<PAGE>
PROSPECTUS
MAY 1, 1998
COMPASS I
The individual flexible payment deferred annuity contracts (the "Contracts")
offered by this Prospectus are designed for use in connection with retirement
plans which meet the requirements of Sections 401 or 408 (excluding Section
408(b)) of the Internal Revenue Code. No Contracts have been issued for use in
connection with deferred compensation plans established pursuant to Section 457
of the Code since May 1, 1990. The Contracts are issued by Sun Life Assurance
Company of Canada (U.S.) (the "Company"). The Company's Annuity Service Mailing
Address: is c/o Retirement Products and Services, P.O. Box 1024, Boston,
Massachusetts 02103.
The Owner of a Contract may elect to have Contract values accumulated on a
fixed basis in the Fixed Account (which is part of the Company's general account
and pays interest at a guaranteed fixed rate) or on a variable basis in Sun Life
of Canada (U.S.) Variable Account C (the "Variable Account"), a separate account
of the Company, or divided among the Fixed Account and the Variable Account. The
Variable Account uses its assets to purchase, at net asset value, Class A shares
in one or more of the following mutual funds selected by the Owner from among a
group of mutual funds advised by Massachusetts Financial Services Company, an
affiliate of the Company: MFS-Registered Trademark- Money Market Fund;
MFS-Registered Trademark- Government Money Market Fund;
MFS-Registered Trademark- World Governments Fund; MFS-Registered Trademark- Bond
Fund; MFS-Registered Trademark- High Income Fund; MFS-Registered Trademark-
Total Return Fund; Massachusetts Investors Trust; MFS-Registered Trademark-
Research Fund; Massachusetts Investors Growth Stock Fund;
MFS-Registered Trademark- Growth Opportunities Fund; and
MFS-Registered Trademark- Emerging Growth Fund (the "Mutual Fund(s)" or the
"Fund(s)"). If the Owner elects certain forms of an annuity as a retirement
benefit, payments may be funded from either the Fixed Account or the Variable
Account or from both of the Accounts. Contract values allocated to the Variable
Account and annuity payments elected on a variable basis will vary to reflect
the investment performance of the Funds selected by the Owner.
This Prospectus sets forth information about the Contracts and the Variable
Account that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1998 which is incorporated herein by reference. The Statement of
Additional Information is available from the Company without charge upon written
request to the above address or by telephoning (800) 752-7215. The Table of
Contents for the Statement of Additional Information is shown on page 19 of this
Prospectus.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE MUTUAL FUNDS. YOU SHOULD RETAIN THESE PROSPECTUSES FOR FUTURE REFERENCE.
* ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT
ITS ANNUITY SERVICE MAILING ADDRESS, C/O RETIREMENT PRODUCTS AND SERVICES,
P.O. BOX 1024, BOSTON, MASSACHUSETTS 02103.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 2
Synopsis 3
Expense Summary 4
Condensed Financial Information--Accumulation Unit Values 6
Financial Statements 6
A Word About the Company, the Variable Account and the Funds 7
Purchase Payments and Contract Values During Accumulation Period 9
Cash Withdrawals 10
Death Benefit 11
Contract Charges 12
Annuity Provisions 14
Other Contract Provisions 15
Federal Tax Status 17
Distribution of the Contracts 18
Legal Proceedings 19
Owner Inquiries 19
Table of Contents for Statement of Additional Information 19
</TABLE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
Accumulation Account: An account established for the Contract to which net
Purchase Payments are credited in the form of Accumulation Units.
Accumulation Unit: A unit of measure used in the calculation of the value of
the Accumulation Account. There are two types of Accumulation Units: Variable
Accumulation Units and Fixed Accumulation Units.
Annuitant: The person or persons named in the Contract and on whose life the
first annuity payment is to be made.
Annuity Commencement Date: The date on which the first annuity payment is to be
made.
Annuity Unit: A unit of measure used in the calculation of the amount of the
second and each subsequent Variable Annuity payment.
Beneficiary: The person who has the right to the death benefit set forth in the
Contract.
Contract Years and Contract Anniversaries: The first Contract Year shall be the
period of 12 months plus a part of a month as measured from the date the
Contract is issued to the first day of the calendar month which follows the
calendar month of issue. All Contract Years and Anniversaries thereafter shall
be 12 month periods based upon such first day of the calendar month which
follows the calendar month of issue.
Due Proof of Death: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
Fixed Account: The Fixed Account consists of all assets of the Company other
than those allocated to separate accounts of the Company.
Fixed Annuity: An annuity with payments which do not vary as to dollar amount.
Owner: The person, persons or entity entitled to the ownership rights stated in
the Contract and in whose name or names the Contract is issued. The Owner must
be the trustee or custodian of a retirement plan which meets the requirements of
Section 401 or Section 408 (excluding Section 408(b)) of the Internal Revenue
Code.
2
<PAGE>
Payee: The recipient of payments under the Contract. The term may include an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
Purchase Payment (Payment): An amount paid to the Company by the Owner or on
the Owner's behalf as consideration for the benefits provided by the Contract.
Sub-Account: That portion of the Variable Account which invests in shares of a
specific Mutual Fund.
Valuation Period: The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of these
values.
Variable Annuity: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
SYNOPSIS
Purchase Payments are allocated to Sub-Accounts of the Variable Account or
to the Fixed Account or to both Sub-Accounts and the Fixed Account as selected
by the Owner. Purchase Payments must total at least $300 for the first Contract
Year and each Purchase Payment must be at least $25 (see "Purchase Payments" on
page 9). Subject to certain conditions, during the accumulation period the Owner
may, without charge, transfer amounts among the Sub-Accounts and between the
Sub-Accounts and the Fixed Account (see "Transfers/Conversions of Accumulation
Units" on page 10).
No sales charge is deducted from Purchase Payments; however, if any portion
of a Contract's Accumulation Account is surrendered the Company will, with
certain exceptions, deduct a 5% withdrawal charge (contingent deferred sales
charge) to cover certain expenses relating to the sale of the Contracts. A
portion of the Accumulation Account may be withdrawn each year without the
assessment of a withdrawal charge and after a Purchase Payment has been held by
the Company for five years it may be withdrawn without charge. Also, no
withdrawal charge is assessed upon annuitization or upon the
transfers/conversions described above (see "Cash Withdrawals" and "Withdrawal
Charges" on pages 10 and 13, respectively).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable under the Contract except as may be provided under the annuity
option elected (see "Death Benefit" on page 11).
On each Contract Anniversary and on surrender of the Contract for full
value, the Company will deduct a contract maintenance charge of $25 from the
Accumulation Account to reimburse it for administrative expenses related to the
issuance and maintenance of the Contracts. After the Annuity Commencement Date
the charge will be deducted pro rata from each annuity payment made during the
year (see "Contract Maintenance Charge" on page 12).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period, equal to an annual rate of 1.30% of the daily net assets
of the Variable Account, for mortality and expense risks assumed by the Company
(see "Mortality and Expense Risk Charge" on page 12).
Premium taxes payable to any governmental entity will be charged against the
Contracts (see "Premium Taxes" on page 13).
Annuity payments will begin on the Annuity Commencement Date. The Owner
selects the Annuity Commencement Date, frequency of payments, and the annuity
option (see "Annuity Provisions" on page 14).
If the Owner is not satisfied with the Contract it may be returned to the
Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Owner. When the Company receives the returned Contract it will
be cancelled and the full amount of any Purchase Payment(s) received by the
Company will be refunded.
ANY PERSON CONTEMPLATING THE PURCHASE OF A CONTRACT SHOULD CONSULT A
QUALIFIED TAX ADVISER.
3
<PAGE>
EXPENSE SUMMARY
The purpose of the following table is to help Owners and prospective
purchasers to understand the costs and expenses that are borne, directly and
indirectly, by Contract Owners. The table reflects expenses of the Variable
Account as well as of the Funds. The expense information for certain Funds has
been restated to reflect current fees. The information set forth should be
considered together with the narrative provided under the heading "Contract
Charges" in this Prospectus, and with the Funds' prospectuses. In addition to
the expenses listed below, premium taxes may be applicable.
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES MCM MCG MWG MFB MFH MTR MIT MFR MIG
- ------------------------------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases........................ 0 0 0 0 0 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn)(1)
Years Payment in Account
0-5................................................ 5% 5% 5% 5% 5% 5% 5% 5% 5%
more than 5........................................ 0% 0% 0% 0% 0% 0% 0% 0% 0%
Exchange Fee........................................... 0 0 0 0 0 0 0 0 0
ANNUAL CONTRACT FEE
- ------------------------------------------------------- -----------------$25 per Contract -----------------
-----------------$25 per Contract -----------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- -------------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees........................ 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
Other Account Fees and Expenses........................ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses................. 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- -------------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees........................................ 0.48% 0.45% 0.75% 0.40% 0.46% 0.36% 0.22% 0.34% 0.28%
Other Expenses(2)...................................... 0.32% 0.42% 0.60% 0.64% 0.53% 0.59% 0.52% 0.62% 0.53%
Total Fund Annual Expenses............................. 0.80% 0.87% 1.35% 1.04% 0.99% 0.95% 0.74% 0.96% 0.81%
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES MGO MEG
- ------------------------------------------------------- ----- -----
<S> <C> <C>
Sales Load Imposed on Purchases........................ 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn)(1)
Years Payment in Account
0-5................................................ 5% 5%
more than 5........................................ 0% 0%
Exchange Fee........................................... 0 0
ANNUAL CONTRACT FEE
- -------------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- -------------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees........................ 1.30% 1.30%
Other Account Fees and Expenses........................ 0.00% 0.00%
Total Separate Account Annual Expenses................. 1.30% 1.30%
FUND ANNUAL EXPENSES
- -------------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees........................................ 0.42% 0.71%
Other Expenses(2)...................................... 0.38% 0.51%
Total Fund Annual Expenses............................. 0.80% 1.22%
</TABLE>
- ------------
(1) A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment
has been held by the Company for five years it may be withdrawn free of any
withdrawal charge.
