume income earned by the Sub-
account is reinvested. This compounding effect causes effective yield to be
higher than yield.
KEYPORT AND THE VARIABLE ACCOUNT
We were incorporated in Rhode Island in 1957 as a stock life insurance
company. Our executive and administrative offices are at 125 High Street,
Boston, Massachusetts 02110. Our home office is at 695 George Washington
Highway, Lincoln, Rhode Island 02865.
We write individual life insurance and individual and group annuity
contracts on a non-participating basis. We are licensed to do business in
all states except New York and are also licensed in the District of
Columbia and the Virgin Islands. We are rated A (Excellent) by A.M. Best
and Company, independent analysts of the insurance industry. Standard &
Poor's ("S&P") rates us AA for very strong financial security, Moody's
rates us A2 for good financial strength and Duff & Phelps rates us AA- for
very high claims paying ability. The Best's A rating is in the second
highest rating category, which also includes a lower rating of A-. S&P and
Duff & Phelps have one rating category above AA and Moody's has three
rating categories above A. Within the S&P AA category, only AA+ is higher.
The Moody's "2" modifier signifies that Keyport is in the middle of the A
category while the 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 our relative financial strength and our ability
to meet contractual obligations to our policyholders. Even though assets
in the Variable Account are held separately from our other assets, our
ratings may still be relevant to you since not all of our contractual
obligations relate to payments based on those segregated assets.
We are a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and membership in IMSA in
advertisements. Being a member means that we have chosen to participate in
IMSA's Life Insurance Ethical Market Conduct Program.
We are indirectly owned by Liberty Financial Companies, Inc. and are
ultimately controlled by Liberty Mutual Insurance Company of Boston,
Massachusetts, a multi-line insurance company.
We established the Variable Account 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 mean the Securities and Exchange Commission
supervises us or the management of the Variable Account.
Obligations under the Contracts are our obligations. Although the assets of
the Variable Account are our property, these assets are held separately
from our other assets and are not chargeable with liabilities arising out
of any other business we 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 we may conduct.
PURCHASE PAYMENTS AND APPLICATIONS
The initial purchase payment is due on the Issue Date. The minimum initial
purchase payment is $5,000. You may make additional purchase payments.
Each subsequent purchase payment must be at least $1,000 or any lesser
amount we may permit, which is currently $250. We may reject any purchase
payment or any application.
If your application for a Contract is complete and amounts are to be
allocated to the Variable Account, we will apply your initial purchase
payment to the Variable Account within two business days of receipt. If the
application is incomplete, we will notify you and try to complete it within
five business days. If it is not complete at the end of this period, we
will inform you of the reason for the delay. The purchase payment will be
returned immediately unless you specifically consent to our keeping the
purchase payment until the application is complete. Once the application is
complete, the purchase payment will be applied within two business days of
its completion.
We will send you a written notification showing the allocation of all
purchase payments and the re-allocation of values after any transfer you
have requested. You must notify us immediately of any error.
We will permit others to act on your behalf in certain instances,
including:
o We will issue a Contract to replace an existing life insurance or we
will accept an application for a Contract signed by an attorney-in-
fact if we receive a copy of the power of attorney with the
application.
o We annuity policy that we or an affiliated company issued even though
we did not previously receive a signed application from you.
Certain dealers or other authorized persons such as employers and Qualified
Plan fiduciaries may inform us of your responses to application questions
by telephone or by order ticket and cause the initial purchase payment to
be paid to us. If the information is complete, we will issue the Contract
with a copy of an application containing that information. We will send
you the Contract and a letter so you may review the information and notify
us of any errors. We may request you to confirm that the information is
correct by signing a copy of the application or a Contract delivery
receipt. We will send you a written notice confirming all purchases. Our
liability under any Contract relates only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
We will invest the purchase payments you applied to the Variable Account in
the Eligible Fund Sub-accounts chosen by you. Your 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 a whole number. You may change the allocation percentages without
fee, penalty or other charge. You must notify us in writing of your
allocation changes unless you, your attorney-in-fact, or another authorized
person have given us written authorization to accept telephone allocation
instructions. By allowing us to accept telephone changes, you agree to
accept and be bound by our current conditions and procedures. The current
conditions and procedures are in Appendix C. We will notify you of any
changes in advance.
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. We may add or withdraw Eligible Funds and
Sub-accounts as permitted by applicable law.
Eligible Funds
The Eligible Funds are the separate funds of SteinRoe Variable Investment
Trust and Liberty Variable Investment Trust. We and the Variable Account
may enter into agreements with other mutual funds for the purpose of making
such mutual funds available as Eligible Funds under certain Contracts.
We do not promise that the Eligible Funds will meet their investment
objectives. Amounts you have allocated to Sub-accounts may grow, decline,
or grow less in value than you expect, depending on the investment
performance of the Sub-accounts in which the Eligible Funds invest. You
bear the investment risk that those Sub-accounts possibly will not meet
their investment objectives. You should carefully review their
prospectuses before allocating amounts to the Sub-accounts of the Variable
Account.
All the Eligible Funds are funding vehicles for variable annuity contracts
and variable life insurance policies offered by our separate accounts. The
Eligible Funds are also available for the separate accounts of insurance
companies affiliated and unaffiliated with us. The risks involved in this
"mixed and shared funding" are disclosed in the Eligible Fund prospectuses
under the following caption: "The Trust" for the Liberty Trust and
SteinRoe Trust.
Liberty Advisory Services Corp. ("LASC"), our subsidiary, is the manager
for Liberty Trust and its Eligible Funds. Colonial Management Associates,
Inc. ("Colonial"), an affiliate, serves as sub-adviser for the Eligible
Funds (except for Newport Tiger Fund and Stein Roe Global Utilities Fund).
Newport Fund Management, Inc., an affiliate, serves as sub-adviser for the
Newport Tiger Fund.
Stein Roe & Farnham Incorporated ("Stein Roe"), an affiliate, is the
investment adviser for each Eligible Fund of SteinRoe Trust and is sub-
adviser for Stein Roe Global Utilities Fund of the Liberty Trust
We have briefly described the Eligible Funds below. You should read the
current prospectus for the Eligible Funds for more details and complete
information. The prospectus is available, at no charge, from a salesperson
or by writing to us or by calling (800) 437-4466.
Eligible Funds of SteinRoe and
Variable Account Sub-Accounts Investment Objective
Stein Roe Money Market Fund,
Variable Series High current income from short-term money
(SRMMF and SRMMF-DCA market instruments while emphasizing
Sub-accounts)* preservation of capital and maintaining
excellent liquidity.
Stein Roe Mortgage Securities Highest possible level of current income
Fund, Variable Series consistent with safety of principal
(SRMSF Sub-account) and maintenance of liquidity through
investment primarily in mortgage-backed
securities.
Stein Roe Balanced Fund, Variable High total investment return through
Series (SRBF Sub-account) investment in a changing mix of
securities.
Stein Roe Growth Stock Fund, Long-term growth of capital through
Variable Series investment primarily in common stocks.
(SRGSF Sub-account)
Stein Roe Special Venture Fund, Capital growth by investing primarily
Variable Series in common stocks, convertible
(SRSVF Sub-account) securities, and other securities selected
for prospective capital growth.
* The SRMMF-DCA Sub-account was not generally available after July 31, 1993
for the allocation of an initial purchase payment. See Appendix D on Page
36.
Eligible Funds of Liberty Trust
and Variable Account Sub-Accounts Investment Objective
Colonial Growth and Income Fund, Primarily income and long-term capital
Variable Series growth and, secondarily, preservation
(CGIF Sub-account) of capital.
Colonial Strategic Income Fund, A high level of current income, as is
Variable Series consistent with the prudent risk, and
(CSIF Sub-account) maximizing total return, by
diversifying investments primarily in
U.S. and foreign government and high
yield, high risk corporate debt
securities. The Fund may invest a
substantial portion of its assets in
high yield, high risk bonds (commonly
referred to as "junk bonds").
Stein Roe Global Utilities Fund, Current income and long-term growth of
Variable Series capital and income.
(SRGUF Sub-account)
Colonial U.S. Stock Fund Long-term capital growth by investing
Variable Series primarily in large capitalization
(CUSSF Sub-account) equity securities.
Colonial International Fund for Long-term capital growth, by investing
Growth, Variable Series primarily in non-U.S. equity
(CIFG Sub-account) securities. The Fund is non-diversified
and may invest more than 5% of its
total assets in the securities of a
single issuer, thereby increasing the
risk of loss compared to a diversified
fund.
Newport Tiger Fund, Variable Long-term capital growth by investing
Series (NTF Sub-account) primarily in equity securities of
companies located in the nine Tigers of
Asia (Hong Kong, Singapore, South
Korea, Taiwan, Malaysia, Thailand,
Indonesia, China and the Philippines).
There is no assurance that the Eligible Funds will achieve their stated
objectives.
Dollar Cost Averaging
Under the program, we make automatic transfers of Accumulation Units on a
periodic basis out of the SRMMF Sub-account or the One-Year Guarantee
Period into one or more of the other available Sub-accounts you select.
The program allows you to invest in the Sub-accounts over time rather than
all at once. The program is available for purchase payments and amounts
transferred into the SRMMF Sub-account or the One-Year Guarantee Period.
We reserve the right to limit the number of Sub-accounts you may choose;
currently, there are no limits. If you wish to participate in the program,
you must notify us in writing. The One-Year Guarantee Period option of the
program is not available under Contracts issued to New Jersey and
Washington residents.
A transfer under the program will not be counted as a transfer for purposes
of the limitations in "Transfer of Variable Account Value" below. The
automatic transfer program does not guarantee a profit nor does it protect
against loss in declining markets. The program is described in detail in
Appendix D on Page 36. Appendix D also describes the Value-Added Dollar
Cost Averaging Program (with its SRMMF-DCA Sub-account), which was not
generally available after July 31, 1993 for the allocation of an initial
purchase payment.
Transfer of Variable Account Value
You may transfer Variable Account Value from one Sub-account to another Sub-
account and/or to the Fixed Account.
We may charge a transfer fee and limit the number of transfers that you can
make in a time period. Transfer limitations may prevent you from making a
transfer on the date you select. This may result in your Contract Value
being lower than it would have been if you had been able to make the
transfer.
Limits on Transfers
Currently, we are not charging a transfer fee but we are limiting transfers
to 12 per calendar year except as follows:
o We impose a transfer limit of one transfer every thirty days, or such
other period as we may permit, for transfers on behalf of multiple
contracts by a common attorney-in-fact, or transfers that are, in our
determination, based on the recommendation of a common investment
adviser or broker/dealer, and
o We limit each transfer to a maximum of $500,000, or such greater
amount as we may permit. We treat all transfer requests for a
Contract made on the same day as a single transfer. We may treat as
a single transfer all transfers you request on the same day for every
Contract you own. The total combined transfer amount is subject to
the $500,000 limitation. If the total amount of the requested
transfers exceeds $500,000, we will not execute any of the transfers,
and
o We treat as a single transfer all transfers made on the same day on
behalf of multiple Contracts by a common attorney-in-fact, or
transfers that are, in our determination, based on the recommendation
of a common investment adviser or broker/dealer. The $500,000
limitation applies to such transfers. If the total amount of the
requested transfers exceeds $500,000, we will not execute any of the
transfers.
If we have executed a transfer with respect to your Contract as part of a
multiple transfer request, we will not execute another transfer request for
your Contract for thirty days.
By applying these limitations we intend to protect the interests of
individuals who do and those who do not engage in significant transfer
activity among Sub-accounts. We have determined that the actions of
individuals engaging in significant transfer activity may cause an adverse
affect on the performance of the Eligible Fund for the Sub-account
involved. The movement of values from one Sub-account to another may
prevent the appropriate Eligible Fund from taking advantage of investment
opportunities because it must maintain a liquid position in order to handle
redemptions. Such movement may also cause a substantial increase in Fund
transaction costs which all Contract Owners must indirectly bear.
We will notify you prior to charging any transfer fee or a change in the
limitation on the number of transfers. We do not guarantee any maximum
transfer fee that we 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.
You must notify us in writing of your transfer requests unless you have
given us written authorization to accept telephone transfer requests from
you or your attorney-in-fact. By authorizing us to accept telephone
transfer instructions, you agree to accept and be bound by our current
conditions and procedures. The current conditions and procedures are in
Appendix C. You will be given prior notification of any changes. A person
acting on your behalf as an attorney-in-fact may make written transfer
requests.
If we receive your transfer requests before 4:00 p.m. Eastern Time, we will
initiate them at the close of business that day. We will initiate any
requests received after that time at the close of the next business day.
We will execute your request to transfer value by both redeeming and
acquiring Accumulation Units on the day we initiate the transfer.
If you transfer 100% of any Sub-account's value, and the allocation formula
for purchase payments on your application includes that Sub-account, the
allocation formula for future purchase payments will automatically change
unless you tell us otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If shares of any of the Eligible Funds are no longer available for
investment by the Variable Account or further investment in the shares of
an Eligible Fund is no longer appropriate under the Contract, we may add or
substitute shares of another Eligible Fund or of another mutual fund for
Eligible Fund shares already purchased or to be purchased in the future.
Any substitution of securities will comply with the requirements of the
Investment Company Act of 1940.
We also reserve the right to make the following changes in the operation of
the Variable Account and Eligible Funds:
o to operate the Variable Account in any form permitted by law;
o to take any action necessary to comply with applicable law or obtain
and continue any exemption from applicable law;
o to transfer any assets in any Sub-account to another or to one or
more separate investment accounts, or to our general account;
o to add, combine or remove Sub-accounts in the Variable Account; and
o to change how charges are assessed, so long as the total charges do
not exceed the maximum amount that may be charged the Variable
Account and the Eligible Funds in connection with the Contracts.
DEDUCTIONS
Deductions for Contract Maintenance Charge
We charge an annual contract maintenance charge of $36 per Contract Year.
Before the Income Date we do not guarantee the amount of the contract
maintenance charge and may change it. This charge reimburses us for our
expenses incurred in maintaining your Contract. We may not change the
contract maintenance charge of any Contract delivered in Pennsylvania,
South Carolina, or Texas to be greater than $100 per year. There is no such
limit under Contracts delivered in other jurisdictions.
Before the Income Date, we will deduct the contract maintenance charge 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, we will subtract a pro-rata portion of the charge due on the next
Contract Anniversary from the Variable Account Value. This pro-rata charge
covers the period from the prior Contract Anniversary to the Income Date.
We will deduct the charge proportionally from each Sub-account based upon
the value each Sub-account bears to the Variable Account Value.
Once annuity payments begin, on the Income Date or after surrender benefits
are applied under a settlement option, the contract maintenance charge is
guaranteed not to increase. We will subtract this charge in equal parts
from each annuity payment. For example, if annuity payments are monthly,
then we will deduct one-twelfth of the annual charge from each payment.
Deductions for Mortality and Expense Risk Charge
Variable annuity payments fluctuate depending on the investment performance
of the Sub-accounts. The payments will not be affected by the mortality
experience (death rate) of persons receiving such payments or of the
general population. We guarantee that certain total surrenders after your
death or the death of the Annuitant will not mean that payments are reduced
by a contingent deferred sales charge or will not result in payments that
are lower than the amount of purchase payments less any prior partial
surrenders. We also assume an expense risk since the contract maintenance
charge after the Income Date remains the same and does not change to
reflect variations in expenses.
We deduct a mortality and expense risk charge from each Sub-account (other
than the SRMMF-DCA Sub-account from which no deduction is made). The
mortality and expense risk charge is equal, on an annual basis, to 1.25% of
the average daily net asset value of each Sub-account. We deduct the charge
both before and after the Income Date. We may deduct less than the full
charge from Sub-account values attributable to Contracts issued to our
employees and other persons specified in "Distribution of the Contract".
Deductions for Daily Sales Charge
We do not deduct the daily sales charge during the annuity period. We
deduct from each Sub-account for each Valuation Period, a daily sales
charge equal on an annual basis to 0.15% of the average daily net asset
value of each Sub-account. We do not deduct this charge from the SRMMF-DCA
Sub-account. This charge compensates us for certain sales distribution
expenses relating to the Contract.
We will not deduct this charge from your Sub-account values once we have
reached the maximum cumulative daily sales charge limit. We do not deduct
this charge from the values of Contracts issued to our employees and other
persons specified in "Distribution of the Contract". We 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 from our general
account.
Deductions for Contingent Deferred Sales Charge
We do not deduct a sales charge from the Contract when you purchase it. We
may deduct such a charge if you surrender your Contract.
To determine whether we will deduct a contingent deferred sales charge if
you partially or totally surrender your Contract, we maintain a separate
set of records. These records identify the date and amount of each purchase
payment you have made and the Contract Value over time.
You may make partial surrenders during the Accumulation Period without
incurring a contingent deferred sales charge. You may surrender an amount
up to the Contract's earnings. Earnings equal the Contract Value at the
time of surrender, less purchase payments not previously surrendered.
After the first Contract Year, we guarantee that a minimum amount of
Contract Value will be free of contingent deferred sales charges each year.
This amount is equal to 10% of the Contract Value at the beginning of each
Contract Year. This 10% amount will be reduced by the amount of each
surrender in a year that represents the Contract's increase in value. The
amount 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 charges. This portion will be deducted from the purchase payments
from the oldest payment 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 this 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) x (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 the purchase payment to the date of
surrender. We measure years from the date of each payment. The
applicable percentages for each year are:
Year Percentage
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 and thereafter 0%
We calculate the contingent deferred sales charges for each purchase
payment. The lesser of this amount and the maximum cumulative sales charge
will be deducted from Contract Value in the same manner as the surrender
amount. The maximum cumulative sales charge is equal to (a) - (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 sales charge
deductions from the Contract Value and all prior Variable Account
sales charges applicable to the Contract from the 0.15% daily
sales charge factor. After each surrender, our records will be
adjusted to reflect any deductions made from the applicable
purchase payments.