(2) Other expenses for all of the Funds except MCM and MCG include annualized
fees assessed under Distribution Plans adopted pursuant to Section 12(b) of
the Investment Company Act of 1940 and Rule 12b-1 thereunder (see the Funds'
prospectuses). The Distribution Plans commenced on the following dates: MTR
and MWG, October 1, 1989, MIT, January 2, 1991 and MFB, MFH, MFR, MIG, MGO
and MEG, March 1, 1991.
4
<PAGE>
EXAMPLE
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MCM..................................... $67 $114 $163 $253
MCG..................................... $68 $116 $167 $261
MWG..................................... $73 $130 $190 $308
MFB..................................... $70 $121 $175 $278
MFH..................................... $69 $120 $173 $273
MTR..................................... $69 $118 $171 $269
MIT..................................... $67 $112 $160 $248
MFR..................................... $69 $119 $171 $270
MIG..................................... $67 $114 $164 $255
MGO..................................... $67 $114 $163 $253
MEG..................................... $72 $126 $184 $295
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MCM..................................... $22 $ 69 $118 $253
MCG..................................... $23 $ 71 $122 $261
MWG..................................... $28 $ 85 $145 $308
MFB..................................... $25 $ 76 $130 $278
MFH..................................... $24 $ 75 $128 $273
MTR..................................... $24 $ 73 $126 $269
MIT..................................... $22 $ 67 $115 $248
MFR..................................... $24 $ 74 $126 $270
MIG..................................... $22 $ 69 $119 $255
MGO..................................... $22 $ 69 $118 $253
MEG..................................... $27 $ 81 $139 $295
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
5
<PAGE>
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing in the Statement of Additional
Information, all of which has been audited by Deloitte & Touche LLP, independent
certified public accountants.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MIT
Unit Value:
Beginning of
period $ 18.6638 $ 20.3467 $ 27.3399 $ 26.9745 $ 34.0429 $ 36.0967 $ 39.2065 $ 38.3097 $ 52.6746 $ 65.4965
End of period $ 20.3467 $ 27.3399 $ 26.9745 $ 34.0429 $ 36.0967 $ 39.2065 $ 38.3097 $ 52.6746 $ 65.4965 $ 85.1160
Units outstanding
end of period: 386,881 367,624 366,752 316,483 299,263 263,601 233,419 228,398 211,924 191,532
MIG
Unit Value:
Beginning of
period $ 15.4097 $ 15.8380 $ 21.2145 $ 19.9645 $ 29.1252 $ 30.6143 $ 34.5944 $ 31.8549 $ 40.3897 $ 48.9432
End of period $ 15.8380 $ 21.2145 $ 19.9645 $ 29.1252 $ 30.6143 $ 34.5944 $ 31.8549 $ 40.3897 $ 48.9432 $ 71.6206
Units outstanding
end of period 317,516 292,277 264,246 234,979 237,389 210,268 191,666 183,386 137,226 116,839
MTR
Unit Value:
Beginning of
period $ 19.5387 $ 22.1974 $ 26.9600 $ 26.0022 $ 31.2350 $ 33.9389 $ 38.5828 $ 37.0619 $ 46.4569 $ 52.6180
End of period $ 22.1974 $ 26.9600 $ 26.0022 $ 31.2350 $ 33.9389 $ 38.5828 $ 37.0619 $ 46.4569 $ 52.6180 $ 62.6622
Units outstanding
end of period 985,669 1,022,129 1,028,444 761,746 699,832 646,262 580,826 502,308 445,574 376,845
MGO
Unit Value:
Beginning of
period $ 14.5019 $ 15.6008 $ 19.7926 $ 18.6788 $ 22.6160 $ 24.0443 $ 27.4921 $ 26.0211 $ 34.5473 $ 41.5395
End of period $ 14.5019 $ 15.6008 $ 19.7926 $ 18.6788 $ 22.6160 $ 24.4921 $ 26.0211 $ 34.5473 $ 41.5395 $ 50.5718
Units outstanding
end of period 2,727,497 2,184,592 1,827,215 1,517,720 1,303,035 1,126,904 952,138 835,555 752,698 682,668
MFR
Unit Value:
Beginning of
period $ 16.4422 $ 17.8986 $ 22.2941 $ 20.6700 $ 27.1037 $ 29.7380 $ 35.7429 $ 35.2820 $ 48.2543 $ 59.3112
End of period $ 17.8986 $ 22.2941 $ 20.6700 $ 27.1037 $ 29.7380 $ 35.7429 $ 35.2820 $ 48.2543 $ 59.3112 $ 70.5612
Units outstanding
end of period 532,334 435,924 340,420 285,749 253,146 232,537 189,988 158,916 143,843 129,195
MFB
Unit Value:
Beginning of
period $ 17.0748 $ 18.2668 $ 20.4642 $ 21.4953 $ 25.2705 $ 26.5208 $ 29.8082 $ 27.9595 $ 33.5161 $ 34.3871
End of period $ 18.2668 $ 20.4642 $ 21.4953 $ 25.2705 $ 26.5208 $ 29.8082 $ 27.9595 $ 33.5161 $ 34.3871 $ 37.4559
Units outstanding
end of period 648,976 689,054 577,242 461,410 421,711 368,774 233,449 226,571 186,637 158,314
MCM
Unit Value:
Beginning of
period $ 13.7848 $ 14.5714 $ 15.6562 $ 16.6504 $ 17.3549 $ 17.6517 $ 17.8424 $ 18.2359 $ 18.9505 $ 19.5956
End of period $ 14.5714 $ 15.6562 $ 16.6504 $ 17.3549 $ 17.6517 $ 17.8424 $ 18.2359 $ 18.9505 $ 19.5956 $ 20.2949
Units outstanding
end of period 2,081,739 1,661,689 1,574,435 1,090,472 646,162 512,329 480,850 371,369 401,141 301,313
MCG
Unit Value:
Beginning of
period $ 13.5212 $ 14.2436 $ 15.2737 $ 16.1947 $ 16.8311 $ 17.1053 $ 17.2531 $ 17.5882 $ 18.2642 $ 18.8643
End of period $ 14.2436 $ 15.2737 $ 16.1947 $ 16.8311 $ 17.1053 $ 17.2531 $ 17.5882 $ 18.2642 $ 18.8643 $ 19.4875
Units outstanding
end of period 740,766 545,293 538,594 375,155 218,074 162,009 139,248 108,206 73,345 68,686
MFH
Unit Value:
Beginning of
period $ 17.4636 $ 19.3661 $ 18.7620 $ 15.1874 $ 22.6883 $ 26.2356 $ 30.9007 $ 29.6848 $ 34.3557 $ 38.2245
End of period $ 19.3661 $ 18.7620 $ 15.1874 $ 22.6883 $ 26.2356 $ 30.9007 $ 29.6848 $ 34.3557 $ 38.2245 $ 42.8235
Units outstanding
end of period 1,428,696 1,079,466 624,184 515,396 450,376 408,637 339,549 264,391 229,079 200,252
MWG
Unit Value:
Beginning of
period $ 21.0147 $ 21.6384 $ 22.9549 $ 26.7105 $ 29.9468 $ 29.9680 $ 34.9430 $ 32.3034 $ 36.8194 $ 38.3007
End of period $ 21.6384 $ 22.9549 $ 26.7105 $ 29.9468 $ 29.9680 $ 34.9430 $ 32.3034 $ 36.8194 $ 38.3007 $ 37.9444
Units outstanding
end of period 341,247 248,462 227,935 200,763 157,841 125,704 101,661 83,177 70,278 55,822
MEG
Unit Value:
Beginning of
period $ 11.3094 $ 12.8148 $ 15.9033 $ 13.8995 $ 23.3793 $ 24.8430 $ 31.1131 $ 32.2107 $ 44.8831 $ 50.8597
End of period $ 12.8148 $ 15.9033 $ 13.8995 $ 23.3793 $ 24.8430 $ 31.1131 $ 32.2107 $ 44.8831 $ 50.8597 $ 60.5646
Units outstanding
end of period 1,012,310 830,401 585,909 511,153 439,127 405,542 390,605 372,726 321,077 280,589
</TABLE>
FINANCIAL STATEMENTS
Financial Statements of the Variable Account and the Company are included in
the Statement of Additional Information.
6
<PAGE>
A WORD ABOUT THE COMPANY, THE VARIABLE ACCOUNT AND THE FUNDS
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
The Company is an indirect wholly-owned subsidiary of Sun Life Assurance
Company of Canada, 150 King Street West, Toronto, Ontario, Canada M5H 1J9, a
mutual life insurance company incorporated in Canada in 1865.
THE VARIABLE ACCOUNT
Sun Life of Canada (U.S.) Variable Account C (the "Variable Account") was
established as a separate account of the Company on March 31, 1982 pursuant to a
resolution of its Board of Directors. The Variable Account meets the definition
of a separate account under the federal securities laws and is registered with
the Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940. Under Delaware insurance law and the Contract,
the income, gains or losses of the Variable Account are credited to or charged
against the assets of the Variable Account without regard to the other income,
gains or losses of the Company. Although the assets maintained in the Variable
Account will not be charged with any liabilities arising out of any other
business conducted by the Company, all obligations arising under the Contracts,
including the promise to make annuity payments, are general corporate
obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of one of the Funds described below.
THE MUTUAL FUNDS
All amounts allocated to the Variable Account will be used to purchase Fund
shares as designated by the Owner at their net asset value. Any and all
distributions made by the Funds with respect to the shares held by the Variable
Account will be reinvested to purchase additional shares at their net asset
value. Deductions from the Variable Account for cash withdrawals, annuity
payments, death benefits, administrative charges, contract charges against the
assets of the Variable Account for the assumption of mortality and expense risks
and any applicable taxes will, in effect, be made by redeeming the number of
Fund shares at their net asset value equal in total value to the amount to be
deducted. The Variable Account will be fully invested in Fund shares at all
times.
A summary of the investment objectives of each Fund is contained in the
description below. More detailed information may be found in the current
prospectuses of the Funds and their Statements of Additional Information. A
prospectus for each Fund must accompany this Prospectus and should be read in
conjunction herewith.
MFS-REGISTERED TRADEMARK- MONEY MARKET FUND ("MCM")
AND MFS-REGISTERED TRADEMARK- GOVERNMENT MONEY MARKET FUND ("MCG")
MCM and MCG seek as high a level of current income as is considered
consistent with the preservation of capital and liquidity. MCM and MCG are
separate series of MFS Series Trust IV. Each represents a separate diversified
portfolio with separate investment policies.
MCM invests primarily in money market instruments, including U.S. Government
securities and repurchase agreements collateralized by such securities,
obligations of the larger banks, prime commercial paper and high quality
corporate obligations.
MCG invests only in securities issued or guaranteed by the U.S. Treasury or
agencies or instrumentalities of the U.S. Government (repurchase agreements
collateralized by such securities).
7
<PAGE>
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND ("MWG")
MWG will seek income and capital appreciation. The Fund invests, under
normal conditions, at least 65% of its total assets in debt securities issued or
guaranteed by a U.S. or foreign governmental issuer and may invest up to 35% in
debt securities issued by nongovernmental issuers.
MFS-REGISTERED TRADEMARK- BOND FUND ("MFB")
MFB will invest a major portion of its assets in "investment grade" debt
securities. Its primary investment objective is to provide as high a level of
current income as is believed to be consistent with prudent investment risk. A
secondary objective is to protect shareholders' capital.
MFS-REGISTERED TRADEMARK- HIGH INCOME FUND ("MFH")
MFH will seek high current income by investing primarily in a diversified
portfolio of fixed income securities, some of which may involve equity features.
Capital growth, if any, is a consideration incidental to the investment
objective of high current income. Securities offering the high current income
sought by the Fund (commonly known as "junk bonds") are ordinarily in the lower
rating categories of recognized rating agencies or are unrated and generally
involve greater volatility of price and risk of principal and income than
securities in the higher rating categories. The Fund may invest up to 100% of
its net assets in such securities. Accordingly, an investment in the Fund may
not be appropriate for all investors.
MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND ("MTR")
MTR will seek to obtain above-average income (compared to a portfolio
invested entirely in equity securities) consistent with prudent employment of
capital. While current income is the primary objective, the Fund believes that
there also should be a reasonable opportunity for growth of capital and income,
since many securities offering a better-than-average yield may also possess
growth potential. Under normal market conditions, MTR will invest at least 25%
of its assets in fixed income securities and at least 40% but no more than 75%
of its assets in equity securities.
MASSACHUSETTS INVESTORS TRUST ("MIT")
MIT will seek to provide reasonable current income and long-term growth of
capital and income. The Fund is believed to constitute a conservative medium for
that portion of an investor's capital which the investor wishes to have invested
in securities considered to be of high or improving investment quality. The
assets of the Fund are normally invested in equity securities. However, the Fund
may hold its assets in cash or invest in commercial paper, repurchase agreements
or other forms of debt securities either to provide reserves for future
purchases of common stock or as a defensive measure in certain economic
environments.
MFS-REGISTERED TRADEMARK- RESEARCH FUND ("MFR")
MFR will seek to provide long-term growth of capital and future income by
investing a substantial proportion of its assets in the common stocks or
securities convertible into common stocks of companies believed to possess
better than average prospects for long-term growth. A smaller proportion of the
assets may be invested in bonds, short-term obligations, preferred stocks or
common stocks whose principal characteristic is income production rather than
growth. Such securities may also offer opportunities for growth of capital as
well as income.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND ("MIG")
MIG will seek to provide long-term growth of capital and future income
rather than current income by investing (except for working cash balances) in
the common stocks, or securities convertible into common stocks, of companies
believed to possess better-than-average prospects for long-term growth. Emphasis
is placed on the selection of progressive, well-managed companies.
MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND ("MGO")
MGO (formerly Massachusetts Capital Development Fund ("MCD")) will seek
growth of capital. Dividend income, if any, is a consideration incidental to the
objective of growth of capital. The Fund maintains a
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flexible approach towards types of companies as well as types of securities,
depending upon the economic environment and the relative attractiveness of the
various securities markets. Generally emphasis is placed upon companies believed
to possess above average growth opportunities.
MFS-REGISTERED TRADEMARK- EMERGING GROWTH FUND ("MEG")
MEG will seek long-term growth of capital by investing primarily in common
stocks of companies that are early in their life cycle, but which have the
potential to become major enterprises (i.e. emerging growth companies).
Investments in emerging growth companies are generally more volatile in price
and involve higher risk than investments in more established companies.
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. Purchase Payments may be made annually, semi-annually,
quarterly, monthly or on any other frequency acceptable to the Company. Unless
the Contract has been surrendered, Purchase Payments may be made at any time
during the life of the Annuitant and before the Annuity Commencement Date. The
amount of Purchase Payments may vary; however, Purchase Payments must total at
least $300 for the first Contract Year, and each Purchase Payment must be at
least $25. In addition, the prior approval of the Company is required before it
will accept a Purchase Payment which would cause the value of a Contract's
Accumulation Account to exceed $1,000,000. If the value of a Contract's
Accumulation Account exceeds $1,000,000, no additional Purchase Payments will be
accepted without prior approval.
Completed application forms, together with the initial Purchase Payment, are
forwarded to the Company. Upon acceptance, the Contract is issued to the Owner
and the initial Purchase Payment is credited to the Contract in the form of
Accumulation Units. The initial Purchase Payment must be applied within two
business days of receipt of a completed application. The Company may retain the
Purchase Payment for up to five business days while attempting to complete an
incomplete application. If the application cannot be made complete within five
business days, the applicant will be informed of the reasons for the delay and
the Purchase Payment will be returned immediately unless the applicant
specifically consents to the Company's retaining the Purchase Payment until the
application is made complete. Thereafter, the Purchase Payment will be applied
within two business days. All subsequent Purchase Payments must be applied using
the Accumulation Unit values for the Valuation Period during which the Purchase
Payment is received by the Company.
The Company will establish an Accumulation Account for each Contract. The
Contract's Accumulation Account value for any Valuation Period is equal to the
variable accumulation value, if any, plus the fixed accumulation value, if any,
for that Valuation Period. The variable accumulation value is equal to the sum
of the value of all Variable Accumulation Units credited to the Contract's
Accumulation Account.
Each net Purchase Payment will be allocated to either the Fixed Account (see
Appendix A to the Statement of Additional Information for a description of the
Fixed Account) or to Sub-Accounts of the Variable Account or to both
Sub-Accounts and the Fixed Account in accordance with the allocation factors
specified by the Owner in the application or as subsequently changed. Upon
receipt of a Purchase Payment, all or that portion, if any, of the net Purchase
Payment to be allocated to the Sub-Accounts will be credited to the Accumulation
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is received.
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such
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subsequent Valuation Period. The Variable Accumulation Unit value for each
Sub-Account for any Valuation Period is determined at the end of the particular
Valuation Period and may increase, decrease or remain constant from Valuation
Period to Valuation Period, depending upon the investment performance of the
Fund in which the Sub-Account is invested, and the expenses and charges deducted
from the Variable Account.
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Fund share held in the Sub-Account
determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by the Fund issuing the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid, or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present
law);
(b) is the net asset value of a Fund share held in the Sub-Account
determined as of the end of the preceding Valuation Period; and
(c) is the risk charge factor determined by the Company for the Valuation
Period to reflect the charge for assuming the mortality and expense
risks.