The contingent deferred sales charge is used to cover expenses we incur
selling the Contract, including compensation paid to selling dealers and
the cost of sales literature. We pay any expenses not covered by the charge
from our general account, which may include monies deducted from the
Variable Account for the mortality and expense risk charge.
The contingent deferred sales charge is not applicable to Contracts issued
to our employees and other persons specified in "Distribution of the
Contract".
We may reduce or change any contingent deferred sales charge percentage to
0% under a Contract issued in an internal exchange or transfer of an
annuity contract from our general account.
We may establish a systematic withdrawal program to allow you to request
systematic partial surrenders in the first Contract Year up to 10% of the
initial purchase payment. Under this program, we 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 at the time the surrender
occurs. Any such excess surrender amount will not be deducted from the
initial purchase payment. This means that the waiver of the contingent
deferred sales charge is not a permanent waiver and we can collect the
charge in the event that you later make a non-systematic partial or total
surrender.
Deductions for Transfers of Variable Account Value
The Contract allows us to charge a transfer fee. Currently, we do not
charge such a fee. We will notify you prior to the imposition of any fee.
We do not guarantee any maximum transfer fee, but it 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
We deduct the amount of any premium taxes levied by any state or
governmental entity when paid unless we elect to defer such deduction. We
can not anticipate precisely the amount of premium tax payable on any
transaction involving the Contract. Premium taxes depend, among other
things, on the type of Contract (Qualified or Non-Qualified), on your state
of residence, the state of residence of the Annuitant, our status within
such states, and the insurance tax laws of such states. Currently, premium
taxes range from 0% to 5.0% of either total purchase payments or Contract
Value.
Deductions for Income Taxes
We deduct income taxes from any amount payable under the Contract that a
governmental authority requires us to withhold. See "Income Tax
Withholding" and "Tax-Sheltered Annuities".
Total Variable Account Expenses
The total Variable Account expenses you will incur are 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 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 where you have allocated values. We determine the value of each
Sub-account at any time by multiplying the number of Accumulation Units
attributable to that Sub-account by its Accumulation Unit value.
Each purchase payment you make results in the credit of additional
Accumulation Units to your Contract and the appropriate Sub-account. 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
We determine the value of the Variable Account each valuation period using
the net asset value of the Eligible Fund shares. A valuation period is the
period beginning at 4:00 P.M. (EST) which is the close of trading on the
New York Stock Exchange and ending at the close of trading for the next
business day. The New York Stock Exchange is currently closed on weekends,
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
Net Investment Factor
Your Variable Account Value will fluctuate with the investment results of
the underlying Eligible Funds you have selected. In order to determine how
these fluctuations affect value, we use an Accumulation Unit value. Each
Sub-account has its own Accumulation Units and value per unit. We determine
the unit value applicable during any valuation period at the end of that
period.
When we first purchased Eligible Fund shares on behalf of the Variable
Account, we valued each Accumulation Unit at $10.00. 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. We
calculate a net investment factor for each Sub-account according to the
following formula (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 the Eligible Fund made if
the "ex-dividend" date occurs during that same valuation period.
(b) is the net asset value per share of the Eligible Fund at the end of the
prior valuation period.
(c) is equal to:
(i) the valuation period equivalent of the mortality and expense
risk charge; plus
(ii) the valuation period equivalent of the daily sales charge;
plus
(iii) a charge factor, if any, for any tax provision established by us
as a result of the operations of that Sub-account.
For the SRMMF-DCA Sub-account only, (c)(i) and (c)(ii) above are not
applicable.
If we have deducted the maximum cumulative sales charge limit, we will not
deduct the daily sales charge in (c) (ii) above. For Contracts issued to
our employees and other persons specified in "Distribution of the
Contract", the mortality and expense risk charge in (c) (i) above is.35%
and the daily sales charge in (c)(ii) above is eliminated. We may
eliminate the daily sales charge in (c)(ii) above for certain Contracts we
issue in an internal exchange or transfer.
Modification of the Contract
Only our President or Secretary may agree to alter the Contract or waive
any of its terms. A change may be made to the Contract if there have been
changes in applicable law or interpretations of law. Any changes will be
made in writing and with your consent, except as may be required by
applicable law.
Right to Revoke
You may return the Contract within 10 days after you receive it by
delivering or mailing it to us. The postmark on a properly addressed and
postage-prepaid envelope determines if a Contract is returned within the
period. We will treat the returned Contract as if we never issued it and we
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 you are 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 you are under age 60.
If we deliver your Contract to you in California and you are age 60 or
older, you may return the Contract to us or the agent from whom you
purchased it. If you return the Contract within 30 days after you receive
it, we will refund the Contract Value.
DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS
Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant
If the Contract is In Force, you or any joint Owner dies or the Annuitant
dies under a Contract when a non-natural person such as a trust owns the
Contract, we will treat the Designated Beneficiary as the Contract Owner
after such a death.
Under this paragraph you are the covered person. However, if there is a non-
natural Owner such as a trust, the covered person is the Annuitant. If the
covered person dies, we will increase the Contract Value 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) the Anniversary value. We will compute an "Anniversary Value" for
each Contract Anniversary (if any) before the 81st birthday of the
covered person and we will use the greatest of such "Anniversary
Values". Initially, the "Anniversary Value" for each applicable
Contract Anniversary is equal to 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 between July 1, 1993 and
before the later of July 5, 1994 and the date we changed the death
provisions in the state of issue of a Contract. Contracts on application
form number FLEX-APP(REV)3, FLEX-APP-OH(REV)3 or FLEX-APP-PA(REV)3 are
affected. 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
the Contract Value on the seventh Contract Anniversary, plus any purchase
payments made from that Anniversary until the date of death, and 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)
above and the Contract Value.
When we receive due proof of the covered person's death, we will compare,
as of the date of death, the Contract Value and the GMDV. If the Contract
Value is less than the GMDV, we 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 we receive due proof of death. We allocate the amount
credited, if any, to the Variable Account and/or the Fixed Account based on
the purchase payment allocation in effect when we receive due proof of
death. The Designated Beneficiary may, by the later of the 90th day after
the covered person's death and the 60th day after we receive proof of the
death, surrender the Contract for the Contract Value without incurring any
applicable contingent deferred sales charge. 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, we will pay the Surrender Value. If the
Contract is not surrendered, it will continue for the time period specified
below.
If the decedent's surviving spouse is the sole Designated Beneficiary, he
or she will become the new sole primary Owner as of the decedent's date of
the death. If the Annuitant is the decedent, the new Annuitant will be any
living contingent annuitant, otherwise the new Annuitant will be the
surviving spouse. The Contract can stay In Force until another death
occurs. Except for this paragraph, all of "Death Provisions" will apply to
that subsequent death.
In all other cases, the Contract may remain 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 effect at the end of the five-
year period, we will automatically end it by paying the Contract Value to
the Designated Beneficiary. If the Designated Beneficiary is not alive, we
will pay any person(s) named by the Designated Beneficiary in writing;
otherwise we will pay the Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, you or any
Designated Beneficiary may direct us in writing to pay any benefit of
$5,000 or more under an annuity payment option that meets the following:
o the first payment to the Designated Beneficiary must be made no later
than one year after the date of death;
o payments must be made over the life of the Designated Beneficiary or
over a period not extending beyond that person's life expectancy; and
o 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-Contract Owner Annuitant. These provisions apply if,
while the Contract is In Force, the Annuitant dies, the Annuitant is not a
Contract Owner, and the Contract Owner is a natural person. The Contract
will continue after the Annuitant's death. The new Annuitant will be any
living contingent annuitant, otherwise the primary Contract Owner.
DEATH PROVISIONS FOR QUALIFIED CONTRACTS
Death of Annuitant. If the Annuitant dies while the Contract is In Force,
the Designated Beneficiary will control the Contract. We will increase the
Contract Value, 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 we receive due proof of the Annuitant's death, we will compare, as
of the date of death, the Contract Value to the GMDV. If the Contract Value
is less than the GMDV, we 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 we receive due proof of death.
We will allocate the amount credited, if any, to the Variable Account
and/or the Fixed Account based on the purchase payment allocation selection
that is in effect when we receive due proof of death. The Designated
Beneficiary may, by the later of the 90th day after the Annuitant's death
and the 60th day after we are notified of the death, surrender the Contract
for the Contract Value without incurring any applicable contingent deferred
sales charge. If the surrender is made after the applicable 90 or 60 day
period, we will pay the Surrender Value.
If the Designated Beneficiary does not surrender the Contract, it may
continue for the time period permitted by the Internal Revenue Code
provisions applicable to the particular Qualified Plan. During this period,
the Designated Beneficiary may exercise all ownership rights, including the
right to make transfers or partial surrenders or the right to totally
surrender the Contract for its Surrender Value. If the Contract is still in
effect at the end of the period, we will automatically end it by paying the
Contract Value to the Designated Beneficiary. If the Designated Beneficiary
is not alive then, we will pay any person(s) named by the Designated
Beneficiary in writing; otherwise, we will pay the Designated Beneficiary's
estate.
Payment of Benefits. You or any Designated Beneficiary may direct us in
writing to pay any benefit of $5,000 or more under an annuity payment
option that meets the following:
o the first payment to the Designated Beneficiary must be made no later
than one year after the date of death;
o payments must be made over the life of the Designated Beneficiary or
over a period not extending beyond that person's life expectancy; and
o 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.
CONTRACT OWNERSHIP
The Contract Owner shall be the person designated in the application and
may exercise all the rights of the Contract. Joint Contract Owners are
permitted. Contingent Contract Owners are not permitted.
You may direct us in writing to change the Contract Owner, primary
beneficiary, contingent beneficiary or contingent annuitant. An irrevocably-
named person may be changed only with the written consent of that person.
Because a change of Contract Owner by means of a gift may be a taxable
event, you 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. You
should consult a competent tax adviser as to the tax consequences resulting
from such a transfer.
ASSIGNMENT
You may assign the Contract at any time. You must file a copy of any
assignment with us. Your rights and those of any revocably-named person
will be subject to the assignment. A Qualified Contract may have
limitations on your ability to assign the Contract.
Because an assignment may be a taxable event, you should consult the plan
administrator and a competent tax adviser as to the tax consequences
resulting from any such assignment.
SURRENDERS
You may partially surrender the Contract by notifying us in writing. The
minimum amount to be surrendered must be at least $300. We may permit a
lesser amount with a systematic withdrawal program. If the Contract Value
after a partial surrender would be below $2,500, we will treat the request
as a surrender of only the amount over $2,500. The amount surrendered will
include any applicable contingent deferred sales charge and may be greater
than the amount of the surrender check requested. Unless you specify
otherwise, we will deduct the total amount surrendered 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 or
insufficient value in the Variable Account, then the amount surrendered, or
the insufficient portion, will be deducted from the Fixed Account.
You may totally surrender the Contract by notifying us in writing.
Surrendering the Contract will end it. Upon surrender, you will receive the
Surrender Value.
We will pay the amount of any surrender within seven days of receipt of
your request. Alternatively, you may purchase for yourself an annuity
payment option with any surrender benefit of at least $5,000. If the
Contract Owner is not a natural person, we must consent to the selection of
an annuity payment option.
You may not surrender Settlement Options based on life contingencies after
annuity payments have begun. You may surrender Settlement Option 1,
described in "Settlement Options" below, which is not based on life
contingencies if you have selected a variable payout.
Because of the potential tax consequences of a full or partial surrender,
you 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,
we will begin payments under the payment option or options you have chosen.
We determine the amount of the payments on the Income Date by:
o applying the Contract Value;
o less any premium taxes not previously deducted; and
o less any applicable contract maintenance charge on the Income Date in
accordance with the option selected.
Income Date and Settlement Option
You may select an Income Date and Settlement Option at the time of
application. If you do not select a Settlement Option, we automatically
choose Option 2. If you do 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:
o the Annuitant's 75th birthday, or
o the 10th Contract Anniversary.
Change in Income Date and Settlement Option
o You may choose or change a Settlement Option or Income Date by
writing to us at least 30 days before the Income Date. However, any
Income Date must be:
o for variable annuity payment options, not earlier than the second
calendar month after the Issue Date;
o for fixed annuity payment options, not earlier than the first
calendar month after the end of the first Contract Year;
o not later than the calendar month after the Annuitant's 90th
birthday; and
o the first day of a calendar month.
Settlement Options
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.
You may arrange other options if we agree. 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. Fixed annuity payments will not fluctuate.
Unless you choose otherwise, we will apply Variable Account Value to a
variable annuity option and Fixed Account Value to a fixed annuity option.
The same amount applied to a variable option and a fixed option will
produce a different initial payment and 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 under any variable or fixed option is less than
$5,000, we reserve the right to pay such amount in one sum to the payee in
lieu of the payment otherwise provided for.
We will make annuity payments monthly unless you have requested in writing
quarterly, semi-annual or annual payments. However, if any payment would be
less than $100, we may reduce the frequency of payments to a period that
will result in each payment being at least $100.
Option 1: Income For a Fixed Number of Years. We will pay an annuity for a
chosen number of years, not less than 5 nor more than 50. You may choose a
period of years over 30 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 we are making variable annuity payments, the payee may elect to
receive the following amount:
o 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 you chose 3% per year in writing; less
o any contingent deferred sales charge due by treating the value
defined above as a total surrender. Instead of receiving a lump
sum, the payee may elect another payment option and we will not
deduct the amount applied to the option by the contingent deferred
sales charge above.
If, at the death of the payee, Option 1 payments have been made for less
than the chosen number of years:
o we will continue payments during the remainder of the period to the
successor payee; or
o the 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 the payee chose 3% per year in writing.
The mortality and expense risk charge is deducted during the Option 1
payment period but we have no mortality risk during this period.
You may choose a "level monthly" payment option for variable payments under
Option 1. Under this option, we convert your annual payment into twelve
equal monthly payments. Thus the monthly payment amount changes annually
instead of monthly. We will determine each annual payment as described in
"Variable Annuity Payment Values", place each annual payment in our general
account, and distribute it in twelve equal monthly payments. The sum of
the twelve monthly payments will exceed the annual payment amount because
of an interest rate factor we use which will vary from year to year. If the
payments are commuted, (1) we will use the commutation method described
above for calculating the present value of remaining payments and (2) use
the interest rate that determined the current twelve payments to commute
any unpaid monthly payments.
See "Annuity Payments" for the manner in which Option 1 may be taxed.
Option 2: Life Income with 10 Years of Payments Guaranteed. We will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for fewer than 10 years:
o we will continue payments during the remainder of the period to the
successor payee; or
o such 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 the payee chose 3% per year in writing.
The amount of the annuity payments will depend on the age of the payee on
the Income Date and it may also depend on the payee's sex.
Option 3: Joint and Last Survivor Income. We will pay an annuity for as
long as either the payee or a designated second natural person is alive.
The amount of the annuity payments will depend on the age of both persons
on the Income Date and it may also depend on each person's sex. It is
possible under this option to receive only one annuity payment if both
payees die after the receipt of the first payment or to receive only two
annuity payments if both payees die after receipt of the second payment and
so on.
Variable Annuity Payment Values
We determine the amount of the first variable annuity payment by using an
annuity purchase rate based on an assumed annual investment return of 6%
(5% for Oregon Contracts), unless you choose 3% in writing. 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.
Currently there is no limit on the number of times or the frequency with
which a payee may instruct us 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
We 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, we
will compute the amount payable based on the correct age and sex. If income
payments have begun, we will pay in full any underpayments with the next
annuity payment. Any overpayments, unless repaid in one sum, will be
deducted from future annuity payments until we are repaid in full.
SUSPENSION OF PAYMENTS
We reserve the right to postpone surrender payments from the Fixed Account
for up to six months. We may suspend or postpone any type of payment from
the Variable Account for any period when:
o the New York Stock Exchange is closed other than customary weekend or
holiday closings;
o trading on the Exchange is restricted;
o 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
o 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 two conditions described above
exist.
YEAR 2000 MATTERS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the year 2000. This potential problem has become known as
the "Year 2000 issue". The Year 2000 issue affects virtually all companies
and organizations.
Computer applications that are affected by the Year 2000 issue could impact
our business functions in various ways, ranging from a complete inability
to perform critical business functions to a loss of productivity in varying
degrees. Likewise, the failure of some computer applications could have no
impact on critical business functions.
We are assessing and addressing the Year 2000 issue by implementing a four-
step plan. The first two steps involve conducting an inventory of all
computer applications which support our business functions and prioritizing
computer applications which are affected by the Year 2000 issue, based upon
the degree of impact each application has on the functioning of our
business units. The first two steps of the plan are substantially
complete.
The final two steps of the four-step plan involve repairing and replacing
affected computer programs and testing them for Year 2000 readiness. For
computer applications which are "mission critical" (i.e., their failure
would result in our complete inability to perform critical business
functions), we expect to complete the final two steps of the plan by June
30, 1999. We expect to complete the repair and replacement of non-critical
computer applications by December 31, 1999.
We believe the Year 2000 issue could have a material impact on our
operations if we do not implement the four-step plan in a timely manner.
However, based upon our progress, we believe we will meet our timetable,
and the Year 2000 issue will not pose significant operational problems for
our computer systems.
We do not expect the cost of addressing the Year 2000 issue to be material
to our financial condition or results of operations.
TAX STATUS
Introduction
This discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. We make no
attempt to consider any applicable state or other tax laws. Moreover, this
discussion is based upon our understanding of current federal income tax
laws as they are currently interpreted. We make no representation
regarding the likelihood of continuation of those current federal income
tax laws or of the current interpretations by the Internal Revenue Service.
The Contract is for use by individuals in retirement plans which may or may
not be Qualified Plans under the provisions of the Internal Revenue Code at
1986, as amended (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 you purchase the Contract and upon the tax and
employment status of the individual concerned.
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. If you fully surrender your Contract,
the portion of the payment that exceeds your cost basis in the Contract is
subject to tax as ordinary income. For Non-Qualified Contracts, the cost
basis is generally the amount of the purchase payments made for the
Contract. 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 your death or the death of the
Annuitant is taxed on the portion of the amount that exceeds your 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 you. 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 are taxed as ordinary income. Since
the cost basis of Qualified Contracts is generally zero, partial surrender
amounts will generally be fully taxed as ordinary income.