TRANSFERS/CONVERSIONS OF ACCUMULATION UNITS
During the accumulation period the Owner may convert the value of a
designated number of Fixed Accumulation Units then credited to a Contract's
Accumulation Account into Variable Accumulation Units of particular Sub-Accounts
having an equal aggregate value, or convert the value of a designated number of
Variable Accumulation Units into other Variable Accumulation Units and/or Fixed
Accumulation Units having an equal aggregate value. These transfers/conversions
are subject to the following conditions: (1) conversions involving Fixed
Accumulation Units may be made only during the 45 day period before and the 45
day period after each Contract Anniversary; (2) not more than 12 conversions may
be made in any Contract Year; and (3) the value of Accumulation Units converted
may not be less than $1,000 unless all of the Fixed Accumulation Units or all of
the Variable Accumulation Units of a particular Sub-Account credited to the
Accumulation Account are being converted. In addition, these
transfers/conversions shall be subject to such terms and conditions as may be
imposed by each Fund. The conversion will be made using the Accumulation Unit
values for the Valuation Period during which the request for conversion is
received by the Company. Conversions may be made pursuant to telephoned
instructions.
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Owner may elect to receive a cash withdrawal payment from the
Company. Any such election shall specify the amount of the withdrawal and will
be effective on the date that it is received by the Company. For withdrawals in
excess of $5,000 the Company may require a signature guarantee. The withdrawal
will result in the cancellation of Accumulation Units with an aggregate value
equal to the dollar amount of the cash withdrawal payment plus, if applicable,
the contract maintenance charge and any withdrawal charge. Unless
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instructed to the contrary, the Company will cancel Fixed Accumulation Units and
Variable Accumulation Units of the particular Sub-Accounts on a pro rata basis
reflecting the existing composition of the Contract's Accumulation Account. If a
partial withdrawal is requested which would leave an Accumulation Account value
of less than the contract maintenance charge, then such partial withdrawal will
be treated as a full surrender. Under certain conditions, the Company will
assess a withdrawal charge if a cash withdrawal payment is made. The amount of
any withdrawal charge and the conditions under which the charge will apply are
discussed under "Withdrawal Charges". Any cash withdrawal payment will be paid
within seven days from the date the election becomes effective, except as the
Company may be permitted to defer such payment in accordance with the Investment
Company Act of 1940. Deferment is currently permissible only (1) for any period
(a) during which the New York Stock Exchange is closed other than customary
week-end and holiday closings, or (b) during which trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission,
(2) for any period during which an emergency exists as a result of which (a)
disposal of securities held by the Funds is not reasonably practicable, or (b)
it is not reasonably practicable to determine the value of the net assets of the
Funds, or (3) for such other periods as the Securities and Exchange Commission
may by order permit for the protection of security holders.
Since the Contracts will be issued only in connection with retirement plans
which meet the requirements of Section 401 or Section 408 (excluding Section
408(b)) of the Internal Revenue Code, reference should be made to the terms of
the particular retirement plan for any limitations or restrictions on cash
withdrawals. The tax consequences of a cash withdrawal payment should be
carefully considered (see "Federal Tax Status").
DEATH BENEFIT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable under the Contract except as may be provided under the annuity
option elected.
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Accumulation Account applied
under one or more annuity options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death of
the Annuitant. If no election of a method of settlement of the death benefit by
the Owner is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a cash payment; or (b)
to have the value of the Accumulation Account applied under one or more of the
annuity options (on the Annuity Commencement Date described under "Payment of
Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination
of both for the Beneficiary as Payee. If an election by the Beneficiary is not
received by the Company within 60 days following the date Due Proof of Death of
the Annuitant and any required release or consent is received, the Beneficiary
will be deemed to have elected a cash payment as of the last day of the 60 day
period.
In all cases, no Owner or Beneficiary shall be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any limitations or restrictions on the election
of a method of settlement and payment of the death benefit.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 under the
circumstances described under "Cash Withdrawals." If the death benefit is to be
paid in one sum to the Owner, or to the estate of the deceased Annuitant,
payment will be made within seven days of the date Due Proof of Death of the
Annuitant, and the Beneficiary is received. If settlement under one or more of
the annuity options is elected by the Owner, the Annuity Commencement Date will
be the first day of the second calendar month following receipt of Due Proof of
Death of the Annuitant and the Beneficiary, if any. In the
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case of an election by the Beneficiary, the Annuity Commencement Date will be
the first day of the second calendar month following the effective date of the
election. An Annuity Commencement Date later than that described above may be
elected by an Owner or Beneficiary provided that such date is (a) the first day
of a calendar month, and (b) not later than the first day of the first month
following the 85th birthday of the Beneficiary or other Payee designated by the
Owner, as the case may be, unless otherwise restricted by the particular
retirement plan or by applicable law (see "Annuity Commencement Date").
AMOUNT OF DEATH BENEFIT
The death benefit is equal to the greatest of: (1) the value of the
Contract's Accumulation Account, (2) the total Purchase Payments made under the
Contract reduced by all withdrawals or (3) the value of the Contract's
Accumulation Account on the fifth (5th) Contract Anniversary, adjusted for any
Purchase Payments or cash withdrawal payments made and contract charges assessed
subsequent to such fifth (5th) Contract Anniversary. The Accumulation Unit
values used in determining the amount of the death benefit under (1) above will
be the values for the Valuation Period during which Due Proof of Death of the
Annuitant is received by the Company if settlement is elected by the Owner under
one or more of the annuity options or, if no election by the Owner is in effect,
either the values for the Valuation Period during which an election by the
Beneficiary is effective or the values for the Valuation Period during which Due
Proof of Death of both the Annuitant and the designated Beneficiary is received
by the Company if the amount of the death benefit is to be paid in one sum to
the deceased Owner/Annuitant's estate.
CONTRACT CHARGES
Contract charges may be assessed under the Contracts as follows:
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary and on surrender of the Contract for full value
on other than the Contract Anniversary, the Company deducts from the
Accumulation Account a contract maintenance charge of $25 to reimburse it for
administrative expenses relating to the issuance and maintenance of the
Contract. The contract maintenance charge will be deducted in equal amounts from
the Fixed Account and each Sub-Account in which the Owner has Accumulation Units
at the time of such deduction. On the Annuity Commencement Date the value of the
Contract's Accumulation Account will be reduced by a proportionate amount of the
contract maintenance charge to reflect the time elapsed between the last
Contract Anniversary and the day before the Annuity Commencement Date. After the
Annuity Commencement Date, the contract maintenance charge will be deducted pro
rata from each annuity payment made during the year.
The amount of the contract maintenance charge may not be increased by the
Company. The Company reserves the right to reduce the amount of the contract
maintenance charge for groups of participants with individual Contracts under an
employer's retirement program in situations in which the size of the group and
established administrative efficiencies contribute to a reduction in
administrative expenses. The Company does not expect to make a profit from the
contract maintenance charge.
MORTALITY AND EXPENSE RISK CHARGE
The mortality and expense risks assumed by the Company are the risks that
Annuitants may live for a longer period of time than estimated by the Company in
establishing the guaranteed annuity rates incorporated into the Contract, and
the risk that administrative charges assessed under the Contracts may be
insufficient to cover actual administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the accumulation period
and after annuity payments begin at an effective annual rate of 1.30%. The rate
of this deduction may be changed annually but in no event may it exceed 1.30% on
an annual basis. If the deduction is insufficient to cover the actual cost of
the mortality and expense risk undertaking, the Company will bear the loss.
Conversely, if the deduction proves more than sufficient, the excess will be
profit to the Company and would be available for any proper corporate purpose
including, among other things, payment of distribution expenses. If the
withdrawal charges described below
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prove insufficient to cover expenses associated with the distribution of the
Contracts, the deficiency will be met from the Company's general corporate
funds, which may include amounts derived from the mortality and expense risk
charges.
WITHDRAWAL CHARGES
No sales charges are deducted from Purchase Payments. However, a withdrawal
charge (contingent deferred sales charge), when applicable, will be assessed to
reimburse the Company for certain expenses relating to the distribution of the
Contracts, including commissions, costs of preparation of sales literature and
other promotional costs and acquisition expenses.
A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment has
been held by the Company for five years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization or upon the transfer of Accumulation Account values among the
Sub-Accounts or between the Sub-Accounts and the Fixed Account.
All other full or partial withdrawals are subject to a withdrawal charge
equal to 5% of the amount withdrawn which is subject to the charge. The charge
will be applied as follows:
(1) Old Payments, new Payments and accumulated value: With respect to a
particular Contract Year, "new Payments" are those Payments made in
that Contract Year or in the four immediately preceding Contract Years; "old
Payments" are those Payments not defined as new Payments; and "accumulated
value" is the value of the Accumulation Account less the sum of old and new
Payments.
(2) Order of liquidation: To effect a full surrender or partial
withdrawal, the oldest previously unliquidated Payment will be deemed
to have been liquidated first, then the next oldest, and so forth. Once all
old and new Payments have been withdrawn, additional amounts withdrawn will
be attributed to accumulated value.