If you assign or pledge a Non-Qualified Contract, you will be treated as if
you had received the amount assigned or pledged. You will be subject to
taxation under the rules applicable to surrenders. If you give away your
Contract to anyone other than your spouse, you are treated for income tax
purposes as if you had fully surrendered the Contract.
A special computational rule applies if we issue to you, during any
calendar year, two or more Contracts or one or more Contracts and one or
more of our other annuity contracts. Under this rule, the amount of any
distribution includable in your gross income is determined under Section
72(e) of the Code. All of the contracts will be treated as one contract. We
believe that this means the amount of any distribution under any 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
cost bases for all the contracts.
Annuity Payments. We determine the non-taxable portion of each variable
annuity payment by dividing the cost basis of your values allocated to
Variable Account Value by the total number of expected payments. We
determine the non-taxable portion of each fixed annuity payment with an
"exclusion ratio" formula which establishes the ratio that the cost basis
of your values 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 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 our 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 you, 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:
o after the taxpayer attains age 59-1/2;
o in a series of substantially equal payments made for life or life
expectancy;
o after the death of the Certificate Owner (or, where the Certificate
Owner is not a natural person, after the death of the Annuitant);
o if the taxpayer becomes totally and permanently disabled; or
o under a Non-Qualified Contract's annuity payment option that provides
for a series of substantially equal payments, provided only that 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. We are required to withhold federal income taxes on
taxable amounts paid under Contracts unless the recipient elects not to
have withholding apply. We will notify recipients of their right to elect
not to have withholding apply. See "Tax-Sheltered Annuities" (TSAs) for an
alternative type of withholding that may apply to distributions from TSAs
that are eligible for rollover to another TSA or an individual retirement
annuity or account (IRA).
Section 1035 Exchanges. You may purchase a Non-Qualified Contract 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 our understanding that in such an event:
o the new Contract will be subject to the distribution-at-death rules
described in "Death Provisions for Non-Qualified Contracts"
o purchase payments made between August 14, 1982 and January 18, 1985
and the income allocable to them will, following an exchange, no
longer be covered by a "grandfathered" exception to the penalty tax
for a distribution of income that is allocable to an investment made
over ten years prior to the distribution; and
o purchase payments made before August 14, 1982 and the income
allocable to them will, following an exchange, continue to receive
the following "grandfathered" tax treatment under prior law:
(i) the penalty tax does not apply to any distribution;
(ii) partial 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.
We base our understanding of the above principally 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 intend 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 will not be
treated as an annuity contract. As a consequence, income earned on a
Contract would be taxable to you in the year in which diversification
requirements were not satisfied, including previously non-taxable income
earned in prior years. As a further consequence, we 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 your
control of the investments of a segregated asset account may cause you,
rather than us, to be treated as the owner of the assets of the account.
The regulations could impose requirements that are not reflected in the
Contract. We, however, have reserved certain rights to alter the Contract
and investment alternatives so as to comply with such regulations. Since no
regulations have 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, you are urged to consult with your tax
adviser.
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, we do not attempt 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 with them. 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:
o 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
o 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 December 31, 1988. 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.
If you have requested a distribution from a Contract, we will notify you 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 unless you direct us in writing to transfer the
amount as a direct rollover to another TSA or IRA.
Individual Retirement Annuities
Section 408(b) and 408(A) of the Code permit eligible individuals to
contribute to an individual retirement program known as an "Individual
Retirement Annuity"and "Roth IRA" respectively. 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 a Section
408(b) 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 we are 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 Contract 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, retires, 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 our view of present applicable law, we 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. We will vote shares for which we have not received
instructions in the same proportion as we vote shares for which we have
received instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation should change, and as a
result we determine that we are permitted to vote the shares of the
Eligible Funds in our own right, we may elect to do so.
You have the voting interest under a Contract prior to the Income Date. The
number of shares held in each Sub-account which are attributable to you is
determined by dividing your Variable Account Value in each Sub-account by
the net asset value of the applicable share of the Eligible Fund. The payee
has the voting interest after the Income Date under an annuity payment
option. 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.
We will determine the number of shares in which a person has a voting
interest as of the date established by the respective Eligible Fund for
determining shareholders eligible to vote at the meeting of the Fund. We
will solicit voting instructions in writing 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.
DISTRIBUTION OF THE CONTRACT
Keyport Financial Services Corp. ("KFSC"), our subsidiary, serves as the
principal underwriter for the Contract described in this prospectus.
Salespersons who represent us as variable annuity agents will sell the
Contracts. Such salespersons are also 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.
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 we and KFSC select, the percentage
may increase to 6.25%.
Different Contracts are sold to persons who are officers, directors, or
employees of ours, trustees or officers of SteinRoe Trust or Liberty Trust,
employees of the investment adviser or sub-investment adviser of either
Trust, or employees of a company that is under contract with either Trust
to provide management or administrative services or to any Qualified Plan
established for such persons. Such Contracts are different from the
Contracts sold to others in that they are not subject to a contract
maintenance charge, asset-based sales charge or the contingent deferred
sales charge and 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. We are engaged in various kinds of
routine litigation which, in our judgment, is not of material importance in
relation to our total capital and surplus.
INQUIRIES BY CONTRACT OWNERS
You may write our Client Service Department with questions about your
Contract at 125 High Street, Boston, MA 02110, or call (800) 367-3653.
TABLE OF CONTENTS-STATEMENT OF ADDITIONAL INFORMATION
Page
Keyport Life Insurance Company 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Principal Underwriter 4
Custodian 4
Experts 4
Investment Performance 4
Average Annual Total Return for a Contract
that is Surrendered and for a Contract that Continues 5
Change in Accumulation Unit Value 7
Yields for SRMMF and SRMMF-DCA Sub-Accounts 8
Financial Statements 9
KMA Variable Account 10
Keyport Life Insurance Company 31
<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.
Any purchase payments you allocate to the Fixed Account option become part
of our general account. Because of applicable exemptive and exclusionary
provisions in the securities laws, our general account, including the Fixed
Account, are not subject to regulation under the Securities Act of 1933 or
Investment Company Act of 1940. 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
We will allocate purchase payments to the Fixed Account according to your
selection in the application. Your selection must specify the percentage of
the purchase payment you want to allocate to each Guarantee Period of the
Fixed Account. The percentage, if not zero, must be at least 10%. You may
change the allocation percentages without any charges. You must make
allocation changes in writing unless you have authorized us in writing to
accept telephone allocation instructions. By authorizing us to accept
telephone changes, you agree to the conditions and procedures we establish
from time to time. The current conditions and procedures are in Appendix C.
We will notify you in advance of any changes.
Each Guarantee Period currently offered is available for initial and
subsequent purchase payments and for transfers of Contract Value.
We currently offer Guarantee Periods of 1, 3, 5, and 7 years. We may change
at any time the number and/or length of Guarantee Periods we offer. If we
no longer offer a particular Guarantee Period, the existing Fixed Account
Value in that Guarantee Period will remain until the end of that period.
At that time you must select a different Guarantee Period.
We offer a capital protection plus program. Under this program, we allocate
part of the purchase payment to the Guarantee Period you select. Based on
the length of the period and the period's interest rate, we determine how
much of your purchase payment must be allocated to the Guarantee Period so
that, at the end of the Guarantee Period, the allocated amount plus
interest will be equal to your total purchase payment. We will allocate the
rest of your purchase payment to the Sub-account(s) of the Variable Account
based on your allocation instructions.
For example, assume you select the 7-year Guarantee Period and we receive
your purchase payment of $10,000 when the interest rate for the Guarantee
Period is 6.75% per year. We will allocate $6,331 to that Guarantee Period,
because $6,331 will increase, at the interest rate of 6.75%, to $10,000
after 7 years. The remaining $3,669 of the payment will be allocated to the
Sub-account(s) you select.
If you surrender or transfer any part of the Fixed Account Value before the
end of the Guarantee Period, the value at the end of that Period will not
equal the original purchase payment amount.
Fixed Account Value
The Fixed Account Value at any time is equal to:
o all purchase payments allocated to the Fixed Account plus the
interest credited on those payments; plus
o any Variable Account Value transferred to the Fixed Account plus the
interest credited on the transferred value; less
o any prior partial surrenders from the Fixed Account, including any
changes; less
o any Fixed Account Value transferred to the Variable Account.
Interest Credits
We credit interest daily. The interest we credit is based on an annual
compound interest rate. It is credited to purchase payments allocated to
the Fixed Account at rates declared by us 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, we will credit interest at the Basic Rate. At the end of
the Guarantee Period, we 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), we 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):
o the maturity rate will be credited only on amounts held for the
entire Guarantee Period; and
o if you 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 we set will be at least 3.5% per
year.
Our method of crediting interest means that Fixed Account Value might be
subject to different rates for each Guarantee Period you have selected in
the Fixed Account. For purposes of this section, we treat Variable Account
Value transferred to the Fixed Account and Fixed Account Value renewed for
or transferred to another Guarantee Period 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, we will immediately credit 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 you have selected in writing. If you have not made a
selection, we will automatically transfer the total accumulated amount at
the end of the Guarantee Period to the SRMMF 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, which allows the selected Guarantee Period to go into effect. You may
not select a Guarantee Period that would end after the Income Date.
Transfers of Fixed Account Value
You may transfer Fixed Account Value from one of your Guarantee Periods to
another or to one or more Sub-accounts of the Variable Account. If the
Fixed Account Value represents multiple Guarantee Periods, your transfer
request must specify from which values you want the transfer made.
The Contract allows us to limit the number of transfers you may make in a
specified time period. Currently, we generally limit Variable Account and
Fixed Account transfers to 12 transfers per calendar year with a $500,000
per transfer dollar limit. See "Limits on Transfers". These limitations
will not apply to any transfer made at the end of a Guarantee Period. We
will notify you prior to any change in the current limitations.
You must request transfers in writing unless you have authorized us in
writing to accept telephone transfer instructions from you or from a person
acting on your behalf as an attorney-in-fact under a power of attorney. By
authorizing us to accept telephone transfer instructions, you agree to the
conditions and procedures we establish from time to time. The current
conditions and procedures are in Appendix C. If you have authorized
telephone transfers, you will be notified in advance, of any changes. A
person acting on your behalf as an attorney-in-fact under a power of
attorney may request transfers in writing.
If we receive your transfer requests before 4:00 P.M. Eastern time, which
is the close of trading on the New York Stock Exchange, we will execute
them at the close of business that day. Any requests we receive later, we
will execute at the close of the next business day.
We will deduct the amount of the transfer from the specified values in the
manner stated in the next section below.
If you transfer 100% of a Guarantee Period's value and your current
allocation for purchase payments includes that Guarantee Period, we will
automatically change the allocation formula for future purchase payments
unless you instruct otherwise. For example, if the allocation formula is
50% to the one-year Guarantee Period and 50% to Sub-account A and you
transfer all Fixed Account Value to Sub-account A, we will change the
allocation formula to 100% to Sub-account A.
Reductions of Guarantee Period Values After a Transfer or Surrender
You must specify in your transfer request from which Guarantee Period's
values the transfer is to be made. A partial surrender request may, at your
option, 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".
If a partial surrender request does not specify any Guarantee Period, the
ordering rule in "Surrenders" 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
We determine the dollar amount of each fixed annuity payment 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:
o the applicable factor shown in the appropriate table in the
Contract; or
o the factor we currently offer 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". Persons who
purchased non-qualified contracts between April 9, 1981 and September 25,
1981 are not permitted to make any additional purchase payments under those
contracts. Such non-qualified contracts are not included in number 4 below.
1. KEYFLEX Contracts (Form #FLEX(4)). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
Accumulation unit values are shown on Page 7. The dollar cost averaging
program for use with the SRMMF Sub-Account or the One-Year Guarantee Period
of the Fixed Account is available (see "Dollar Cost Averaging" on Page 11).
2. KEYFLEX Contracts (Form #FLEX-I). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
SRMMF, SRMSF, SRBF, SRGSF and SRSVF were substituted on 1/1/89 for,
respectively, the former eligible mutual funds: Cash Income Trust; Mortgage
Securities Income Trust; Managed Assets Trust; Managed Growth Stock Trust;
and Aggressive Stock Trust. Accumulation unit values are shown on Page 29.
3. FLEX 2 Contracts (Form #FLEX-II). The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
SRMMF, SRMSF, SRBF, SRGSF and SRSVF were substituted on 1/1/89 for,
respectively, the former eligible mutual funds: Cash Income Trust; Mortgage
Securities Income Trust; Managed Assets Trust; Managed Growth Stock Trust;
and Aggressive Stock Trust. Accumulation unit values are shown on Page 30.
4. All K-100 and KeySource Contracts (Form #VA-1-81) Other than those
Identified in Numbers 5 and 6 below. The current Eligible Funds are those
listed on Page 11. CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added
effective 7/1/93, 7/1/93, 5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively.
SRMMF, SRMMF, SRBF, and SRSVF were substituted on 1/1/89 for, respectively,
the former eligible mutual funds: Cash Income Trust; Money Market/Options
Investments, Inc.; Managed Assets Trust; and Aggressive Stock Trust.
Accumulation unit values are shown on Pages 31-32.
5. K-100 Qualified Contracts (Form #VA-1-81) Issued Before May 1, 1986
Pursuant to Section 457 of the Internal Revenue Code. The current Eligible
Mutual Funds are: Evergreen Money Market Fund - A, Evergreen Diversified
Bond Fund - A, Evergreen High Income Bond Fund - A, Evergreen Strategic
Income Fund - A, Evergreen Blue Chip Fund - A and Evergreen Small Company
Growth Fund - A. On January 23, 1998, the fund names for High Income Bond
Fund (B-4), Keystone Liquid Trust, Growth and Income Fund (S-1), Mid-Cap
Growth Fund (S-3) and Small Company Growth (S-4) were changed to Evergreen
High Income Bond Fund - A, Evergreen Money Market - A, Evergreen Blue Chip
- - A, Evergreen Strategic Growth Fund - A and Evergreen Small Company Growth
Fund - A, respectively. In addition, the fund names for Diversified Bond
Fund (B-2) and Qualified Bond Fund (B-1) were changed to Evergreen
Diversified Bond Fund - A. Accumulation unit values are shown on Pages 33-
34. As of July 1997, Evergreen Money Market Fund - A (formerly named
Keystone Liquid Trust) and Evergreen Strategic Growth Fund - A (formerly
named Mid-Cap Growth Fund and Keystone Custodian Fund, Series S-3) were no
longer eligible funds available for investment.
6. All Other K-100 Qualified Contracts (Form #VA-1-81) Issued Before
September 25, 1981. The current Eligible Funds are those listed on Page 11.
CGIF, SRGUF, CIFG, CUSSF, CSIF and NTF were added effective 7/1/93, 7/1/93,
5/2/94, 7/5/94, 7/5/94 and 5/1/95, respectively. SRMMF, SRMMF, SRGSF, SRSVF
and SRSVF were substituted on 1/1/89 for, respectively, the former eligible
mutual funds: Keystone Liquid Trust; Money Market/Options Investments,
Inc.; and Growth and Income Fund, Mid-Cap Growth Fund, and Small Company
Growth Fund (formerly named Keystone Custodian Fund, Series S-1, S-3, and S-
4, respectively). Accumulation unit values for 1989-1996 are shown on Page
32 and values for 1987-1988 are shown on Pages 33-34.
ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER TWO
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year Year
Stein Roe Money Market $17.348 $18.009 100,397 1998
Fund (formerly named 16.704 17.348 128,486 1997
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
Colonial U.S. Stock 20.227 24.003 43,556 1998
Fund (formerly named 15.488 20.227 47,700 1997
Colonial-Keyport U.S. 12.871 15.488 57,589 1996
Stock Fund and 10.048 12.871 73,706 1995
Colonial-Keyport 10.000 (8/11/94) 10.048 5,259 1994
U.S. Fund for Growth)
Stein Roe Mortgage 19.882 20.972 116,120 1998
Securities Fund 18.460 19.882 138,209 1997
(formerly named 17.853 18.460 164,783 1996
Mortgage Securities 15.617 17.853 189,804 1995
Income Fund) 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
Colonial Growth 19.537 21.445 63,550 1998
and Income Fund 15.338 19.537 79,459 1997
(formerly named 13.184 15.338 68,918 1996
Colonial-Keyport 10.258 13.184 57,955 1995
Growth and Income Fund) 10.464 10.258 66,152 1994
10.000 (7/22/93) 10.464 20,759 1993
Stein Roe Balanced Fund 40.111 44.584 406,222 1998
(formerly named Managed 34.765 40.111 498,914 1997
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
Stein Roe Global 15.396 17.994 17,624 1998
Utilities Fund 12.107 15.396 13,807 1997
(formerly named 11.508 12.107 20,126 1996
Colonial-Keyport 8.621 11.508 27,533 1995
Utilities Fund) 9.727 8.621 31,506 1994
Colonial-Keyport 10.000 (7/21/93) 9.727 52,776 1993
Utilities Fund)
Colonial Strategic 13.597 14.239 278,009 1998
Income Fund (formerly 12.606 13.597 331,692 1997
Named Colonial-Keyport 11.633 12.606 392,216 1996
Strategic Income Fund) 10.000 (1/19/95) 11.633 486,417 1995
Available in 1994 but no accumulation units were
purchased.