(3) Maximum free withdrawal amount: The maximum amount that can be
withdrawn without a withdrawal charge in a Contract Year is equal to
the sum of (a) any old Payments not already liquidated; and (b) 10% of any
new Payments, irrespective of whether these new Payments have been
liquidated.
(4) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge will be the excess, if any, of (a) amounts
liquidated from old and new Payments over (b) the remaining maximum free
withdrawal amount at the time of the withdrawal.
In no event shall the aggregate withdrawal charges assessed against a
Contract exceed 5% of the aggregate Purchase Payments made under the Contract
(see Appendix C in the Statement of Additional Information for examples of
withdrawals and withdrawal charges).
PREMIUM TAXES
A deduction, when applicable, is made for premium taxes or similar state or
local taxes. The amount of such applicable tax varies by jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions,
there is no premium tax at all. The Company believes that such premium taxes or
similar taxes currently range from 0% to 3.5%. For more complete information, a
tax adviser should be consulted. It is currently the Company's policy to deduct
the tax from the amount applied to provide an annuity at the time annuity
payments commence; however, the Company reserves the right to deduct such taxes
on or after the date they are incurred.
CHARGES OF THE FUNDS
The Variable Account purchases shares of the Funds at net asset value. The
net asset value of these shares reflects investment management fees, Rule 12b-1
(i.e. distribution plan) fees and expenses (including, but not limited to,
compensation of trustees/directors, governmental expenses, interest charges,
taxes, fees of auditors, legal counsel, transfer agent and custodian,
transactional expenses and brokerage commissions) already deducted from the
assets of the Funds. These fees and expenses are more fully described in the
Funds' prospectuses and statements of additional information.
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ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments under a Contract will begin on the Annuity Commencement
Date which is selected by the Owner at the time the Contract is applied for.
This date may be changed by the Owner as provided in the Contract; however, the
new Annuity Commencement Date must be the first day of a month and not later
than the first day of the first month following the Annuitant's 85th birthday,
unless otherwise limited or restricted by the particular retirement plan or by
applicable law. In most situations, current law requires that the Annuity
Commencement Date be no later than April 1 following the year the Annuitant
reaches age 70 1/2 and the particular retirement plan may impose additional
limitations. The Annuity Commencement Date may also be changed by an election of
an annuity option as described under "Death Benefit".
On the Annuity Commencement Date the Contract's Accumulation Account will be
cancelled and its adjusted value will be applied to provide an annuity. The
adjusted value will be equal to the value of the Accumulation Account for the
Valuation Period which ends immediately preceding the Annuity Commencement Date,
reduced by any applicable premium or similar taxes and a proportionate amount of
the contract maintenance charge (see "Contract Maintenance Charge"). No cash
withdrawals will be permitted after the Annuity Commencement Date except as may
be available under the annuity option elected.
ANNUITY OPTIONS
Unless restricted by the particular retirement plan or any applicable
legislation, during the lifetime of the Annuitant and prior to the Annuity
Commencement Date the Owner may elect one or more of the annuity options
described below or such other settlement option as may be agreed to by the
Company for the Annuitant as Payee. Annuity options may also be elected by the
Owner or the Beneficiary, as provided under "Death Benefit." The Owner may not
change any election after 30 days prior to the Annuity Commencement Date, and no
change of annuity option is permitted after the Annuity Commencement Date. If no
election is in effect on the 30th day prior to the Annuity Commencement Date,
Annuity Option B, for a Life Annuity with 120 monthly payments certain, will be
deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Contract's Accumulation Account to be applied to the Fixed Account and the
Sub-Accounts. In the event the election does not so specify, then the portion of
the adjusted value of the Accumulation Account to be applied to the Fixed
Account and the Sub-Accounts will be determined on a pro rata basis from the
composition of the Accumulation Account on the Annuity Commencement Date.
Annuity Options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of the
Payee. This option offers a higher level of monthly payments than options B or C
because no further payments are payable after the death of the Payee and there
is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable during
the joint lifetime of the Payee and a designated second person and during the
lifetime of the survivor. During the lifetime of the survivor, variable monthly
payments, if any, will be determined using the percentage chosen at the time of
the election of this option of the number of each type of Annuity Unit credited
to the Contract and each fixed monthly payment, if any, will be equal to the
same percentage of the fixed monthly payment payable during the joint lifetime
of the Payee and the designated second person.
Annuity Option D. Fixed Payments for a Specified Period Certain: Fixed monthly
payments for a specified period of time, three years or more but not exceeding
30 years, as elected.
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Annuity Option E. Fixed Payments: The amount applied to provide fixed payments
in accordance with this option will be held by the Company at interest. Fixed
payments will be made in such amounts and at such times as may be agreed upon
with the Company and will continue until the amount held by the Company with
interest is exhausted. Interest will be credited yearly on the amount remaining
unpaid at a rate which shall be determined by the Company from time to time but
which shall not be less than 4% per year compounded annually. The rate so
determined may be changed by the Company at any time; however, the rate may not
be reduced more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Sub-Account is determined by dividing that portion of the first variable annuity
payment attributable to that Sub-Account by the Annuity Unit value of that
Sub-Account for the Valuation Period which ends immediately preceding the
Annuity Commencement Date. The number of Annuity Units of each particular
Sub-Account credited to the Contract then remains fixed unless an exchange of
Annuity Units is made as described below. The dollar amount of each variable
annuity payment after the first may increase, decrease or remain constant
depending on the investment performance of the Sub-Accounts.
The Statement of Additional Information contains detailed disclosure
regarding the method of determining the amount of each variable annuity payment
and calculating the value of a Variable Annuity Unit, as well as hypothetical
examples of these calculations.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may exchange the value of a
designated number of Variable Annuity Units of particular Sub-Accounts then
credited to the Contract for other Variable Annuity Units, the value of which
would be such that the dollar amount of an annuity payment made on the date of
the exchange would be unaffected by the fact of the exchange. Exchanges may be
made only between Sub-Accounts of the Variable Account. Twelve such exchanges
may be made within each Contract Year.
ANNUITY PAYMENT RATES
The Contract contains annuity payment rates for each annuity option
described above. The rates show, for each $1,000 applied, the dollar amount of
(a) the first monthly Variable Annuity payment based on the assumed interest
rate of 4%, and (b) the monthly Fixed Annuity payment, when this payment is
based on the minimum guaranteed interest rate of 4% per year. The annuity
payment rates may vary according to the annuity option elected and the adjusted
age of the Payee. Over a period of time, if the Sub-Accounts achieved a net
investment return exactly equal to the assumed interest rate of 4%, the amount
of each variable annuity payment would remain constant. However if the
Sub-Accounts achieved a net investment result greater than 4%, the amount of
each variable annuity payment would increase; conversely, a net investment
result smaller than 4% would decrease the amount of each variable annuity
payment.
OTHER CONTRACT PROVISIONS
OWNER
The Owner is entitled to exercise all Contract rights and privileges without
the consent of the Beneficiary or any other person. Such rights and privileges
may be exercised only during the lifetime of the Annuitant and prior to the
Annuity Commencement Date, except as otherwise provided in the Contract. The
Annuitant becomes the Owner on and after the Annuity Commencement Date. The
Beneficiary becomes the Owner on the death of the Annuitant. In some qualified
plans the Owner of the Contract is a Trustee and the Trust authorizes the
Annuitant/participant to exercise certain Contract rights and privileges.
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Transfer of ownership of a Contract is governed by the laws and regulations
applicable to the retirement plan for which the Contract was issued. Subject to
the foregoing, a Contract may not be sold, assigned, transferred, discounted or
pledged as collateral for a loan or as security for the performance of an
obligation or for any other purpose to any person other than the Company.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
may change or revoke the designation of a Beneficiary at any time while the
Annuitant is living. Reference should be made to the terms of the particular
retirement plan and any applicable legislation for any restrictions on the
beneficiary designation.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. Fund shares for which no timely voting instructions are received
will be voted by the Company in the same proportion as the shares for which
instructions are received from persons having such voting rights. The Owner is
the person having the right to give voting instructions prior to the Annuity
Commencement Date. On or after the Annuity Commencement Date the Payee is the
person having such voting rights.
Owners of Contracts may be subject to other voting provisions of the
particular retirement plan. Employees who contribute to retirement plans which
are funded by the Contracts are entitled to instruct the Owners as to how to
instruct the Company to vote the Fund shares attributable to their
contributions. Such plans may also provide the additional extent, if any, to
which the Owners shall follow voting instructions of persons with rights under
the plans.
The number of particular Fund shares as to which each such person is
entitled to give instructions will be determined by the Company on a date not
more than 90 days prior to each such meeting. Prior to the Annuity Commencement
Date, the number of particular Fund shares as to which voting instructions may
be given to the Company is determined by dividing the value of all of the
Variable Accumulation Units of the particular Sub-Account credited to the
Contract's Accumulation Account by the net asset value of one particular Fund
share as of the same date. On or after the Annuity Commencement Date, the number
of particular Fund shares as to which such instructions may be given by a Payee
is determined by dividing the reserve held by the Company in the particular
Sub-Account for the Contract by the net asset value of a particular Fund share
as of the same date.