Colonial International 9.712 10.836 67,742 1998
Fund for Growth 10.114 9.712 17,002 1997
(formerly named 9.747 10.114 38,348 1996
Colonial-Keyport 9.323 9.747 34,733 1995
International fund for 10.000 (5/3/94) 9.323 24,303 1994
Growth
Stein Roe Growth Stock 38.146 48.190 185,449 1998
Fund (formerly named 29.198 38.146 223,973 1997
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
Stein Roe Special 41.320 33.749 182,408 1998
Venture Fund (formerly 38.805 41.320 218,638 1997
Named Capital 30.953 38.805 270,844 1996
Appreciation Fund and 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
Newport Tiger Fund 7.652 7.071 7,872 1998
(formerly named 11.252 7.652 3,797 1997
Newport-Keyport 10.242 11.252 23,324 1996
Tiger 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
Stein Roe Money Market $16.994 $17.624 2,008 1998
Fund (formerly named 16.379 16.994 11,719 1997
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
Colonial U.S. Stock 18.923 22.433 0 1998
Fund (formerly named 14.503 18.923 688 1997
Colonial-Keyport U.S. 12.065 14.503 689 1996
Stock Fund and 10.000 (3/7/95) 12.065 1,642 1995
Colonial-Keyport U.S. Available in 1994 but no accumulation units were
Fund for Growth) purchased
Stein Roe Mortgage 19.764 20.827 14,578 1998
Securities Fund 18.369 19.764 15,069 1997
(formerly name 17.783 18.369 15,996 1996
Mortgage Securities 15.571 17.783 16,594 1995
Income Fund) 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
Colonial Growth and 10.293 11.287 1,814 1998
Income Fund (formerly 10.000( / /97) 10.293 687 1997
Named Colonial-Keyport Available in 1993, 1994, 1995 and 1996 but no
Growth and Income Fund) accumulation units were purchased.
Stein Roe Balanced Fund 38.494 42.745 27,878 1998
(formerly named Managed 33.396 38.494 28,016 1997
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
Stein Roe Global Available in 1993, 1994, 1995, 1996, 1997 and 1998
Utilities Fund but no accumulation units were purchased.
formerly named
Colonial-Keyport
Utilities Fund)
Colonial Strategic 13.105 13.710 20,161 1998
Income Fund (formerly 12.161 13.105 23,147 1997
Named 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 International 9.733 10.849 58 1998
Fund for Growth 10.146 9.733 58 1997
(formerly named 9.788 10.146 537 1996
Colonial-Keyport 9.371 9.788 540 1995
International Fund for 10.000 (5/24/94) 9.371 599 1994
Growth)
Stein Roe Growth Stock 34.883 44.025 4,594 1998
Fund (formerly named 26.727 34.883 4,701 1997
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
Stein Roe Special 42.093 34.347 19,836 1998
Venture Fund (formerly 39.571 42.093 22,741 1997
named Capital 31.595 39.571 24,773 1996
Appreciation Fund 28.653 31.595 24,833 1995
And Aggressive 28.059 28.653 29,605 1994
Stock fund) 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
Newport Tiger Fund 7.046 6.505 1,476 1998
(formerly named 10.371 7.046 1,477 1997
Newport-Keyport 10.000 (2/5/96) 10.371 1,762 1996
Tiger 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.
1989-1998 ACCUMULATION UNIT VALUES FOR CONTRACTS
DESCRIBED IN NUMBERS FOUR AND SIX
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year Year
Stein Roe Money Market $24.421 $25.413 639,325 1998
Fund (formerly named 23.457 24.421 743,550 1997
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 U.S. Stock 20.091 23.900 50,149 1998
Fund (formerly named 15.346 20.091 28,870 1997
Colonial-Keyport U.S. 12.722 15.346 28,128 1996
Stock Fund and Colonial 10.000 (1/13/95) 12.722 22,589 1995
- -Keyport U.S. Fund for Available in 1994 but no accumulation units were
Growth) purchased.
Stein Roe Mortgage 18.734 19.809 43,444 1998
Securities Fund 17.352 18.734 42,325 1997
(formerly named 16.740 17.352 42,934 1996
Mortgage Securities 14.608 16.740 68,359 1995
Income Fund) 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 Growth and 19.503 21.460 22,165 1998
Income Fund (formerly 15.274 19.503 13,889 1997
Named 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
Stein Roe Balanced Fund 40.240 44.837 198,156 1998
(formerly named Managed 34.791 40.240 212,648 1997
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
Stein Roe Global 15.564 18.235 9,953 1998
Utilities Fund 12.209 15.564 9,597 1997
(formerly named 11.577 12.209 13,770 1996
Colonial-Keyport 8.651 11.577 24,359 1995
Utilities Fund) 9.737 8.651 18,049 1994
10.000 (7/21/93) 9.737 23,195 1993
Colonial Strategic 13.279 13.939 410,209 1998
Income Fund (formerly 12.281 13.279 444,370 1997
Named Colonial-Keyport 11.305 12.281 446,354 1996
Strategic Income Fund) 10.000 (2/28/95) 11.305 465,616 1995
Available in 1994 but no accumulation units were
purchased.
Colonial International 9.855 11.022 18,039 1998
Fund for Growth 10.238 9.855 20,489 1997
(formerly named 9.842 10.238 21,566 1996
Colonial-Keyport 9.390 9.842 27,992 1995
International Fund 10.000 (5/25/94) 9.390 44,610 1994
For Growth)
Stein Roe Growth Stock 88.236 111.743 83,655 1998
Fund (formerly named 67.374 88.236 61,394 1997
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
Stein Roe Special 84.183 68.927 193,700 1998
Venture Fund (formerly 78.867 84.183 258,066 1997
Named Capital 62.755 78.867 270,716 1996
Appreciation Fund and 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 Tiger Fund 7.837 7.260 22,116 1998
(formerly named Newport- 11.496 7.837 21,662 1997
Keyport Tiger Fund) 10.438 11.496 15,623 1996
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.
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1989-1998)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year of Year of Year Year
Evergreen Money Market $24.432 $24.435 2,840 1998
Fund - A (formerly 23.930 24.432 0 1997
Keystone Liquid Trust) 23.122 23.930 18,450 1996
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
Evergreen Diversified 39.560 40.990 2,237 1998
Bond Fund - A (formerly 36.980 39.560 148 1997
Keystone Custodian 35.378 36.980 708 1996
Fund, Series B-2 and 31.149 35.378 558 1995
Keystone Custodian 33.798 31.149 414 1994
Fund, Series B-1) 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
Evergreen High Income 35.860 36.441 380 1998
Bond Fund - A (formerly 33.468 35.860 371 1997
Keystone Custodian 30.569 33.468 481 1996
Fund, Series B-4) 28.120 30.569 527 1995
32.345 28.120 514 1994
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
(Accumulation unit values continue on the next page)
ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE (1989-1998) (CONTINUED)
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year* of Year of Year Year
Evergreen Strategic $52.599 $52.077 9 1998
Income Fund - A 46.815 52.599 2,524 1997
(formerly Keystone 44.970 46.815 3,352 1996
Custodian Fund, 33.423 44.970 3,693 1995
Series S-3) 35.401 33.423 6,753 1994
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
Evergreen Blue Chip 66.572 78.068 3,274 1998
Fund - A (formerly 50.864 66.572 3,669 1997
Keystone Custodian 43.376 50.864 2,664 1996
Fund, Series S-1) 33.202 43.376 4,179 1995
35.621 33.202 5,248 1994
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
Evergreen Small Company 47.822 39.622 5,448 1998
Growth Fund - A 41.893 47.822 6,529 1997
(formerly Keystone 42.685 41.893 10,123 1996
Custodian Fund, 32.263 42.685 9,696 1995
Series S-4) 32.527 32.263 12,813 1994
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
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 us to accept
telephone instructions but either Owner can give us telephone instructions.
2. All callers must identify themselves. We reserve the right to refuse
to act upon any telephone instructions in cases where the caller has not
sufficiently identified himself/herself to our satisfaction.
3. Neither we nor any person acting on our behalf shall be subject to any
claim, loss, liability, cost or expense if we or such person acted in good
faith upon a telephone instruction, including one that is unauthorized or
fraudulent. However, we will employ reasonable procedures to confirm that
a telephone instruction is genuine and, if we do not, we may be liable for
losses due to an unauthorized or fraudulent instruction. You thus bear the
risk that an unauthorized or fraudulent instruction we execute may cause
your Contract Value to be lower than it would be had we not executed the
instruction.
4. We record all conversations with disclosure at the time of the call.
5. The application for the Contract may allow you to create a power of
attorney by authorizing another person to give telephone instructions.
Unless prohibited by state law, we will treat such power as durable in
nature and it shall not be affected by your subsequent incapacity,
disability or incompetency. Either we or the authorized person may cease to
honor the power by sending written notice to you at your last known
address. Neither we nor any person acting on our 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:
o we receive your written revocation,
o we discontinue the privilege, or
o we receive written evidence that you have entered into a market
timing or asset allocation agreement with an investment adviser or
with a broker/dealer.
7. If we receive telephone transfer instructions at 800-367-3653 before
the 4:00 P.M. Eastern Time close of trading on the New York Stock Exchange,
they will be initiated that day based on the unit value prices calculated
at the close of that day. We will initiate instructions we receive after
the close of trading on the NYSE on the following business day.
8. Once we accept instructions, they may not be canceled.
9. You must make all transfers in accordance with the terms of the
Contract and current prospectus. If your transfer instructions are not in
good order, we will not execute the transfer and will notify the caller
within 48 hours.
10. If you transfer 100% of any Sub-account's value and the allocation
formula for purchase payments includes that Sub-account, then we will
change the allocation formula for future purchase payments accordingly
unless we receive telephone instructions to the contrary. For example, if
the allocation formula is 50% to Sub-account A and 50% to Sub-account B and
you transfer all of Sub-account A's value to Sub-account B, we will change
the allocation formula to 100% to Sub-account B unless you instruct us
otherwise.
Telephone Changes to Purchase Payment Allocation Percentages
Numbers 1-6 above are applicable.
<PAGE>
APPENDIX D
DOLLAR COST AVERAGING
We offer a dollar cost averaging program that you may participate in. The
program periodically transfers Accumulation Units from the SRMMF Sub-
account or the One-Year Guarantee Period of the Fixed Account to other Sub-
accounts you select. The program allows you to invest in non-"money market"
Sub-accounts over time rather than having to invest in those Sub-accounts
all at once.
The program is available for initial and subsequent purchase payments and
for Contract Value transferred into the SRMMF Sub-account or One-Year
Guarantee Period. Under the program, we make automatic transfers on a
periodic basis out of the SRMMF Sub-account or the One-Year Guarantee
Period into one or more of the other available Sub-accounts. We may limit
the number of Sub-accounts you 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.
You must specify in writing the SRMMF Sub-account or One-Year Guarantee
Period from which the transfers are to be made, the monthly amount to be
transferred and the Sub-account(s) to which the transfers are to be made.
The minimum amount to be transferred is $150. The first transfer will
occur at the close of the Valuation Period that includes the 30th day after
the receipt of your request. Each succeeding transfer will occur one month
later. 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, you may extend the program by allocating additional
purchase payments to the SRMMF Sub-account or One-Year Guarantee Period or
by transferring Contract Value to the SRMMF Sub-account or One-Year
Guarantee Period. You may, in writing 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. We reserve the right to end the program at any time
by sending you a notice one month in advance.
We must receive your written or telephone instructions by 5:00 P.M. Eastern
Time of the business day preceding the next scheduled transfer in order for
them to be in effect for that transfer. Telephone instructions are subject
to the conditions and procedures we establish from time to time. The
current conditions and procedures appear below and you will be notified, in
advance, of any changes.
1. If there are joint Contract Owners, either Owner can give us telephone
transfer instructions.
2. All callers will be required to identify themselves. We reserve the
right to refuse to act upon any telephone instructions in cases where the
caller has not sufficiently identified himself/herself to our satisfaction.
3. Neither we nor any person acting on our 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, we will employ reasonable procedures to confirm that a
telephone instruction is genuine and, if we do not, we may be liable for
losses due to an unauthorized or fraudulent instruction. You bear 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:
o we receive your written revocation,
o we discontinue the privilege, or
o we receive written evidence that you have entered into a market
timing or asset allocation agreement with an investment adviser or
with a broker/dealer.
6. We must receive your telephone instructions at 800-367-3653 before
5:00 P.M. Eastern Time of the business day preceding the next scheduled
transfer in order for them to be in effect for that transfer.
7. Once we accept instructions, 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,
we will not execute them and will notify the caller within 48 hours.
Value-Added Dollar Cost Averaging Program (for purchase payments made
before August 1, 1993)
We previously offered a Value-Added Dollar Cost Averaging Program for
initial purchase payments made under Contracts issued generally before
August 1, 1993. The remainder of this Appendix describes that program for
the benefit of Contract Owners who are still participating in it.
The Value-Added Dollar Cost Averaging program uses the SRMMF-DCA Sub-
account and was available only for the initial purchase payment (and for
subsequent payments under Qualified Contracts meeting the conditions
described below). The SRMMF-DCA Sub-account is the only Sub-account with no
deduction for the Contract's 1.40% asset-based charge.
Under this program, allocations of all or part of the initial purchase
payment could be made to the SRMMF-DCA Sub-account for automatic transfers
over either 12 months or 24 months. An allocation of at least $1,800 was
made if 12 months was selected and at least $3,600 if 24 months was
selected. Based on the period you selected, we transfer each month either
1/12 or 1/24 of the original allocated amount from the SRMMF-DCA Sub-
account to the Sub-account(s) you chose. The first transfer occurred at the
close of the Valuation Period that included the 30th day after the Issue
Date of the Contract. Each succeeding transfer occurs one month later
(e.g., if the 30th day after the Issue Date is April 8, the second transfer
occurred at the close of the Valuation Period that included May 8). The
last transfer (the 12th or 24th transfer, as applicable) will be of all the
remaining value in the SRMMF-DCA Sub-account. Before this final transfer,
you may, in writing 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 you transfer any SRMMF-DCA Sub-account value outside the
program, the program will automatically end. The program will also
automatically end if the Income Date occurs. If the program ends for any
reason, we, in the absence of instructions to the contrary, will transfer
any remaining SRMMF-DCA Sub-account value to the SRMMF Sub-account. Once
the program ends, you may not restart it.
If a Qualified Contract application stated that the Value-Added Dollar Cost
Averaging program was to apply to multiple transfer or rollover payments
that would all be made to us within a reasonable time, the program began as
stated above with the first transfer or rollover payment received by us.
Then, as each subsequent transfer or rollover payment was received, that
payment was added to the then-current SRMMF-DCA Sub-account value and
divided by the applicable 1/12 or 1/24 to determine a new monthly transfer
amount. The total SRMMF-DCA Sub-account value will then be transferred out
monthly for the applicable 12 or 24 transfers. Each monthly transfer
continues to occur on the monthly transfer date established for the first
payment allocated to the program.
<PAGE>
[PREFERRED ADVISOR LOGO]
KEYPORT PREFERRED ADVISOR
PROSPECTUS
May 3, 1999
NOT May lose value
FDIC No bank guarantee
INSURED
<PAGE>
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[KEYPORT LIFE LOGO]
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
Keyport Logo is a registered service mark of Keyport Life Insurance
Company.
KAVP 5/99
Yes. I would like to receive the Keyport Preferred Advisor Variable
Annuity Statement of Additional Information.
Yes. I would like to receive the SteinRoe Variable Investment Trust
Statement of Additional Information.
Yes. I would like to receive the Liberty Variable Investment Trust
Statement of Additional Information.
Name
Address
City, State Zip
<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 3, 1999. The prospectus is available, at no charge, by writing
Keyport at 125 High Street, Boston, MA 02110 or by calling (800) 437-4466.
TABLE OF CONTENTS
Page
Keyport Life Insurance Company ............................ 2
Variable Annuity Benefits.................................. 2
Variable Annuity Payment Values.......................... 2
Re-Allocating Sub-Account Payments....................... 3
Principal Underwriter...................................... 4
Custodian.................................................. 4
Experts.................................................... 4
Investment Performance..................................... 4
Average Annual Total Return for a Contract that is
Surrendered and for a Contract that Continues.......... 5
Change in Accumulation Unit Value........................ 7
Yields for SRMMF and SRMMF-DCA Sub-Accounts.............. 8
Financial Statements....................................... 9
KMA Variable Account..................................... 10
Keyport Life Insurance Company........................... 31
The date of this statement of additional information is May 3, 1999
KMA1999.SAI
<PAGE>
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, 1998,
owned, indirectly, at least 72% of the combined voting power of the
outstanding voting stock of LFC (with the balance being publicly held). For
additional information about Keyport, see page 9 of the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each periodic
payment will be equal to: (a) the sum of all Sub-account payments; less (b)
the pro-rata amount of the annual Contract Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting any
applicable Contract Maintenance Charge and any applicable state premium
taxes and then dividing the remaining value of that Sub-Account by $1,000
and multiplying the result by the greater of: (a) the applicable factor
from the Contract's annuity table for the particular payment option; or (b)
the factor currently offered by Keyport at the time annuity payments begin.
This current factor may be based on the sex of the payee unless to do so
would be prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by
dividing such first payment by the Sub-Account Annuity Unit value for the
Valuation Period that includes the date of the first payment. The number of
Annuity Units remains fixed for the annuity payment period. Each
Sub-Account payment after the first one will be determined by multiplying
(a) by (b), where: (a) is the number of Sub-Account Annuity Units; and (b)
is the Sub-Account Annuity Unit value for the Valuation Period that
includes the date of the particular payment.
Variable annuity payments will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect annuity payments, Keyport uses an Annuity Unit value.
Each Sub-Account has its own Annuity Units and value per Unit. The Unit
value applicable during any Valuation Period is determined at the end of
such period.
When Keyport first purchased the Eligible Fund shares of SteinRoe Variable
Investment Trust and Liberty Variable Investment Trust on behalf of the
Variable Account, Keyport valued each Annuity Unit for each Sub-Account at
$10. The Unit value for each Sub-Account in any Valuation Period thereafter
is determined by multiplying the value for the prior period by a net
investment factor. This factor may be greater or less than 1.0; therefore,
the Annuity Unit may increase or decrease from Valuation Period to
Valuation Period. For each assumed annual investment rate (AIR), Keyport
calculates a net investment factor for each Sub-Account by dividing (a) by
(b), where:
(a) is equal to the net investment factor defined on page 16 of the
prospectus without any deduction for the sales charge defined in
(c)(ii) on that page; and
(b) is the assumed investment factor for the current Valuation Period.