PERIODIC REPORTS
During the accumulation period the Company may send the Owner, or such other
person having voting rights, at least once during each Contract Year, a
statement showing the number, type and value of Accumulation Units credited to
the Contract's Accumulation Account and the fixed accumulation value of such
account, which statement shall be accurate as of a date not more than two months
previous to the date of mailing. These periodic statements contain important
information concerning the Contract's Accumulation Account transactions with
respect to a Contract. It is the obligation of the Owner to review each such
statement carefully and to report to the Company, at the address or telephone
number provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless the
Company receives notice of any such error or discrepancy from the Owner within
such time period, the Company may not be responsible for correcting the error or
discrepancy.
In addition, every person having voting rights will receive such reports or
prospectuses concerning the Variable Account and the Funds as may be required by
the Investment Company Act of 1940 and the Securities Act of 1933. The Company
will also send such statements reflecting transactions in the Contract's
Accumulation Account as may be required by applicable laws, rules and
regulations.
Upon request, the Company will provide the Owner with information regarding
fixed and variable accumulation values.
16
<PAGE>
SUBSTITUTED SECURITIES
Shares of any of the particular Funds may not always be available for
purchase by the Variable Account or the Company may decide that further
investment in any such Fund's shares is no longer appropriate in view of the
purposes of the Variable Account. In either event, shares of another registered
open-end investment company may be substituted both for Fund shares already
purchased by the Variable Account and as the security to be purchased in the
future provided that these substitutions have been approved, if required, by the
Securities and Exchange Commission. In the event of any substitution pursuant to
this provision, the Company may make appropriate endorsement to the Contract to
reflect the substitution.
MODIFICATION
Upon notice to the Owner, or to the Payee during the annuity period, the
Contract may be modified by the Company, but only if such modification (i) is
necessary to make the Contract or the Variable Account comply with any law or
regulation issued by a governmental agency to which the Company is subject or
(ii) is necessary to assure continued qualification of the Contract under the
Internal Revenue Code or other federal or state laws relating to retirement
annuities or annuity contracts or (iii) is necessary to reflect a change in the
operation of the Variable Account or the Sub-Accounts or (iv) provides
additional Variable Account and/or fixed accumulation options or (v) as may
otherwise be in the best interests of Owners or Payees, as applicable. In the
event of any such modification, the Company may make appropriate endorsement to
the Contract to reflect such modification.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Fund shares
held by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the
Securities and Exchange Commission. In the event of any change in the operation
of the Variable Account pursuant to this provision, the Company may make
appropriate endorsement to the Contract to reflect the change and take such
action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change of unit values, strict equity will be preserved and no
change will have a material effect on the benefits or other provisions of the
Contract.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use by
retirement plans under the provisions of Sections 401 and 408 (excluding Section
408(b)) of the Internal Revenue Code (the "Code"). The ultimate effect of
federal income taxes on the value of the Contract's Accumulation Account, on
annuity payments and on the economic benefit to the Owner, the Annuitant, the
Payee or the Beneficiary may depend upon the type of retirement plan for which
the Contract is purchased and upon the tax and employment status of the
individual concerned.
The following discussion of the treatment of the Contracts and of the
Company under the federal income tax laws is general in nature, is based upon
the Company's understanding of current federal income tax laws, and is not
intended as tax advice. Congress has the power to enact legislation affecting
the tax treatment of annuity contracts, and such legislation could be applied
retroactively to Contracts purchased before the date of enactment. A more
detailed discussion of the federal tax status of the Contracts is contained in
the Statement of Additional Information. Any person contemplating the purchase
of a Contract
17
<PAGE>
should consult a qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE
REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT OR ANY
TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY
Under existing federal income tax laws, the income of the Variable Account,
to the extent that it is applied to increase reserves under the Contracts, is
not taxable to the Company.
TAXATION OF ANNUITIES IN GENERAL
The Contracts offered by this Prospectus are designed for use in connection
with retirement plans. All or a portion of the contributions to such plans will
be used to make Purchase Payments under the Contracts. Generally, no tax is
imposed on the increase in the value of a Contract until a distribution occurs.
Monthly annuity payments made as retirement distributions, and lump-sum payments
or cash withdrawals (when permitted by the applicable retirement plan) under a
Contract are generally taxable to the Annuitant as ordinary income to the extent
that such payments are not deemed to come from the Owner's previously taxed
investment in the Contract. Distributions made prior to age 59 1/2 generally are
subject to a 10% penalty tax, although this tax will not apply in certain
circumstances. Owners, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
In certain circumstances, the Company is required to withhold and remit to
the U.S. government part of the taxable portion of each distribution made under
a Contract.
RETIREMENT PLANS
The Contracts described in this Prospectus are designed for use with the
following types of qualified retirement plans: (1) Pension and Profit-Sharing
Plans established by business employers and certain associations, as permitted
by Sections 401(a) and 401(k) of the Code, including those purchasers who would
have been covered under the rules governing old H.R. 10 (Keogh) Plans; and (2)
Individual Retirement Accounts ("IRA's") permitted by Sections 219 and 408 of
the Code (excluding IRA's established as "Individual Retirement Annuities" under
Section 408(b), but including Simplified Employee Pensions established by
employers pursuant to Section 408(k)) and Simple Retirement Accounts established
pursuant to Section 408(p).
The tax rules applicable to participants in such retirement plans vary
according to the type of plan and its terms and conditions. Therefore, no
attempt is made herein to provide more than general information about the use of
the Contracts with the various types of retirement plans. Participants in such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans are subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contracts. The Company will provide purchasers of Contracts
used in connection with Individual Retirement Accounts with such supplemental
information as may be required by the Internal Revenue Service or other
appropriate agency. Any person contemplating the purchase of a Contract should
consult a qualified tax adviser.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by Clarendon Insurance Agency, Inc., One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181, a wholly-owned
subsidiary of the Company. Commissions and other distribution compensation will
be paid by the Company and will not be more than 5.11% of the Purchase Payments.
In addition, after the fifth (5th) Contract Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 0.20% of the Contract's Accumulation Account
value.
18
<PAGE>
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company is engaged in various kinds of routine litigation which, in management's
opinion, is not material with respect to the Variable Account.
OWNER INQUIRIES
All Owner inquiries should be directed to the Company at its Annuity Service
Mailing Address.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
General Information.................................................................... 2
Annuity Provisions..................................................................... 2
Other Contract Provisions.............................................................. 3
Federal Tax Status..................................................................... 4
Administration of the Contracts........................................................ 5
Distribution of the Contracts.......................................................... 5
Accountants............................................................................ 6
Financial Statements................................................................... 7
Appendix A--The Fixed Account.......................................................... 36
Appendix B-- Variable Accumulation Unit Value, Variable Annuity Unit Value and Variable
Annuity Payment Calculations............................................... 39
Appendix C--Withdrawals and Withdrawal Charges......................................... 40
</TABLE>
19
<PAGE>
This Prospectus sets forth information about the Contracts and the Variable
Account that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1998 which is incorporated herein by reference. The Statement of
Additional Information is available upon request and without charge from Sun
Life Assurance Company of Canada (U.S.). To receive a copy, return this request
form to the address shown below or telephone (800) 752-7215.
- --------------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
Compass I--Sun Life of Canada (U.S.) Variable Account C.
Name
- ---------------------------------------------------------------------------
Address
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
City
- --------------------------------------------------- State
- ---------------------------------- Zip
- -------------------------------------
Telephone
- ---------------------------------------------------------------------------
20
<PAGE>
PROSPECTUS
MAY 1, 1998
COMBINATION FIXED/VARIABLE
ANNUITY FOR QUALIFIED
RETIREMENT PLANS
ISSUED IN CONNECTION WITH
SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT C
CO1US-1 5/98
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Annuity Service Mailing Address:
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
<PAGE>
[LOGO]
<PAGE>
MAY 1, 1998
COMPASS I
STATEMENT OF ADDITIONAL INFORMATION
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information.................................................. 2
Annuity Provisions................................................... 2
Other Contract Provisions............................................ 3
Federal Tax Status................................................... 4
Administration of the Contracts...................................... 5
Distribution of the Contracts........................................ 5
Accountants.......................................................... 6
Financial Statements................................................. 7
Appendix A--The Fixed Account........................................ 36
Appendix B-- Variable Accumulation Unit Value, Variable Annuity Unit
Value and Variable Annuity Payment Calculations.......... 39
Appendix C--Withdrawals and Withdrawal Charges....................... 40
</TABLE>
This Statement of Additional Information sets forth information which may be
of interest to prospective purchasers of Compass I Combination Fixed/Variable
Annuity Contracts (the "Contracts") issued by Sun Life Assurance Company of
Canada (U.S.) (the "Company") in connection with Sun Life of Canada (U.S.)
Variable Account C (the "Variable Account") which is not necessarily included in
the Prospectus dated May 1, 1998. This Statement of Additional Information
should be read in conjunction with the Prospectus, a copy of which may be
obtained without charge from the Company at its Annuity Service Mailing Address,
c/o Retirement Products and Services, P.O. Box 1024, Boston, Massachusetts
02103, or by telephoning (800) 752-7215.