The assumed investment factor adjusts for the interest assumed in
determining the first variable annuity payment. Such factor for any
Valuation Period shall be the accumulated value, at the end of such
period, of $1.00 deposited at the beginning of such period at the
assumed annual investment rate (AIR). The AIR for Annuity Units
based on the Contract's annuity tables is 6% per year (5% per year
for Oregon contracts.) An AIR of 3% per year is also currently
available upon Written Request.
With a particular AIR, payments after the first one will increase or
decrease from month to month based on whether the actual annualized
investment return of the selected Sub-Account(s) (after deducting the
Mortality and Expense Risk Charge) is better or worse than the assumed AIR
percentage. If a given amount of Sub-Account value is applied to a
particular payment option, the initial payment will be smaller if a 3% AIR
is selected instead of a 6% AIR but, all other things being equal, the
subsequent 3% AIR payments have the potential for increasing in amount by a
larger percentage and for decreasing in amount by a smaller percentage.
For example, consider what would happen if the actual annualized investment
return (see the first sentence of this paragraph) is 9%, 6%, 3%, or 0%
between the time of the first and second payments. With an actual 9%
return, the 3% AIR and 6% AIR payments would both increase in amount but
the 3% AIR payment would increase by a larger percentage. With an actual
6% return, the 3% AIR payment would increase in amount while the 6% AIR
payment would stay the same. With an actual return of 3%, the 3% AIR
payment would stay the same while the 6% AIR payment would decrease in
amount. Finally, with an actual return of 0%, the 3% AIR and 6% AIR
payments would both decrease in amount but the 3% AIR payment would
decrease by a smaller percentage. Note that the changes in payment amounts
described above are on a percentage basis and thus do not illustrate when,
if ever, the 3% AIR payment amount might become larger than the 6% AIR
payment amount. Note though that if Option 1 (Income for a Fixed Number of
Years) is selected and payments continue for the entire period, the 3% AIR
payment amount will start out being smaller than the 6% AIR payment amount
but eventually the 3% AIR payment amount will become larger than the 6% AIR
payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable annuity
option will remain fixed during the entire annuity payment period unless
the payee makes a written request for a change. Any change requested must
be at least six months after a prior selection. The payee's request must
specify the percentage of the annuity payment that is to be based on the
investment performance of each Sub-Account. The percentage for each Sub-
Account, if not zero, must be at least 10% and must be a whole number. At
the end of the Valuation Period during which Keyport receives the request,
Keyport will: (a) value the Annuity Units for each Sub-Account to create a
total annuity value; (b) apply the new percentages the payee has selected
to this total value; and (c) recompute the number of Annuity Units for each
Sub-Account. This new number of units will remain fixed for the remainder
of the payment period unless the payee requests another change.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport
Financial Services Corp. ("KFSC"), a wholly-owned subsidiary of Keyport.
During the fiscal years ended December 31, 1996, 1995 and 1994, Keyport
paid KFSC underwriting commissions for the Contract of $0.00, $0.00, and
$0.00, respectively.
CUSTODIAN
The custodian of the assets of the KMA Variable Account is State Street
Bank and Trust Company, a state chartered trust company. Its principal
office is at 225 Franklin Street, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Keyport Life Insurance Company at
December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and the financial statements of Keyport Life
Insurance Company-KMA Variable Account at December 31, 1998 and for each of
the two years in the period ended December 31, 1998, 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.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance information
concerning its various Sub-Accounts. A Sub-Account's performance may also
be compared to the performance of sub-accounts used with variable annuities
offered by other insurance companies. This comparative information may be
expressed as a ranking prepared by Financial Planning Resources, Inc. of
Miami, FL (The VARDS Report) or by Morningstar, Inc. of Chicago, IL
(Morningstar's Variable Annuity Performance Report), which are independent
services that compare the performance of variable annuity sub-accounts.
The rankings are done on the basis of changes in accumulation unit values
over time and do not take into account any charges (such as sales charges
or administrative charges) that are deducted directly from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from 1926 on
capital markets in the United States. The Variable Account may quote the
performance of its Sub-Accounts in conjunction with the long-term
performance of capital markets in order to illustrate general long-term
risk versus reward investment scenarios. Capital markets tracked by
Ibbotson Associates include common stocks, small company stocks, long-term
corporate bonds, long-term government bonds, U.S. Treasury Bills, and the
U.S. inflation rate. Historical total returns are determined by Ibbotson
Associates for: Common Stocks, represented by the Standard and Poor's
Composite Stock Price Index (an unmanaged weighted index of 90 stocks prior
to March 1957 and 500 stocks thereafter of industrial, transportation,
utility and financial companies widely regarded by investors as
representative of the stock market); Small Company Stocks, represented by
the fifth capitalization quintile (i.e., the ninth and tenth deciles) of
stocks on the New York Stock Exchange for 1926-1981 and by the performance
of the Dimensional Fund Advisors Small Company 9/10 (for ninth and tenth
deciles) Fund thereafter; Long Term Corporate Bonds, represented beginning
in 1969 by the Salomon Brothers Long-Term High-Grade Corporate Bond Index,
which is an unmanaged index of nearly all Aaa and Aa rated bonds,
represented for 1946-1968 by backdating the Salomon Brothers Index using
Salomon Brothers' monthly yield data with a methodology similar to that
used by Salomon Brothers in computing its Index, and represented for 1925-
1945 through the use of the Standard and Poor's monthly High-Grade
Corporate Composite yield data, assuming a 4% coupon and a 20-year
maturity. Long-Term Government Bonds, measured each year using a portfolio
containing one U.S. government bond with a term of approximately twenty
years and a reasonably current coupon; U.S. Treasury Bills, measured by
rolling over each month a one-bill portfolio containing, at the beginning
of each month, the shortest-term bill having not less than one month to
maturity; Inflation, measured by the Consumer Price Index for all Urban
Consumers, not seasonably adjusted, since January, 1978 and by the Consumer
Price Index before then. The stock capital markets may be contrasted with
the corporate bond and U.S. government securities capital markets. Unlike
an investment in stock, an investment in a bond that is held to maturity
provides a fixed rate of return. Bonds have a senior priority to common
stocks in the event the issuer is liquidated and interest on bonds is
generally paid by the issuer before it makes any distributions to common
stock owners. Bonds rated in the two highest rating categories are
considered high quality and present minimal risk of default. An additional
advantage of investing in U.S. government bonds and Treasury bills is that
they are backed by the full faith and credit of the U.S. government and
thus have virtually no risk of default. Although government securities
fluctuate in price, they are highly liquid.
The tables below provide performance results for each Sub-Account through
December 31, 1998. The results shown in this section are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Contract Owner. Moreover,
the performance information for four of the Sub-Accounts (SRMSF, SRBF,
SRGSF and SRSVF) reflects the investment experience of the Eligible Funds
previously available under the Variable Account. The Funds of the SteinRoe
Trust replaced these other mutual funds as the Eligible Funds beginning
January 1, 1989. These other funds had a different investment adviser
(Keystone Custodian Funds, Inc.) than the SteinRoe Trust (Stein Roe &
Farnham, Incorporated). See Appendix B of the prospectus. The performance
information for the same four Sub-Accounts also reflects historical asset-
based charges for the period before May 1, 1989 that are at a lower level
than the current asset-based charges.
Average Annual Total Return for a Contract that is Surrendered and for a
Contract that Continues
The first section of the following table was calculated using the method
prescribed by the Securities and Exchange Commission. It illustrates each
Sub-Account's average annual total return over the periods shown assuming a
single $1,000 initial purchase payment and the surrender of the contract at
the end of each period. The Sub-Account's average annual total return is
the annual rate that would be necessary to achieve the ending value of an
investment kept in the Sub-Account for the period specified.
Each calculation assumes that the $1,000 initial purchase payment was
allocated to only one Sub-Account and no transfers or additional purchase
payments were made. The rate of return reflects all charges assessed
against a Contract and the Sub-Account except for any premium taxes that
may be payable. The charges reflected are: a Contingent Deferred Sales
Charge that applies when the hypothetical Contract is surrendered; the
annual 1.25% Mortality and Expense Risk Charge; for any period on or after
May 1, 1989, the annual 0.15% sales charge; and, on an allocated basis, the
Contract's Contract Maintenance Charge that is deducted at the end of each
year and upon surrender. The Contingent Deferred Sales Charge used in the
calculations for a particular Sub-Account is equal to the percentage charge
in effect at the end of the period multiplied by: the assumed $1,000
payment less any amount of that payment that is free of Contingent Deferred
Sales Charge under the Contract's surrender provisions. The percentage
charge declines from 7% to 1% over 7 years by 1% per year. The Contract
Maintenance Charge used in the calculations for a particular Sub-Account is
equal to a dollar and time-weighted average for that Sub-Account based on a
yearly charge of $30 for the portion of the period shown that is before
7/1/94 and $36 for any later portion of that period. A particular Sub-
Account's prorated portion is then equated to a $1,000 basis by multiplying
it by a fraction equal to $1,000 divided by the average Contract Value in
that Sub-Account during the period shown.
The second section of the table was calculated in the same manner as the
first except no Contingent Deferred Sales Charge was deducted since it is
assumed the Contract continues through the end of each period.
If the current charges under the Contracts had been in effect during the
period before May 1, 1989, any total return percentage that includes a
period before May 1, 1989 would be lower than the percentage shown since
current Accumulation Unit values reflect additional asset-based charges of
.15% (i.e., total asset-based charges of 1.40% rather than 1.25%).
Average Annual Total Return for a
Contract Surrendered on 12/31/98
Hypothetical $1,000 Purchase Payment*
Length of Investment Period
One Three Five Ten Since Contract
Sub-Account Year Years Years Years Inception Shown
SRMSF -1.68% 4.13% 4.99% 6.73% 6.14%(10/27/86)
SRBF 3.99 12.34 11.23 11.38 11.47 (5/14/85)
SRGSF 19.14 24.46 19.62 17.30 14.38 (5/26/87)
SRSVF -24.16 1.49 3.26 10.97 9.22 (5/16/85)
SRGUF 9.70 14.89 12.67 N/A 10.97 (7/1/93)
CGIF 2.60 16.46 15.03 N/A 14.46 (7/1/93)
CIFG 4.40 2.18 N/A N/A 0.98 (5/3/94)
CUSF 11.49 22.01 N/A N/A 21.91 (7/6/94)
CSIF -2.44 5.63 N/A N/A 7.72 (7/14/94)
NTF -14.19 -12.94 N/A N/A -7.38 (5/1/95)
* Expense reimbursement was applicable to SRMSF beginning January 1, 1989
to the extent expenses, including management fees, exceeded 1.00% of
average annual assets. See footnote 2 on page 5 of the prospectus for the
expense reimbursement percentages applicable to SRMSF and the other Funds
of the SteinRoe Trust beginning May 1, 1993. See footnote 2 on page 5 of
the prospectus for the expense reimbursement applicable to the Liberty
Trust Funds beginning July 1, 1993; CSIF was at 1.00% before May 1, 1995
when it decreased to .80%. The return percentages shown would be lower
without this expense reimbursement.
Average Annual Total Return for a
Contract Still in force on 12/31/98
Hypothetical $1,000 Purchase Payment*
Length of Investment Period
One Three Five Ten Since Contract
Sub-Account Year Years Years Years Inception Shown
SRMSF 5.32% 5.35% 5.32% 6.73% 6.14%(10/27/86)
SRBF 10.99 13.39 11.49 11.38 11.47 (5/14/85)
SRGSF 26.14 25.31 19.81 17.30 14.38 (5/26/87)
SRSVF -18.45 2.77 3.61 10.97 9.22 (5/16/85)
SRGUF 16.70 15.89 12.92 N/A 11.20 (7/1/93)
CGIF 9.60 17.43 15.26 N/A 14.66 (7/1/93)
CIFG 11.40 3.44 N/A N/A 1.59 (5/3/94)
CUSF 18.49 22.90 N/A N/A 22.24 (7/6/94)
CSIF 4.56 6.81 N/A N/A 8.23 (7/14/94)
NTF -7.73 -11.75 N/A N/A -6.34 (5/1/95)
* Expense reimbursement was applicable to SRMSF beginning January 1, 1989
to the extent expenses, including management fees, exceeded 1.00% of
average annual assets. See footnote 2 on page 5 of the prospectus for the
expense reimbursement percentages applicable to SRMSF and the other Funds
of the SteinRoe Trust beginning May 1, 1993. See footnote 2 on page 5 of
the prospectus for the expense reimbursement applicable to the Liberty
Trust Funds beginning July 1, 1993; CSIF was at 1.00% before May 1, 1995
when it decreased to .80%. The return percentages shown would be lower
without this expense reimbursement.
Change in Accumulation Unit Value
The following performance information illustrates the average annual change
and the actual annual change in Accumulation Unit values for each Sub-
Account and is computed differently than the standardized average annual
total return information.
A Sub-Account's average annual change in Accumulation Unit values is the
annualized rate at which the value of a Unit changes over the time period
illustrated. A Sub-Account's actual annual change in Accumulation Unit
values is the rate at which the value of a Unit changes over each 12-month
period illustrated. These rates of change in Accumulation Unit values
reflect the Contract's annual 1.25% Mortality and Expense Risk Charge and
for any period on or after May 1, 1989, the annual .15% sales charge. They
do not reflect deductions for any Contingent Deferred Sales Charge,
Contract Maintenance Charge, and premium taxes. The rates of change would
be lower if these charges were included.
If the current charges under the Contract had been in effect during the
period before May 1, 1989, any change percentage that includes a period
before May 1, 1989 would be lower than the percentage shown since current
Accumulation Unit values reflect additional asset-based charges of .15%
(i.e., total asset-based charges of 1.40% rather than 1.25%).
Average Annual Change
In Accumulation Unit 12-Month Period Change
Value From Contract in Accumulation Unit Value**
Sub- Inception Shown
Account through 12/31/98** 1989 1990 1991 1992 1993
SRMSF 6.14%(10/27/86) 11.46% 7.59% 12.90% 4.49% 4.79%
SRBF 11.47 (5/14/85) 21.16 -2.11 26.17 6.04 7.78
SRGSF 14.38 (5/26/87) 29.71 -3.04 45.98 5.16 3.52
SRSVF 9.22 (5/16/85) 29.45 -10.29 35.36 12.90 33.80
SRGUF 11.20 (7/1/93) N/A N/A N/A N/A -2.38*
CGIF 14.66 (7/1/93) N/A N/A N/A N/A 4.28*
CIFG 1.59 (5/3/94) N/A N/A N/A N/A N/A
CUSF 22.24 (7/6/94) N/A N/A N/A N/A N/A
CSIF 8.23 (7/14/94) N/A N/A N/A N/A N/A
NTF -6.34 (5/1/95) N/A N/A N/A N/A N/A
12-Month Period Change in Accumulation Unit Value**
Sub-Account 1994 1995 1996 1997 1998
SRMSF -2.93% 14.15% 3.24% 7.54% 5.32%
SRBF -4.52 23.75 14.02 15.21 10.99
SRGSF -7.64 35.84 19.59 30.45 26.14
SRSVF -0.21 10.21 25.18 6.32 -18.45
SRGUF -11.51 33.29 5.05 26.98 16.70
CGIF -2.12 28.34 16.16 27.19 9.60
CIFG -6.86* 4.39 3.61 -4.12 11.40
CUSF 3.69* 27.91 20.14 30.41 18.49
CSIF 0.14* 16.67 8.20 7.70 4.56
NTF N/A 14.45* 9.70 -32.09 -7.73
* Percentage of change is for less than 12 months; it is for the period
from the inception date shown in the second column to the end of the year.
** Expense reimbursement was applicable to SRMSF beginning January 1, 1989
to the extent expenses, including management fees, exceeded 1.00% of
average annual assets. See footnote 2 on page 5 of the prospectus for the
expense reimbursement percentages applicable to SRMSF and the other Funds
of the SteinRoe Trust beginning May 1, 1993. See footnote 3 on page 5 of
the prospectus for the expense reimbursement applicable to the Liberty
Trust Funds beginning July 1, 1993; CSIF was at 1.00% before May 1, 1995
when it decreased to .80%. The return percentages shown would be lower
without this expense reimbursement.
Yields for SRMMF and SRMMF-DCA Sub-Accounts
Yield and effective yield percentages for the SRMMF and SRMMF-DCA Sub-
Accounts are calculated using the method prescribed by the Securities and
Exchange Commission. Both yields reflect the deduction of the annual 1.40%
asset-based Contract charges (this deduction is not applicable to the SRMMF-
DCA Sub-Account and accounts for the SRMMF-DCA Sub-Account yields being
higher than the SRMMF yields). Both yields also reflect, on an allocated
basis, the Contract's annual $36 Contract Maintenance Charge. Both yields
do not reflect Contingent Deferred Sales Charges and premium taxes. The
yields would be lower if these charges were included. The following are
the standardized formulas:
Yield equals: (A - B - 1) x 365
C 7
Effective Yield Equals: (A - B)365/7 - 1
C
Where:
A = the Accumulation Unit value at the end of the 7-day period.
B = hypothetical Contract Maintenance Charge for the 7-day period. The
assumed annual SRMMF charge is equal to the $36 Contract charge
multiplied by a fraction equal to the average number of Contracts
with SRMMF Sub-Account value during the 7-day period divided by
the average total number of Contracts during the 7-day period.
This annual amount is converted to a 7-day charge by multiplying
it by 7/365. It is then equated to an Accumulation Unit size basis
by multiplying it by a fraction equal to the average value of one
SRMMF Accumulation Unit during the 7-day period divided by the
average Contract Value in SRMMF Sub-Account during the 7-day
period. The assumed annual SRMMF-DCA charge is similarly
calculated using SRMMF-DCA data.
C = the Accumulation Unit value at the beginning of the 7-day period.