The terms used in this Statement of Additional Information have the same
meanings as in the Prospectus.
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE>
GENERAL INFORMATION
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
The Company is an indirect wholly-owned subsidiary of Sun Life Assurance
Company of Canada, 150 King Street West, Toronto, Ontario, Canada, a mutual life
insurance company incorporated in Canada in 1865.
THE VARIABLE ACCOUNT
Sun Life of Canada (U.S.) Variable Account C (the "Variable Account") is a
separate account of the Company which meets the definition of a separate account
under the federal securities laws and which is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940.
THE FIXED ACCOUNT
If the Owner elects to have Contract values accumulated on a fixed basis,
Purchase Payments are allocated to the Fixed Account, which is the general
account of the Company. Because of exemptive and exclusionary provisions, that
part of the Contract relating to the Fixed Account is not registered under the
Securities Act of 1933 ("1933 Act") and the Fixed Account is not registered as
an investment company under the Investment Company Act of 1940 ("1940 Act").
Accordingly, neither the Fixed Account, nor any interests therein are subject to
the provisions or restrictions of the 1933 Act or the 1940 Act, and the staff of
the Securities and Exchange Commission has not reviewed the disclosures in this
Statement of Additional Information with respect to that portion of the Contract
relating to the Fixed Account. Disclosures regarding the fixed portion of the
Contract and the Fixed Account, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made herein (see "Appendix A--The Fixed
Account").
ANNUITY PROVISIONS
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Contract's Accumulation Account will be
canceled and its adjusted value will be applied to provide a Variable Annuity or
a Fixed Annuity or a combination of both. The adjusted value will be equal to
the value of the Accumulation Account for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by any applicable
premium or similar taxes and a proportionate amount of the contract maintenance
charge to reflect the time elapsed between the last Contract Anniversary and the
day before the Annuity Commencement Date.
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Sub-Account is determined by dividing that portion of the first variable annuity
payment attributable to that Sub-Account by the Annuity Unit value of that
Sub-Account for the Valuation Period which ends immediately preceding the
Annuity Commencement Date. The number of Annuity Units of each particular
Sub-Account credited to the Contract then remains fixed unless an exchange of
Annuity Units is made as described in the Prospectus. The dollar amount of each
variable annuity payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Sub-Account credited to the Contract by
the Annuity Unit value for the particular Sub-Account for the Valuation Period
which ends immediately preceding the due date of each subsequent payment.
For a description of fixed annuity payments, see Appendix A.
2
<PAGE>
For a hypothetical example of the calculation of a variable annuity payment,
see Appendix B.
ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (see "Net
Investment Factor" in the Prospectus) for the particular Sub-Account for the
current Valuation Period and then multiplying that product by a factor to
neutralize the assumed interest rate of 4% per year used to establish the
annuity payment rates found in the Contract. The factor is 0.99989255 for a one
day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix B.
OTHER CONTRACT PROVISIONS
RIGHT TO RETURN CONTRACT
The Owner should read the Contract carefully as soon as it is received. If
the Owner wishes to return the Contract, it must be returned to the Company at
the Company's Annuity Service Mailing Address within ten days after it was
delivered to the Owner. When the Company receives the returned Contract, it will
be canceled and the full amount of any Purchase Payment(s) received by the
Company will be refunded.
Under the Internal Revenue Code, an Owner establishing an Individual
Retirement Account ("IRA") must be furnished with a disclosure statement
containing certain information about the Contract and applicable legal
requirements. This statement must be furnished on or before the date the IRA is
established. If the Owner is furnished with such disclosure statement before the
7th day preceding the date the IRA is established, the Owner will not have any
right of revocation. If the disclosure statement is furnished after the 7th day
preceding the establishment of the IRA, then the Owner may revoke the Contract
any time within seven days after the issue date. Upon such revocation, the
Company will refund all Purchase Payment(s) made by the Owner. The foregoing
right of revocation with respect to an IRA is in addition to the return
privilege set forth in the preceding paragraph. The Company will allow an Owner
establishing an IRA a "ten day free look," notwithstanding the provisions of the
Internal Revenue Code.
OWNER AND CHANGE OF OWNERSHIP
The Contract shall belong to the Owner or to the successor Owner or
transferee of the Owner. All Contract rights and privileges may be exercised by
the Owner, the successor Owner or transferee of the Owner without the consent of
the Beneficiary (other than an irrevocably designated beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant and prior to the Annuity Commencement Date, except as otherwise
provided in the Contract. The Annuitant becomes the Owner on and after the
Annuity Commencement Date. The Beneficiary becomes the Owner on the death of the
Annuitant. In some qualified plans the Owner of the Contract is a Trustee and
the Trust authorizes the Annuitant/participant to exercise certain contract
rights and privileges.
Ownership of the Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
trustee of an individual retirement account plan qualified under Section 408 of
the Internal Revenue Code for the benefit of the Owner; or (4) as otherwise
permitted from time to time by laws and regulations governing the retirement
plans for which the Contract may be issued. Subject to the foregoing, the
Contract may not be sold, assigned, transferred, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose to any person other than the Company. A change of ownership
will not be binding upon the Company until written notification is received by
the Company. Once received by the Company the change will be effective as of the
date on which the request for change was signed by the Owner but the change will
be without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change. The Company may require that
the signature of the Owner be guaranteed by a member firm of the New York,
3
<PAGE>
American, Boston, Midwest, Philadelphia or Pacific Stock Exchange, or by a
commercial bank (not a savings bank) which is a member of the Federal Deposit
Insurance Corporation or, in certain cases, by a member firm of the National
Association of Securities Dealers, Inc. which has entered into an appropriate
agreement with the Company.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in the application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
(or the Annuitant, as permitted by the Owner) may change or revoke the
designation of a Beneficiary at any time while the Annuitant is living by filing
with the Company a written beneficiary designation or revocation in such form as
the Company may require. The change or revocation will not be binding upon the
Company until it is received by the Company. When it is so received the change
or revocation will be effective as of the date on which the beneficiary
designation or revocation was signed by the Owner or the Annuitant, as
applicable.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
CUSTODIAN
The Custodian of the assets of the Variable Account is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The Company
will direct the Custodian to purchase Fund shares at net asset value in
connection with amounts allocated to the particular Sub-Account in accordance
with the instructions of the Owner and to redeem Fund shares at net asset value
for the purpose of meeting the contractual obligations of the Variable Account,
paying charges relative to the Variable Account or making adjustments for
annuity reserves held in the Variable Account.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use by
retirement plans under the provisions of Sections 401 or 408 (excluding Section
408(b)) of the Internal Revenue Code (the "Code"). The ultimate effect of
federal income taxes on the value of the Contract's Accumulation Account, on
annuity payments and on the economic benefit to the Owner, the Annuitant, the
Payee or the Beneficiary may depend upon the type of retirement plan for which
the Contract is purchased and upon the tax and employment status of the
individual concerned. The discussion contained herein is general in nature, is
based upon the Company's understanding of federal income tax laws as currently
interpreted, and is not intended as tax advice. Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could be applied retroactively to Contracts purchased before the
date of enactment. Any person contemplating the purchase of a Contract should
consult a qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE
REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Account is not separately taxable as a regulated investment company or otherwise
as a taxable entity separate from the Company. Under existing federal income tax
laws, the income and capital gains of the Variable Account to the extent applied
to increase reserves under the Contracts are not taxable to the Company.
4
<PAGE>
TAXATION OF ANNUITIES IN GENERAL
A participant in a retirement plan is the individual on whose behalf a
Contract is issued. Certain federal income tax advantages are available to
participants in retirement plans which meet the requirements of Section 401 or
Section 408 (excluding Section 408(b)) of the Code. The Contracts offered by
this Prospectus are designed for use in connection with such retirement plans
and accordingly all or a portion of the contributions to such plans will be used
to make Purchase Payments under the Contracts. Monthly annuity payments made as
retirement distributions under a Contract are generally taxable to the Annuitant
as ordinary income under Section 72 of the Code. Distributions prior to age
59 1/2 generally are subject to a 10% penalty tax, although this tax will not
apply in certain circumstances. Certain distributions, known as "eligible
rollover distributions," if rolled over to certain other qualified retirement
plans (either directly or after being distributed to the Owner or Payee), are
not taxable until distributed from the plan to which they are rolled over. In
general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more.
Owners, Annuitants, Payees and Beneficiaries should seek qualified advice
about the tax consequences of distributions, withdrawals, rollovers and payments
under the retirement plans in connection with which the Contracts are purchased.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract issued in connection
with an individual retirement account unless the Owner or Payee provides his or
her taxpayer identification number to the Company and notifies the Company (in
the manner prescribed) before the time of the distribution that he or she
chooses not to have any amounts withheld.
In the case of distributions from a Contract (other than a Contract issued
for use with an individual retirement account), the Company or the plan
administrator must withhold and remit to the U.S. government 20% of each
distribution that is an eligible rollover distribution (as defined above) unless
the Owner or Payee elects to make a direct rollover of the distribution to
another qualified retirement plan that is eligible to receive the rollover. If a
distribution from a Contract is not an eligible rollover distribution, then the
Owner or Payee can choose not to have amounts withheld as described above for
individual retirement accounts.