The yield formula assumes that the weekly net income generated by an
investment in the SRMMF or SRMMF-DCA Sub-Account will continue over an
entire year. The effective yield formula also annualizes seven days of net
income but it assumes that the net income is reinvested over the year. This
compounding effect causes effective yield to be higher than the yield.
For the 7-day period ended 12/31/98 the yield for the SRMMF Sub-Account was
3.46% and the effective yield was 3.52%. For the SRMMF-DCA Sub-Account the
yield was 4.84% and the effective yield was 4.96%.
FINANCIAL STATEMENTS
The financial statements of the Variable Account and Keyport Life Insurance
Company are included in the statement of additional information. The
consolidated financial statements of Keyport Life Insurance Company are
provided as relevant to its ability to meet its financial obligations under
the Contracts and should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
<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,
1998, and the related statement of operations and changes in net assets for
each of the two years in the period 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 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 statements referred to above present fairly,
in all material respects, the financial position of Keyport Life Insurance
Company - KMA Variable Account at December 31, 1998 and the results of its
operations and changes in net assets for each of the two years in the
period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts /s/Ernst & Young LLP
March 12, 1999
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Assets and Liabilities
December 31, 1998
Assets
Investments at market value:
Keystone Custodian Funds
Evergreen Money Market - A - 225,814 shares
(cost $225,814) $ 225,814
Evergreen Diversified Bond Fund - A - 2,957
shares (cost $42,310) 47,052
Evergreen High Income Bond Fund - A - 3,307
shares (cost $22,364) 13,260
Evergreen Blue Chip Fund - A - 8,500 shares
(cost $159,608) 256,191
Evergreen Small Company Growth Fund - A - 43,204
shares (cost $308,525) 234,600
SteinRoe Variable Investment Trust
SteinRoe Money Market Fund - 50,088,880 shares
(cost $50,088,880) 50,088,880
SteinRoe Special Venture Fund - 7,924,049 shares
(cost $123,815,011) 107,925,549
SteinRoe Balanced Fund - 14,901,562 shares
(cost $193,396,926) 255,412,775
SteinRoe Mortgage Securities Fund - 4,085,723
shares (cost $41,864,361) 44,084,951
SteinRoe Growth Stock Fund - 4,030,444 shares
(cost $83,659,400) 175,445,246
Liberty Variable Investment Trust
Colonial Growth and Income Fund - 5,380,930
shares (cost $64,309,529) 88,193,440
SteinRoe Global Utilities Fund - 3,671,701
shares (cost $37,640,664) 50,522,602
Colonial International Fund for Growth -
7,735,821 shares (cost $15,238,266) 15,471,642
Colonial Strategic Income Fund - 5,033,137
shares (cost $55,812,029) 55,767,162
Colonial U.S. Stock Fund - 4,016,609 shares
(cost $55,073,243) 75,472,089
Newport Tiger Fund - 11,433,090 shares
(cost $14,010,681) 17,949,951
Total assets 937,111,204
Liabilities
Due to Keyport Life Insurance Company (Note 2) (46,902)
Net assets $ 937,064,302
Net Assets
Variable annuity contracts (Note 5) $ 880,928,133
Annuity reserves (Note 2) 47,857,355
Retained by Keyport Life Insurance Company (Note 2) 8,278,814
Net assets $ 937,064,302
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Evergreen Money Evergreen Diversified
Market - A Bond Fund - A
1998 1997 1998 1997
Income
Dividends $ 1,001 $ 13,856 $ 3,817 $ 1,626
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 4,711 4,673 1,353 618
Net investment income
(expense) (3,710) 9,183 2,464 1,008
Realized gain (loss) - - 291 618
Unrealized appreciation
(depreciation) during
the period - - 1,646 1,605
Net increase (decrease)
in net assets from
operations (3,710) 9,183 4,401 3,231
Purchase payments
from contract owners 608 1,997 931 4,788
Transfers between
accounts 276,879 (43,979) 5,916 24,029
Contract terminations
and annuity payouts (47,960) (459,094) (21,822) (46,307)
Other transfers (to)
from Keyport Life
Insurance Company - (3) - 147
Net increase (decrease)
in net assets from
contract transactions 229,527 (501,079) (14,975) (17,343)
Net assets at
beginning of year (3) 491,893 57,626 71,738
Net assets at end of
year $ 225,814 $ (3)$ 47,052 $ 57,626
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Evergreen High Evergreen Blue Chip
Income Bond Fund - A Fund - A
1998 1997 1998 1997
Income
Dividends $ 1,202 $ 594 $ 18,854 $ 37,418
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 203 153 2,908 2,163
Net investment income
(expense) 999 441 15,946 35,255
Realized gain (loss) 12 (517) 28,162 13,620
Unrealized appreciation
(depreciation) during
the period (699) 1,203 23,420 4,407
Net increase (decrease)
in net assets from
operations 312 1,127 67,528 53,282
Purchase payments
from contract owners 325 325 1,805 14,115
Transfers between
accounts (1,426) 716 (18,585) 15,482
Contract terminations
and annuity payouts - (6,041) (28,106) (87,287)
Other transfers (to)
from Keyport Life
Insurance Company - 96 - 1,506
Net increase (decrease)
in net assets from
contract transactions (1,101) (4,904) (44,886) (56,184)
Net assets at
beginning of year 14,049 17,826 233,549 236,451
Net assets at end of
year $ 13,260 $ 14,049 $ 256,191 $ 233,549
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Evergreen Stategic Evergreen Small Company
Growth Fund - A Growth Fund - A
1998 1997 1998 1997
Income
Dividends $ - $ 2,938 $ 60,110 $ 82,273
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 1,793 778 4,325 4,629
Net investment income
(expense) (1,793) 2,160 55,785 77,644
Realized gain (loss) - 41,931 5,701 13,555
Unrealized appreciation
(depreciation) during
the period 4,872 (32,197) (128,107) (27,863)
Net increase (decrease)
in net assets from
operations 3,079 11,894 (66,621) 63,336
Purchase payments
from contract owners - 2,590 4,226 6,667
Transfers between
accounts (146,852) 29,365 (92,064) (21,457)
Contract terminations
and annuity payouts - (41,426) (76,812) (145,609)
Other transfers (to)
from Keyport Life
Insurance Company - 913 - 3,165
Net increase (decrease)
in net assets from
contract transactions (146,852) (8,558) (164,650) (157,234)
Net assets at
beginning of year 143,773 140,437 465,871 559,769
Net assets at end of
year $ - $ 143,773 $ 234,600 $ 465,871
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe SteinRoe
Money Market Fund Special Venture Fund
1998 1997 1998 1997
Income
Dividends $ 3,136,631 $ 2,586,509 $ 14,724,283 $ 32,404,123
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 310,461 652,913 1,224,467 2,360,432
Net investment income
(expense) 2,826,170 1,933,596 13,499,816 30,043,691
Realized gain (loss) - - (6,280,461) 304,408
Unrealized appreciation
(depreciation) during
the period - - (34,924,144) (20,358,821)
Net increase (decrease)
in net assets from
operations 2,826,170 1,933,596 (27,704,789) 9,989,278
Purchase payments from
contract owners 18,322,250 2,232,759 1,327,985 8,864,042
Transfers between
accounts 7,330,930 4,645,785 (21,349,190) (2,411,037)
Contract terminations
and annuity payouts (27,908,695) (10,268,287) (16,555,224) (17,624,867)
Other transfers (to)
from Keyport Life
Insurance Company - 229,495 - 797,509
Net increase (decrease)
in net assets from
contract transactions (2,255,515) (3,160,248) (36,576,429) (10,374,353)
Net assets at
beginning of year 49,518,225 50,744,877 172,206,767 172,591,842
Net assets at end
of year $ 50,088,880 $ 49,518,225 $107,925,549 $172,206,767
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe Mortgage
SteinRoe Balanced Fund Securities Fund
1998 1997 1998 1997
Income
Dividends $ 26,856,206 $ 29,366,189 $ 3,186,505 $ -
Expenses (Note 3)
Mortality and expense
risk and
administrative
charges 3,085,688 3,680,951 543,128 680,742
Net investment income
(expense) 23,770,518 25,685,238 2,643,377 (680,742)
Realized gain (loss) 3,957,694 2,000,955 350,443 95,604
Unrealized appreciation
(depreciation) during
the period (816,179) 9,035,738 223,584 4,054,544
Net increase (decrease)
in net assets from
operations 26,912,033 36,721,931 3,217,404 3,469,406
Purchase payments
from contract owners 9,986,404 11,384,403 2,689,041 1,099,637
Transfers between
accounts (18,018,346) 139,635 (2,538,970) (2,616,043)
Contract terminations
and annuity payouts (31,325,981) (33,537,818) (7,150,468) (5,402,030)
Other transfers (to)
from Keyport Life
Insurance Company - 1,240,110 - 221,645
Net increase (decrease)
in net assets from
contract
transactions (39,357,923) (20,773,670) (7,000,397) (6,696,791)
Net assets at
beginning of year 267,858,665 251,910,404 47,867,944 51,095,329
Net assets at end
of year $255,412,775 $267,858,665 $ 44,084,951 $ 47,867,944
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe Growth Colonial Growth
Stock Fund and Income Fund
1998 1997 1998 1997
Income
Dividends $ 9,855,550 $ 5,913,208 $ 3,374,925 $ 14,180,708
Expenses (Note 3)
Mortality and expense
risk and
administrative
charges 2,096,538 1,960,446 1,075,366 1,101,488
Net investment income
(expense) 7,759,012 3,952,762 2,299,559 13,079,220
Realized gain (loss) 10,039,209 811,786 (133,930) 7,307,008
Unrealized appreciation
(depreciation) during
the period 18,010,074 31,378,730 5,790,111 (916,573)
Net increase (decrease)
in net assets from
operations 35,808,295 36,143,278 7,955,740 19,469,655
Purchase payments
from contract owners 5,448,189 8,599,818 5,576,908 7,302,191
Transfers between
accounts (4,961,413) 10,416,941 2,335,629 (18,730,782)
Contract terminations
and annuity payouts (17,779,169) (15,111,534) (19,078,188) (6,930,596)
Other transfers (to)
from Keyport Life
Insurance Company - 726,589 (33,182) 422,798
Net increase (decrease)
in net assets from
contract
transactions (17,292,393) 4,631,814 (11,198,833) (17,936,389)
Net assets at
beginning of year 156,929,344 116,154,252 91,403,351 89,870,085
Net assets at end
of year $175,445,246 $156,929,344 $ 88,160,258 $ 91,403,351
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
SteinRoe Colonial International
Global Utilities Fund Fund for Growth
1998 1997 1998 1997
Income
Dividends $ 1,293,478 $ 6,820,601 $ 124,996 $ 1,361,979
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 594,530 633,788 232,455 210,261
Net investment income
(expense) 698,948 6,186,813 (107,459) 1,151,718
Realized gain (loss) 901,256 539,709 (225,807) 617,805
Unrealized appreciation
(depreciation) during
the period 6,141,599 4,208,841 2,668,099 (2,431,327)
Net increase (decrease)
in net assets from
operations 7,741,803 10,935,363 2,334,833 (661,804)
Purchase payments
from contract owners 1,423,965 907,142 4,049,208 3,726,578
Transfers between
accounts 1,509,102 (3,043,719) (3,456,455) (6,965,440)
Contract terminations
and annuity payouts (10,007,299) (4,738,492) (6,599,895) (2,637,836)
Other transfers (to)
from Keyport Life
Insurance Company (7,001) 230,732 (295) 88,390
Net increase (decrease)
in net assets from
contract
transactions (7,081,233) (6,644,337) (6,007,437) (5,788,308)
Net assets at
beginning of year 49,855,031 45,564,005 19,143,951 25,594,063
Net assets at end
of year $ 50,515,601 $ 49,855,031 $ 15,471,347 $ 19,143,951
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Colonial Strategic Colonial
Income Fund U.S. Stock Fund
1998 1997 1998 1997
Income
Dividends $ 3,535,106 $ 4,842,388 $ 3,011,229 $ 11,625,335
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 697,641 747,240 933,300 729,737
Net investment income
(expense) 2,837,465 4,095,148 2,077,929 10,895,598
Realized gain (loss) 175,530 13,253 366,225 118,886
Unrealized appreciation
(depreciation) during
the period (81,464) 33,395 9,162,039 7,242,000
Net increase (decrease)
in net assets from
operations 2,931,531 4,141,796 11,606,193 18,256,484
Purchase payments from
contract owners 4,869,654 5,089,952 6,446,664 6,455,281
Transfers between
accounts (4,373,444) 6,010,460 (13,244,467) 5,799,734
Contract terminations
and annuity payouts (8,868,767) (5,459,174) (13,878,616) (6,397,463)
Other transfers (to)
from Keyport Life
Insurance Company - 283,152 (6,424) 391,960
Net increase (decrease)
in net assets from
contract transactions (8,372,557) 5,924,390 (20,682,843) 6,249,512
Net assets at
beginning of year 61,208,188 51,142,002 84,542,315 60,036,319
Net assets at end
of year $ 55,767,162 $ 61,208,188 $ 75,465,665 $ 84,542,315
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Newport Tiger Fund
1998 1997
Income
Dividend $ 390,403 $ 343,006
Expenses (Note 3)
Mortality and expense risk
and administrative charges 110,646 275,759
Net investment income (expense) 279,757 67,247
Realized gain (loss) 13,309,375 (342,005)
Unrealized appreciation (depreciation)
during the period (5,997,352) (10,879,130)
Net increase (decrease) in net assets
from operations 7,591,780 (11,153,888)
Purchase payments from contract owners 286,398 2,978,336
Transfers between accounts (10,995,608) (858,717)
Contract terminations and
annuity payouts (1,126,998) (2,726,530)
Other transfers (to) from Keyport Life
Insurance Company - 140,032
Net increase (decrease) in net assets
from contract transactions (11,836,208) (466,879)
Net assets at beginning of year 22,194,379 33,815,146
Net assets at end of year $ 17,949,951 $ 22,194,379
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Statement of Operations and Changes in Net Assets
For the Years Ended December 31, 1998 and 1997
Total Total
1998 1997
Income
Dividends $ 69,574,296 $ 109,582,751
Expenses (Note 3)
Mortality and expense risk
and administrative charges 10,919,513 13,046,771
Net investment income (expense) 58,654,783 96,535,980
Realized gain (loss) 22,493,700 11,536,616
Unrealized appreciation (depreciation)
during the period 77,499 21,314,552
Net increase (decrease) in net assets
from operations 81,225,982 129,387,148
Purchase payments from contract owners 60,434,561 58,670,621
Transfers between accounts (67,738,364) (7,609,027)
Contract terminations and annuity payouts (160,454,000) (111,620,391)
Other transfers (to) from Keyport Life
Insurance Company (46,902) 4,778,236
Net increase (decrease) in net assets from
contract transactions (167,804,705) (55,780,561)
Net assets at beginning of year 1,023,643,025 950,036,438
Net assets at end of year $ 937,064,302 $1,023,643,025
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements
December 31, 1998
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 Liberty Variable Investment Trust
("LVIT"). A third trust, Keystone Custodian Funds, is only available to
existing K-100 contractholders. This contract series was issued prior to
May 1, 1986. There are currently eleven available subaccounts within the
Variable Account to which contract funds may be allocated.
On November 15, 1997, the fund names for Cash Income Fund, Capital
Appreciation Fund, Managed Assets Fund, Mortgage Securities Income Fund and
Managed Growth Stock Fund were changed to SteinRoe Money Market Fund,
SteinRoe Special Venture Fund, SteinRoe Balanced Fund, SteinRoe Mortgage
Securities Fund and SteinRoe Growth Stock Fund, respectively. Also on
November 15, 1997, the fund names for Colonial-Keyport Growth and Income
Fund, Colonial-Keyport Utilities Fund, Colonial-Keyport International Fund
for Growth, Colonial-Keyport U.S. Stock Fund, Colonial-Keyport Strategic
Income Fund and Newport-Keyport Tiger Fund were changed to Colonial Growth
and Income Fund, SteinRoe Global Utilities Fund, Colonial International
Fund for Growth, Colonial U.S. Stock Fund, Colonial Strategic Income Fund
and Newport Tiger Fund, respectively.
On January 23, 1998, the fund names for High Income Bond Fund (B-4),
Keystone Liquid Trust, Growth and Income Fund (S-1), Mid-Cap Growth Fund (S-
3) and Small Company Growth (S-4) were changed to Evergreen High Income
Bond Fund - A, Evergreen Money Market - A, Evergreen Blue Chip - A,
Evergreen Strategic Growth Fund - A and Evergreen Small Company Growth Fund
- - A, respectively. In addition, the fund names for Diversified Bond Fund (B-
2) and Qualified Bond Fund (B-1) were changed to Evergreen Diversified Bond
Fund - A.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
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. Certain prior year
amounts have been reclassified to conform to the current year's
presentation.
Shares of the SRVIT and LVIT 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 and administrative charges earned by the Company in 1998 but
not transferred to the Company until January 1999.
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.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
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. Stein
Roe & Farnham, Inc., an affiliate of the Company, is the investment advisor
to the SRVIT. Liberty Advisory Services Corporation (formerly Keyport
Advisory Services Corporation), a wholly-owned subsidiary of the Company,
is the investment advisor to the LVIT. Colonial Management Associates,
Inc., an affiliate of the Company, is the investment sub-advisor to the
LVIT. Keyport Financial Services Corp., a wholly-owned subsidiary of the
Company, is the principal underwriter for SRVIT and LVIT. The investment
advisors' compensation is derived from the mutual funds.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
5. Unit Values
A summary of the accumulation unit values at December 31, 1998 and 1997 and
the accumulation units and dollar value outstanding at December 31, 1998
are as follows:
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
Evergreen Money Market - A
K100 Qualified $ - $ 24.344844 2,839.9788 $ 69,139
Evergreen Diversified
Bond Fund - A
K100 Qualified 39.559521 40.990232 2,236.8012 91,687
Evergreen High Income
Bond Fund - A
K100 Qualified 35.860178 36.441441 380.2859 13,858
Evergreen Blue Chip
Fund - A
K100 Qualified 66.571571 78.067546 3,273.8247 255,579
Evergreen Strategic
Growth Fund - A
K100 Qualified 52.599314 52.076664 8.9942 468
Evergreen Small
Company Growth Fund - A
K100 Qualified 47.821834 39.622011 5,447.9973 215,861
K100 Non-Qualified 54.355774 45.008804 2,764.4919 124,426
SteinRoe Money
Market Fund
K100 24.420778 25.413023 639,324.8327 16,247,177
Flex I 17.348349 18.009135 100,397.4054 1,808,070
Flex II 16.993893 17.623803 2,008.3315 35,394
Preferred Advisor 13.780309 14.283805 2,099,132.5311 29,983,600
Dollar Cost
Averaging 13.319731 13.999701 19,490.2178 272,857
Employee 12.034296 12.604414 144.1071 1,816
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
5. Unit Values (continued)
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
SteinRoe Special
Venture Fund
K100 $84.183106 $ 68.926636 193,700.3802 $ 13,351,116
Flex I 41.319523 33.748500 182,407.6505 6,155,985
Flex II 42.093310 34.346614 19,836.2231 681,307
Preferred Advisor 31.085014 25.351276 3,260,202.8690 82,650,303
Employee 18.887039 15.564461 18,266.0449 284,301
SteinRoe Balanced Fund
K100 40.239872 44.836896 198,155.8230 8,884,692
Flex I 40.110686 44.583840 406,221.9893 18,110,936
Flex II 38.494326 42.745102 27,878.0271 1,191,649
Preferred Advisor 24.497018 27.188237 7,821,030.9370 212,640,043
Employee 16.476867 18.478127 7,627.5974 140,944
SteinRoe Mortgage
Securities Fund
K100 18.734266 19.809326 43,443.9607 860,596
Flex I 19.881932 20.971510 116,119.6465 2,435,204
Flex II 19.764226 20.826821 14,574.7133 303,545
Preferred Advisor 17.874172 18.825527 2,099,027.4950 39,515,299
SteinRoe Growth
Stock Fund
K100 88.236184 111.743038 83,655.0821 9,347,873
Flex I 38.145609 48.190044 185,448.5000 8,936,771
Flex II 34.883376 44.025450 4,594.2060 202,262
Preferred Advisor 35.538075 44.828835 3,344,812.3440 149,944,041
Employee 22.305278 28.430479 12,737.0418 362,120
Colonial Growth
and Income Fund
K100 19.503337 21.459731 22,165.2757 475,661
Flex I 19.537439 21.444778 63,549.7137 1,362,810
Flex II 10.292965 11.286685 1,814.2277 20,477
Preferred Advisor 19.353674 21.211314 3,788,331.4890 80,355,489
Employee 20.146127 22.310588 10,276.6832 229,279
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
5. Unit Values (continued)
1997 1998
UNIT UNIT
VALUE VALUE UNITS DOLLARS
SteinRoe Global
Utilities Fund
K100 $15.563870 $ 18.234997 9,953.2156 $ 181,497
Flex I 15.395504 17.993715 17,623.5042 317,112
Preferred Advisor 15.358133 17.923199 2,640,177.5241 47,320,427
Colonial
International
Fund for Growth
K100 9.854816 11.021919 18,039.0306 198,825
Flex I 9.712387 10.836095 67,742.1959 734,061
Flex II 9.733460 10.848920 57.7388 626
Preferred Advisor 9.659572 10.761067 1,145,641.2525 12,328,322
Employee 10.293313 11.586890 2,462.8064 28,536
Colonial Strategic
Income Fund
K100 13.278547 13.939428 410,209.5436 5,718,086
Flex I 13.596904 14.238756 278,009.1585 3,958,505
Flex II 13.104821 13.709942 20,160.5720 276,400
Preferred Advisor 13.615795 14.237231 3,020,396.5109 43,002,083
Employee 14.021213 14.814437 1,255.0459 18,593
Colonial U.S.
Stock Fund
K100 20.091280 23.899575 50,148.8019 1,198,535
Flex I 20.227193 24.002516 43,556.4057 1,045,463
Preferred Advisor 20.780533 24.622292 2,759,394.6841 67,942,622
Employee 21.635681 25.903402 1,749.6844 45,323
Newport Tiger Fund
K100 7.836941 7.259994 22,116.1258 160,563
Flex I 7.651873 7.071210 7,872.4247 55,668
Flex II 7.046211 6.505087 1,475.6498 9,599
Preferred Advisor 8.525525 7.866774 1,119,720.5525 8,808,589
Employee 8.765513 8.172929 1,965.4964 16,064
36,443,055.6441 $880,928,134
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
6. Purchases and Sales of Securities
The cost of shares purchased and proceeds from shares sold by the Variable
Account during 1998 are shown below:
Purchases Sales
Evergreen Money Market - A $ 293,455 $ 67,641
Evergreen Diversified Bond Fund - A 62,997 75,239
Evergreen High Income Bond Fund - A 163 175
Evergreen Blue Chip Fund - A 16,590 44,429
Evergreen Strategic Growth Fund - A - 4,872
Evergreen Small Company Growth Fund - A 23,128 129,795
SteinRoe Money Market Fund 79,997,000 82,938,490
SteinRoe Special Venture Fund 24,446,468 49,371,928
SteinRoe Balanced Fund 67,888,246 94,219,717
SteinRoe Mortgage Securities Fund 23,938,385 33,443,775
SteinRoe Growth Stock Fund 59,773,208 70,638,904
Colonial Growth and Income Fund 33,946,570 54,251,344
SteinRoe Global Utilities Fund 11,245,476 19,670,822
Colonial International Fund for Growth 23,579,188 38,056,189
Colonial Strategic Income Fund 38,118,932 52,679,750
Colonial U.S. Stock Fund 53,382,618 85,589,029
Newport Tiger Fund 3,750,410 9,363,482
$ 420,462,834 $ 590,545,581
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
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. The 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.
8. Year 2000 (Unaudited)
The Variable Account, like other business organizations and individuals,
would be adversely affected if the Company's computer systems and those of
its service providers do not properly process and calculate date related
information and data from and after January 1, 2000. Many of these systems
are not presently Year 2000 compliant. These systems use programs that were
designed and developed without considering the impact of the upcoming
change in the century. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company's business, financial condition and
results of operations could be materially and adversely affected by the
failure of the Company's systems and applications (and those operated by
third parties interfacing with the Company's systems and applications) to
properly operate or manage these dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this
area and expects to complete this phase during 1999.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY - KMA VARIABLE ACCOUNT
Notes to Financial Statements (continued)
8. Year 2000 (Unaudited) (continued)
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues. The Company is developing, and will
continue to develop, contingency plans for dealing with any adverse effects
that become likely in the event the Company's remediation plans are not
successful or third parties fail to remediate their own Year 2000 issues.
The Company expects contingency planning to be substantially complete by
June 1999. If necessary modifications and conversions are not made, or are
not timely completed, or if the systems of the companies on which the
Company's interface system relies are not timely converted, the Year 2000
issues could have a material impact on the financial condition and results
of operations of the Company. However, the Company believes that with
modifications to existing software and conversions to new software, the
Year 2000 issue will not pose significant operational problems for its
computer systems.
<PAGE>
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated balance sheet of Keyport Life Insurance
Company as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 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 consolidated financial
position of Keyport Life Insurance Company at December 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
Boston, Massachusetts
January 28, 1999
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
ASSETS 1998 1997
Cash and investments:
Fixed maturities available for sale
sale (amortized cost: 1998 -
$11,174,697; 1997 - $10,981,618) $11,277,204 $11,246,539
Equity securities (cost: 1998 -
$21,836; 1997 - $21,950) 24,649 40,856
Mortgage loans 55,117 60,662
Policy loans 578,770 554,681
Other invested assets 662,513 440,773
Cash and cash equivalents 719,625 1,162,347
Total cash and investments 13,317,878 13,505,858
Accrued investment income 160,950 165,035
Deferred policy acquisition costs 340,957 232,039
Value of insurance in force 66,636 53,298
Income taxes recoverable 31,909 22,537
Intangible assets 18,082 18,058
Receivable for investments sold 37,936 1,398
Other assets 35,345 14,777
Separate account assets 1,765,538 1,329,189
Total assets $15,775,231 $15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,504,081 $12,086,076
Deferred income taxes 143,596 133,003
Payable for investments purchased
and loaned 240,440 722,116
Other liabilities 28,312 34,015
Separate account liabilities 1,723,205 1,263,958
Total liabilities 14,639,634 14,239,168
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
Retained earnings 600,396 511,796
Accumulated other comprehensive income 26,253 82,277
Total stockholder's equity 1,135,597 1,103,021
Total liabilities and
stockholder's equity $15,775,231 $15,342,189
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31,
1998 1997 1996
Revenues:
Net investment income $ 815,226 $ 847,048 $ 790,365
Interest credited to
policyholders (562,238) (594,084) (572,719)
Investment spread 252,988 252,964 217,646
Net realized investment
gains 785 24,723 5,509
Fee income:
Surrender charges 17,487 15,968 14,934
Separate account fees 20,589 17,124 15,987
Management fees 4,760 3,261 2,613
Total fee income 42,836 36,353 33,534
Expenses:
Policy benefits (2,880) (3,924) (3,477)
Operating expenses (53,544) (49,941) (43,815)
Amortization of deferred
policy acquisition costs (69,172) (75,906) (60,225)
Amortization of value of
insurance in force (8,238) (10,490) (10,196)
Amortization of intangible
Assets (1,256) (1,128) (1,130)
Total expenses (135,090) (141,389) (118,843)
Income before income taxes 161,519 172,651 137,846
Income taxes (52,919) (59,090) (47,222)
Net income $ 108,600 $ 113,561 $ 90,624
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
Balance,
January 1, 1996 $3,015 $505,933 $307,611 $ 85,772 $ 902,331
Comprehensive income
Net income 90,624 - 90,624
Other comprehensive
income, net of tax
Net unrealized
investment losses - (12,173) (12,173)
Comprehensive income 78,451
Balance,
December 31, 1996 3,015 505,933 398,235 73,599 980,782
Comprehensive income
Net income 113,561 - 113,561
Other comprehensive
income, net of tax
Net unrealized
investment gains 8,678 8,678
Comprehensive income 122,239
Balance,
December 31, 1997 3,015 505,933 511,796 82,277 1,103,021
Comprehensive income
Net income 108,600 - 108,600
Other comprehensive
income, net of tax
Net unrealized
investment losses - (56,024) (56,024)
Comprehensive income 52,576
Dividends paid (20,000) - (20,000)
Balance,
December 31, 1998 $3,015 $505,933 $600,396 $ 26,253 $1,135,597
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1998 1997 1996
Cash flows from operating
activities:
Net income $ 108,600 $ 113,561 $ 90,624
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 562,238 594,084 572,719
Net realized investment
gains (785) (24,723) (5,509)
Amortization of value of
insurance in force and
intangible assets 9,494 11,618 11,326
Net amortization on
investments 75,418 29,862 (29,088)
Change in deferred policy
acquisition costs (33,687) (10,252) (24,403)
Change in current and
deferred income taxes 1,112 71,919 7,263
Net change in other assets
and liabilities (53,786) 7,959 (41,012)
Net cash provided by
operating activities 668,604 794,028 581,920
Cash flows from investing
activities:
Investments purchased -
available for sale (6,789,048) (4,548,374) (4,365,399)
Investments sold -
available for sale 5,405,955 2,563,465 1,714,023
Investments matured -
available for sale 1,273,478 1,531,693 1,387,664
Increase in policy loans (24,089) (21,888) (34,467)
Decrease in mortgage loans 5,545 6,343 7,500
Other invested assets sold
(purchased), net 21,395 (48,921) (130,087)
Purchases of property and
Equipment, net (4,953) (6,213) (1,622)
Value of business acquired,
net of cash (3,999) - (30,865)
Net cash used in
investing activities (115,716) (523,895) (1,453,253)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,690,035) (1,320,837) (1,154,087)
Deposits to policyholder
accounts 1,224,991 950,472 2,134,504
Dividends paid (20,000) - -
Securities lending (510,566) 495,194 (119,083)
Net cash (used in) provided
by financing activities (995,610) 124,829 861,334
Change in cash and
cash equivalents (442,722) 394,962 (9,999)
Cash and cash equivalents
at beginning of year 1,162,347 767,385 777,384
Cash and cash equivalents at
end of year $ 719,625 $ 1,162,347 $ 767,385
See accompanying notes.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1998
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
savings market. These annuity products are sold through a wide ranging
network of banks, agents, and security dealers throughout the United
States.
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 Benefit Life Insurance Company
("Keyport Benefit"), Liberty Advisory Services Corp., 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
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 accumulated other
comprehensive income. The cost basis of securities is adjusted for declines
in value that are determined to be other than temporary. Realized
investment gains and losses are calculated on a first-in, first-out basis,
net of adjustments for amortization of deferred policy acquisition costs
and value of insurance in force.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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. Partnerships are
accounted for by using the equity method of accounting. Partnership
investments totaled $126.8 million and $117.3 million at December 31, 1998
and 1997, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options and futures on the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index") to hedge its obligations
to provide returns based upon this index.
The Company utilizes interest rate swap agreements ("swap agreements") and
interest rate cap agreements ("cap agreements") to match assets more
closely to liabilities. Swap agreements are agreements to exchange with a
counterparty interest rate payments of differing character (e.g., fixed-
rate payments exchanged for variable-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate
changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed
rate assets with interest rates credited to policyholders.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional balance) to hedge
against rising interest rates.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Hedge accounting is applied after the Company determines that the items to
be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements and call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
if the assets and liabilities that were hedged no longer exist, the
position is "marked to market" and realized gains or losses are immediately
recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the
agreements. The unamortized premium is included in other invested assets.
Amounts earned on interest rate cap agreements are recorded as an
adjustment to net investment income. Interest rate swap agreements and cap
agreements hedging investments designated as available for sale are
adjusted to fair value with the resulting unrealized gains and losses, net
of tax, included in accumulated other comprehensive income.
Premiums paid on call options are amortized into net investment income over
the terms of the contracts. The call options are included in other
invested assets and are carried at amortized cost plus intrinsic value, if
any, of the call options as of the valuation date. Changes in intrinsic
value of the call options are recorded as an adjustment to interest
credited to policyholders. Futures contracts are carried at fair value and
require daily cash settlement. Changes in the fair value of futures that
qualify as hedges are deferred and recognized as an adjustment to the
hedged asset or liability. Futures that do not qualify as hedges are
carried at fair value; changes in value are immediately recognized in
income.
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.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
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
spread, 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
investment gains or losses that is credited or charged directly to
accumulated other comprehensive income. Deferred policy acquisition costs
were decreased by $56.0 million and $126.9 million at December 31, 1998 and
1997, respectively, relating to 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 10 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.25%, 5.34% and 5.30% for the
years ended December 31, 1998, 1997 and 1996, 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 investment gains
or losses that is credited or charged directly to accumulated other
comprehensive income. Value of insurance in force was decreased by $10.3
million and $31.8 million at December 31, 1998 and 1997, respectively,
relating to this adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1998 is as follows (in thousands): 1999 - $11,013; 2000 -
$10,043; 2001 - $8,823; 2002 - $7,803; 2003 - $6,975 and thereafter -
$32,252.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis ranging from ten to 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.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
As of December 31, 1998 and 1997, the Company also classified $42.3 million
and $65.2 million, respectively, of fixed maturities and investments in
certain mutual funds sponsored by affiliates of the Company as separate
account assets.
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
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company will be eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
Independence Life, which until July 18, 1997, was required under federal
tax law to file its own federal income tax return, may join with Keyport in
a consolidated income tax return filing. Keyport Benefit may also join
with Keyport in a consolidated income tax filing. Liberty Advisory
Services Corporation and Keyport Financial Services Corp. must file
separate federal tax returns.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
Recent Accounting Changes
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no impact on the Company's net income or
stockholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in accumulated
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 establishes standards for the reporting of financial information
from operating segments in annual and interim financial statements. SFAS
131 requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how to
allocate resources to segments. The adoption of SFAS 131 did not have any
effect on the Company's financial statements as management of the Company
considers its operations to be one segment.
Recent Accounting Pronouncement
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued. SFAS 133 standardizes the
accounting for derivative instruments and the derivative portion of certain
other contracts that have similar characteristics by requiring that an
entity recognize those instruments at fair value. This statement also
requires a new method of accounting for hedging transactions, prescribes
the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. This statement
is effective for fiscal years beginning after June 15, 1999. Earlier
adoption is permitted. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change.
The Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
2. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million. Subsequent to the acquisition, the Company made a capital
contribution to Keyport Benefit in the amount of $7.5 million.
In August 1996, the Company 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.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments
Fixed Maturities
As of December 31, 1998 and 1997, 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
December 31, 1998 Cost Gains Losses Fair Value
U.S. Treasury
securities $ 90,818 $ 3,039 $ (192) $ 93,665
Mortgage backed
securities of U.S.
government
corporations and
agencies 940,075 28,404 (2,894) 965,585
Debt securities
issued by foreign
governments 251,088 9,422 (16,224) 244,286
Corporate securities 5,396,278 185,132 (156,327) 5,425,083
Other mortgage
backed securities 2,286,585 65,158 (19,546) 2,332,197
Asset backed securities 1,941,966 25,955 (16,521) 1,951,400
Senior secured loans 267,887 1,079 (3,978) 264,988
Total fixed
maturities $11,174,697 $ 318,189 $ (215,682) $11,277,204
Gross Gross
Amortized Unrealized Unrealized
December 31, 1997 Cost Gains Losses Fair Value
U.S. Treasury
Securities $ 128,580 $ 1,107 $ (40) $ 129,647
Mortgage backed
securities of
U.S. government
corporations and
agencies 1,089,809 49,536 (1,602) 1,137,743
Debt securities
issued by foreign
governments 272,559 12,694 (4,966) 280,287
Corporate securities 4,744,208 189,387 (83,562) 4,850,033
Other mortgage
backed securities 2,325,889 81,886 (2,579) 2,405,196
Asset backed securities 2,200,689 26,178 (3,118) 2,223,749
Senior secured loans 219,884 - - 219,884
Total fixed
maturities $10,981,618 $ 360,788 $ (95,867) $11,246,539
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $7.8 million and $27.4 million, and gross unrealized losses
aggregated $3.6 million and $6.9 million, respectively.
Net unrealized investment gains (losses) on securities included in other
comprehensive income in 1998, 1997 and 1996 include: gross unrealized
gains (losses) on securities of $(182.2) million, $73.7 million and $(64.4)
million, respectively; reclassification adjustments for realized investment
(gains) losses in net income of $3.5 million, $(31.2) million and $(7.2)
million, respectively; and adjustments to deferred policy acquisition costs
and value of insurance in force of $92.5 million, $(29.1) million and $54.2
million, respectively. The above amounts are shown before income tax
expense (benefit) of $(30.2) million, $4.7 million and $(5.2) million,
respectively.
Deferred tax liabilities for the Company's net unrealized investment gains
and losses, net of adjustment to deferred policy acquisition costs and
value of insurance in force, were $14.1 million and $44.3 million at
December 31, 1998 and 1997, 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, 1998.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1998, $1.1 billion of fixed maturities were below
investment grade.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1998 are as follows (in thousands):
Amortized Fair
December 31, 1998 Cost Value
Due in one year or less $ 334,901 $ 335,179
Due after one year through five years 2,998,421 3,005,087
Due after five years through ten years 1,638,535 1,656,238
Due after ten years 1,034,214 1,031,518
6,006,071 6,028,022
Mortgage and asset backed securities 5,168,626 5,249,182
$11,174,697 $11,277,204
Actual maturities may differ because borrowers may have the right to call
or prepay obligations.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities $ 810,521 $ 811,688 $ 737,372
Mortgage loans and other
invested assets 18,238 27,833 11,422
Policy loans 33,251 32,224 30,188
Equity securities 4,369 5,443 4,494
Cash and cash equivalents 38,269 34,449 36,138
Gross investment income 904,648 911,637 819,614
Investment expenses (17,342) (15,311) (12,708)
Amortization of options and
interest rate caps (72,080) (49,278) (16,541)
Net investment income $ 815,226 $ 847,048 $ 790,365
As of December 31, 1998, the carrying value of fixed maturity investments
that was non-income producing was $30.0 million.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31, 1998 1997 1996
Fixed maturities available for sale:
Gross gains $ 72,119 $ 42,464 $ 24,304
Gross losses (59,730) (19,146) (17,814)
Other than temporary declines in value (28,322) - -
Equity securities 14,754 (51) 1,492
Investments in separate accounts 93 7,912 (576)
Interest rate caps (2,397) - -
Other - - (208)
Gross realized investment (losses) gains (3,483) 31,179 7,198
Amortization adjustments of deferred
policy acquisition costs and value
of insurance inforce 4,268 (6,456) (1,689)
Net realized investment gains $ 785 $ 24,723 $ 5,509
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Proceeds from sales of fixed maturities available for sale were $5.4
billion, $2.6 billion and $1.7 billion, for the years ended December 31,
1998, 1997 and 1996, respectively.
4. Derivatives
Outstanding derivatives, shown in notional amounts along with their
carrying value and fair value, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1998 1997 1998 1998 1997 1997
Interest
rate swaps $2,369,000 $2,575,000 $(71,163) $(71,163) $(42,123) $(42,123)
Interest
rate cap
agreements 250,000 250,000 - - 102 102
S&P 500
Index call
Options - - 535,628 607,022 323,343 345,294
S&P 500 Index
Futures - - (604) (604) 752 752
The interest rate swap agreements expire in 1999 through 2005. The interest
rate cap agreements expire in 1999 through 2000. The call options' and
futures' maturities range from 1999 to 2002.
The Company currently utilizes swap agreements to reduce asset duration and
to better match interest rates earned on longer-term fixed rate assets with
interest credited to policyholders. Cap agreements are used to hedge
against rising interest rates. Call options and futures contracts are used
for purposes of hedging the Company's equity-indexed products. At December
31, 1998 and 1997, the Company had approximately $156.4 million and $155.0
million, respectively, of unamortized premium in call option contracts.
Fair values for swap and cap agreements 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. Fair values for call options and futures contracts
are based on quoted market prices.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap,
cap and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal. Futures
contracts trade on organized exchanges and, therefore, have minimal credit
risk.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31,
1998 1997 1996
Current $ 12,150 $ (48,477) $ 52,369
Deferred 40,769 107,567 (5,147)
$ 52,919 $ 59,090 $ 47,222
A reconciliation of income tax expense with the expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Expected income tax expense $ 56,532 $ 60,427 $ 48,246
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (2,152) (1,416) (1,216)
Amortization of goodwill 440 396 396
Other, net (1,901) (317) (204)
Income tax expense $ 52,919 $ 59,090 $ 47,222
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The components of deferred federal income taxes are as follows (in
thousands):
December 31,
1998 1997
Deferred tax assets:
Policy liabilities $ 107,433 $ 124,250
Guaranty fund expense 2,115 2,795
Net operating loss carryforwards 1,780 2,111
Deferred fees 4,379 -
Other 1,318 1,205
Total deferred tax assets 117,025 130,361
Deferred tax liabilities:
Deferred policy acquisition costs (92,533) (56,331)
Value of insurance in force and
intangible assets (23,322) (18,022)
Excess of book over tax basis of
Investments (135,364) (178,697)
Separate account asset (478) (645)
Deferred loss on interest rate swaps (805) (1,792)
Other (8,119) (7,877)
Total deferred tax liabilities (260,621) (263,364)
Net deferred tax liability $ (143,596) $ (133,003)
As of December 31, 1998, the Company had approximately $5.1 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 of
Independence Life. 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 $21.5 million in 1998 and $46.9 million in 1996,
while income taxes refunded were $8.0 million in 1997.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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. 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.
Plan assets consist principally of investments in certain mutual funds
sponsored by an affiliated company.
The following table sets forth the Plans' funded status (in thousands).
December 31,
1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 12,594 $ 10,559
Service cost 921 804
Interest cost 960 829
Actuarial loss 1,101 606
Benefits paid (294) (204)
Benefit obligation at end of year 15,282 12,594
Change in plan assets
Fair value of plan assets at beginning of year 7,801 6,399
Actual return on plan assets 593 901
Employer contribution 290 705
Benefits paid (294) (204)
Fair value of plan assets as end of year 8,390 7,801
Projected benefit obligation in excess of the
Plans' assets 6,892 4,793
Unrecognized net actuarial loss (2,814) (1,727)
Prior service cost not yet recognized in net
periodic pension cost (138) (160)
Accrued pension cost $ 3,940 $ 2,906
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
6. Retirement Plans (continued)
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,
1998 1997 1996
Pension cost includes the
following components:
Service cost benefits earned
during the period $ 921 $ 804 $ 717
Interest cost on projected
benefit obligation 960 829 725
Expected return on Plan assets (610) (525) (468)
Net amortization and deferred
amounts 53 23 93
Total net periodic pension cost $ 1,324 $ 1,131 $ 1,067
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:
Discount rate 6.75% 7.25% 7.50%
Rate of increase in compensation level 4.75% 5.00% 5.25%
Expected long-term rate of return on assets 9.00% 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, 1998, 1997 and 1996,
expenses related to these defined contribution plans totaled (in thousands)
$853, $702 and $590, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated 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 estimated fair value of financial instruments:
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
7. Fair Value of Financial Instruments (continued)
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: With the exception of call options, the carrying
value for assets classified as other invested assets in the accompanying
balance sheets approximates their fair value. Fair values for call options
are based on market prices quoted by the counterparty to the respective
call option contract.
Cash and cash equivalents: The carrying value of cash and cash equivalents
approximates 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, December 31,
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity
securities $11,277,204 $11,277,204 $11,246,539 $11,246,539
Equity securities 24,649 24,649 40,856 40,856
Mortgage loans 55,117 56,640 60,662 63,007
Policy loans 578,770 578,770 554,681 554,681
Other invested
Assets 662,513 730,394 440,773 462,724
Cash and cash
Equivalents 719,625 719,625 1,162,347 1,162,347
Liabilities:
Policy liabilities 12,504,081 11,647,558 12,086,076 11,366,534
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
8. Quarterly Financial Data (unaudited)
The following is a tabulation of the unaudited quarterly results of
operations (in thousands):
1998 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,075 $ 200,955 $ 201,158 $ 207,038
Interest credited to
policyholders (142,136) (140,198) (143,271) (136,633)
Investment spread 63,939 60,757 57,887 70,405
Net realized investment
gains (losses) 818 (2,483) 4,112 (1,662)
Fee income 9,877 12,400 10,505 10,054
Pretax income 37,870 36,627 44,344 42,678
Net income 26,049 24,092 29,779 28,680
1997 Quarters
March 31 June 30 September 30 December 31
Investment income $ 206,515 $ 210,655 $ 210,365 $ 219,513
Interest credited to
Policyholders (147,313) (147,224) (150,875) (148,672)
Investment spread 59,202 63,431 59,490 70,841
Net realized investment
gains 12,796 2,669 4,951 4,307
Fee income 8,252 8,578 9,841 9,682
Pretax income 47,423 39,914 39,876 45,438
Net income 31,538 26,095 26,377 29,551
9. Statutory Information
The Company is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the State of Rhode Island Insurance Department.
Statutory surplus and statutory net income differ from stockholder's equity
and net income reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, policy liabilities are based
on different assumptions, and income tax expense reflects only taxes paid
or currently payable. The Company's statutory surplus and net income are as
follows (in thousands):
Year Ended December 31,
1998 1997 1996
Statutory surplus $ 790,935 $ 702,610 $ 567,735
Statutory net income 95,422 107,130 40,237
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
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, 1998, 1997
and 1996. 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 $7.1 million for the year ended December 31, 1998 and $7.8 million for
the years ended December 31, 1997 and 1996. In addition, certain
affiliated companies distribute the Company's products and were paid $8.6
million, $7.2 million and $6.4 million by the Company for the years ended
December 31, 1998, 1997, and 1996, respectively.
Keyport had 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 had
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, 1998 and 1997, the amounts outstanding were $39.5 million. In
January 1999, Liberty Mutual retired the mortgage notes with a payment of
$39.7 million for all outstanding principal and interest.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws that restrict the maximum amount of dividends that may be
paid without prior approval of the State of Rhode Island Insurance
Department. As of December 31, 1998, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $59.1 million without such
approval.
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 2008. Rental expense (in thousands) amounted to $4,721,
$3,408 and $3,213 for the years ended December 31, 1998, 1997 and 1996,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1998, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1999 $ 5,354
2000 5,311
2001 4,487
2002 4,342
2003 4,351
Thereafter 16,752
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
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 1998, 1997 and 1996, the Company was assessed $3.2 million, $5.9
million, and $10.0 million, respectively. During 1998, 1997 and 1996, the
Company recorded $1.2 million, $1.0 million, and $1.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1998 and 1997, the reserve for such assessments was $6.0
million and $8.0 million, respectively.
12. Year 2000 (Unaudited)
The Company relies significantly on computer systems and applications in
its operations. Many of these systems are not presently Year 2000
compliant. These systems use programs that were designed and developed
without considering the impact of the upcoming change in the century. Any
of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of the Company's systems
and applications (and those operated by third parties interfacing with the
Company's systems and applications) to properly operate or manage these
dates.
In addressing the Year 2000 issue, the Company has completed an inventory
of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-
party purchased programs and third-party custom developed programs. For
programs which were identified as not being Year 2000 ready, the Company
has implemented a remedial plan which includes repairing or replacing the
programs and appropriate testing for Year 2000. The remediation plan is
substantially complete and is currently in the final testing phase. The
Company also identified its non-information technology systems with respect
to Year 2000 issues. The Company initiated remediation efforts in this area
and expects to complete this phase during 1999.
In addition, the Company has initiated communication with significant
financial institutions, distributors, suppliers and others with which it
does business to determine the extent to which the Company's systems are
vulnerable by the failure of others to remediate their own Year 2000
issues. The Company has received feedback from such parties and is in the
process of independently confirming information received from other parties
with respect to their year 2000 issues.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (continued)
12. Year 2000 (Unaudited) (continued)
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. The Company expects contingency
planning to be substantially complete by June 1999. If necessary
modifications and conversions are not made, or are not timely completed, or
if the systems of the companies on which the Company's interface system
relies are not timely converted, the Year 2000 issues could have a material
impact on the financial condition and results of operations of the Company.
However, the Company believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
<PAGE>
PART C
<PAGE>
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part B:
KMA Variable Account:
Statement of Assets and Liabilities - December 31, 1998
Statement of Operations and Changes in Net Assets for the years
ended December 31, 1998 and 1997
Notes to Financial Statements
Keyport Life Insurance Company:
Consolidated Balance Sheet - December 31, 1998 and 1997
Consolidated Income Statement for the years ended December 31,
1998, 1997 and 1996
Consolidated Statement of Stockholder's Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated 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 incorporated by reference to
Post-Effective Amendment No. 36 to Form N-4 (File No. 2-66388).
(10) Consent of independent auditors is 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. 10 to the Registration Statement (File
No. 333-1043) filed on or about April 24, 1998.
(27) Financial Data Schedule is Exhibit 27.
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 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
Paul H. LeFevre, Jr. Acting President and Executive Vice
President
Bernard R. Beckerlegge Senior Vice President and General
Counsel
Bernhard M. Koch Senior Vice President and Chief
Financial Officer
Stewart R. Morrison Senior Vice President and Chief
Investment Officer
Francis E. Reinhart Senior Vice President and Chief
Information Officer
Mark R. Tully Senior Vice President and Chief
Sales Officer
Garth A. Bernard Vice President
Daniel C. Bryant Vice President and Assistant
Secretary
Clifford O. Calderwood Vice President
James P. Greaton Vice President and Corporate
Actuary
Jacob M. Herschler Vice President
Kenneth M. Hughes Vice President
James J. Klopper Vice President and Secretary
Leslie J. Laputz Vice President
Jeffrey J. Lobo Vice President - Risk Management
Suzanne E. Lyons Vice President - Human Resources
Jeffery J. Whitehead Vice President and Treasurer
Ellen L. Wike Vice President
Daniel T. H. Yin Vice President
Nancy C. Atherton Assistant Vice President
John G. Bonvouloir Assistant Vice President &
Assistant Treasurer
Judith A. Brookins Assistant Vice President
Paul R. Coady Assistant Vice President
Stephen Cross Assistant Vice President and
Assistant Controller
Alan R. Downey Assistant Vice President
Kenneth M. LeClair Assistant Vice President
Gregory L. Lapsley Assistant Vice President
Scott E. Morin Assistant Vice President and
Controller
Michael J. Mulkern Assistant Vice President
Sean P. O'Brien Assistant Vice President
Robert J. Scheinerman Assistant Vice President
Teresa M. Shumila Assistant Vice President
Daniel T. Smyth Assistant Vice President
Donald A. Truman Assistant Vice President and
Assistant Secretary
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 Liberty Advisory Services Corp. (LASC)(formerly
known as Keyport Advisory Services Corp.), a Massachusetts corporation
functioning as an investment adviser, through 100% stock ownership. LASC
files separate financial statements.
The Depositor controls Independence Life and Annuity Company
(Independence Life), a Rhode Island corporation functioning as a life
insurance company, through 100% stock ownership. Independence Life files
separate financial statements.
The Depositor controls Keyport Benefit Life Insurance Company ("Keyport
Benefit"), a New York corporation functioning as a life insurance company,
through 100% stock ownership. Independence Life files separate financial
statements.
The chart for the affiliations of the Depositor is incorporated by
reference to Post-Effective Amendment No. 7 to Registration Statement (File
No. 333-1043) filed on or about February 6, 1998.
Item 27. Number of Contract Owners.
At March 31, 1999, there were 9,845 Qualified Contract Owners and 10,541
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 Liberty 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
Jacob M. Herschler Director
Paul T. Holman Director and Assistant Clerk
James J. Klopper Director, President and Clerk
Daniel C. Bryant Vice President
Rogelio P. Japlit Treasurer
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 28th day of April, 1999.
KMA Variable Account
(Registrant)
BY: Keyport Life Insurance Company
(Depositor)
BY: /s/PAUL H. LEFEVRE, JR.
Paul H. LeFevre, Jr., Acting President
<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.
/s/ Kenneth R. Leibler* /s/ Paul H. LeFevre, Jr. 4/28/99
Kenneth R. Leibler Paul H. LeFevre, Jr. Date
Director and Chairman of the Board Acting President
(Principal Executive Officer)
/s/ Frederick Lippitt * /s/ Bernhard M. Koch*
Frederick Lippitt Bernhard M. Koch
Director Senior Vice President
(Chief Financial Officer)
/s/ Robert C. Nyman*
Robert C. Nyman
Director
*BY: /s/ James J. Klopper April 28, 1999
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
incorporated by reference to Post-Effective Amendment No. 10 to the
Registration Statement (File No. 333-1043, 811-7543) filed on or about
April 24, 1998.
<PAGE>
EXHIBIT INDEX
Item Page
24(b)(10) Consents of Independent Auditors............
EXHIBIT 24(b)(10)
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
January 28, 1999, with respect to the consolidated financial statements of
Keyport Life Insurance Company, and March 12, 1999, with respect to the
financial statements of Keyport Life Insurance Company - KMA Variable
Account, included in this Post-Effective Amendment No. 38 to the
Registration Statement (Form N-4, No. 2-66388).
Boston, Massachusetts /s/Ernst & Young LLP
April 26, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 735,667,611
<INVESTMENTS-AT-VALUE> 937,111,204
<RECEIVABLES> 0
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<NET-CHANGE-IN-ASSETS> (167,804,705)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
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<PER-SHARE-NII> 0
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<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