Amounts withheld from any distribution may be credited against the Owner's
or Payee's federal income tax liability for the year of the distribution.
The Tax Reform Act of 1984 authorizes the Internal Revenue Service to
promulgate regulations that prescribe investment diversification requirements
for segregated asset accounts underlying certain variable annuity contracts.
These regulations do not affect the tax treatment of qualified contracts, such
as the Contracts offered by this Prospectus.
Due to the complex nature and frequent revisions of the federal income tax
laws affecting retirement plans, a person contemplating the purchase of a
Contract for use in connection with a retirement plan, the distribution or
surrender of a Contract held under a retirement plan, or the election of an
annuity option provided in a Contract should consult a qualified tax adviser.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts and the Variable Account. These functions include, among other things,
maintaining the books and records of the Variable Account and the Sub-Accounts,
and maintaining records of the name, address, taxpayer identification number,
Contract number, type of Contract issued to each Owner, the status of the
Accumulation Account under each Contract and other pertinent information
necessary to the administration and operation of the Contracts.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of
5
<PAGE>
broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. The Contracts
will be distributed by Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181, a wholly-owned
subsidiary of the Company. Commissions and other distribution compensation will
be paid by the Company and will not be more than 5.11% of the Purchase Payments.
In addition, after the fifth (5th) Contract Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 0.20% of the Contract's Accumulation Account
values. During 1995, 1996 and 1997, approximately $35,000, $32,000 and $22,500,
respectively, was paid to and retained by Clarendon in connection with the
distribution of the Contracts.
ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110, are
the Variable Account's independent certified public accountants, providing
auditing and other professional services.
6
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENT OF CONDITION-- December 31, 1997
<TABLE>
<CAPTION>
ASSETS:
Investments in mutual funds: Shares Cost Value
------------ ------------ ------------
<S> <C> <C> <C>
Massachusetts Investors Trust ("MIT")*........ 941,569 $ 12,164,764 $ 16,494,283
Massachusetts Investors Growth Stock Fund
("MIG")*..................................... 681,103 7,453,052 8,460,457
MFS Total Return Fund ("MTR")*................ 1,510,751 20,453,360 23,900,329
MFS Growth Opportunities Fund ("MGO")*........ 2,502,414 29,126,966 34,834,288
MFS Research Fund ("MFR")*.................... 429,789 6,239,839 9,151,154
MFS Bond Fund ("MFB")*........................ 449,090 5,941,973 6,114,649
MFS Money Market Fund ("MCM")................. 6,188,254 6,188,254 6,188,254
MFS Government Money Market Fund ("MCG")...... 1,339,023 1,339,023 1,339,023
MFS High Income Fund ("MFH")*................. 1,554,446 7,941,425 8,596,469
MFS World Governments Fund ("MWG")*........... 203,014 2,355,295 2,201,378
MFS Emerging Growth Fund ("MEG")*............. 471,855 9,244,300 17,073,244
------------ ------------
$108,448,251 $134,353,528
------------
------------
<CAPTION>
LIABILITY:
<S> <C> <C> <C>
Payable to sponsor.......................................................... 93,383
------------
Net assets............................................................ $134,260,145
------------
------------
</TABLE>
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity
Contracts Reserve for
---------------------------------- Variable
NET ASSETS OF CONTRACT OWNERS: Units Unit Value Value Annuities Total
------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
MIT...................................... 191,532 $85.1160 $ 16,299,924 $ 215,987 $ 16,515,911
MIG...................................... 116,839 71.6206 8,364,201 106,708 8,470,909
MTR...................................... 376,845 62.6622 23,587,818 63,258 23,651,076
MGO...................................... 682,668 50.5718 34,698,532 205,337 34,903,869
MFR...................................... 129,195 70.5612 9,117,939 44,955 9,162,894
MFB...................................... 158,314 37.4559 6,016,248 116,289 6,132,537
MCM...................................... 301,313 20.2949 6,111,687 85,081 6,196,768
MCG...................................... 68,686 19.4875 1,338,053 1,167 1,339,220
MFH...................................... 200,252 42.8235 8,500,168 134,233 8,634,401
MWG...................................... 55,822 37.9444 2,117,957 42,898 2,160,855
MEG...................................... 280,589 60.5646 16,992,975 98,730 17,091,705
------------ ------------- ------------
Net assets................................................ $133,145,502 $ 1,114,643 $134,260,145
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
* Investments are made in Class A shares of the Fund.
See notes to financial statements
7
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENT OF OPERATIONS-- Year Ended December 31, 1997
<TABLE>
<CAPTION>
MIT MIG MTR MGO MFR MFB
Sub- Sub- Sub- Sub- Sub- Sub-
Account Account Account Account Account Account
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income and expenses:
Dividend income and capital gain distributions
received......................................... $ 1,277,616 $1,295,658 $2,795,205 $ 4,313,661 $ 407,032 $ 419,047
Mortality and expense risk charges................ 193,480 94,410 300,282 436,256 114,990 75,767
----------- ---------- ---------- ----------- ---------- ----------
Net investment income......................... $ 1,084,136 $1,201,248 $2,494,923 $ 3,877,405 $ 292,042 $ 343,280
----------- ---------- ---------- ----------- ---------- ----------
Realized and unrealized gains (losses):
Realized gains (losses) on investment
transactions:
Proceeds from sales............................. $ 2,532,047 $1,711,573 $4,718,889 $ 4,107,750 $1,502,503 $1,448,870
Cost of investments sold........................ 2,140,186 1,691,407 3,553,458 2,915,736 857,095 1,549,093
----------- ---------- ---------- ----------- ---------- ----------
Net realized gains (losses)................... $ 391,861 $ 20,166 $1,165,431 $ 1,192,014 $ 645,408 $ (100,223)
----------- ---------- ---------- ----------- ---------- ----------
Net unrealized appreciation (depreciation) on
investments:
End of year..................................... $ 4,329,519 $1,007,405 $3,446,969 $ 5,707,322 $2,911,315 $ 172,676
Beginning of year............................... 1,892,538 (526,374) 3,006,328 4,176,084 2,324,846 (97,970)
----------- ---------- ---------- ----------- ---------- ----------
Change in unrealized appreciation
(depreciation)............................... $ 2,436,981 $1,533,779 $ 440,641 $ 1,531,238 $ 586,469 $ 270,646
----------- ---------- ---------- ----------- ---------- ----------
Realized and unrealized gains..................... $ 2,828,842 $1,553,945 $1,606,072 $ 2,723,252 $1,231,877 $ 170,423
----------- ---------- ---------- ----------- ---------- ----------
Increase in net assets from operations............ $ 3,912,978 $2,755,193 $4,100,995 $ 6,600,657 $1,523,919 $ 513,703
----------- ---------- ---------- ----------- ---------- ----------
----------- ---------- ---------- ----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MCM MCG MFH MWG MEG
Sub- Sub- Sub- Sub- Sub-
Account Account Account Account Account Total
---------- -------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income and expenses:
Dividend income and capital gain distributions
received.......................................... $ 332,894 $ 58,061 $ 729,766 $ 96,701 $ 160,958 $11,886,599
Mortality and expense risk charges................. 89,090 16,536 109,154 29,209 221,777 1,680,951
---------- -------- ---------- --------- ---------- -----------
Net investment income (expense)................ $ 243,804 $ 41,525 $ 620,612 $ 67,492 $ (60,819) $10,205,648
---------- -------- ---------- --------- ---------- -----------
Realized and unrealized gains (losses):
Realized gains (losses) on investment transactions:
Proceeds from sales.............................. $3,916,262 $327,538 $1,898,424 $ 649,769 $3,522,932 $26,336,557
Cost of investments sold......................... 3,916,262 327,538 1,879,243 700,654 1,563,730 21,094,402
---------- -------- ---------- --------- ---------- -----------
Net realized gains (losses).................... $ -- $ -- $ 19,181 $ (50,885) $1,959,202 $ 5,242,155
---------- -------- ---------- --------- ---------- -----------
Net unrealized appreciation (depreciation) on
investments:
End of year...................................... $ -- $ -- $ 655,044 $(153,917) $7,828,944 $25,905,277
Beginning of year................................ $ -- $ -- 383,786 (105,147) 6,751,376 17,805,467
---------- -------- ---------- --------- ---------- -----------
Change in unrealized appreciation
(depreciation)................................ $ -- $ -- $ 271,258 $ (48,770) $1,077,568 $ 8,099,810
---------- -------- ---------- --------- ---------- -----------
Realized and unrealized gains (losses)............. $ -- $ -- $ 290,439 $ (99,655) $3,036,770 $13,341,965
---------- -------- ---------- --------- ---------- -----------
Increase (decrease) in net assets from
operations........................................ $ 243,804 $ 41,525 $ 911,051 $ (32,163) $2,975,951 $23,547,613
---------- -------- ---------- --------- ---------- -----------
---------- -------- ---------- --------- ---------- -----------
</TABLE>
See notes to financial statements
8
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MIT MIG MTR
Sub-Account Sub-Account Sub-Account
----------------------------- ---------------------------- -----------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------------------------- ---------------------------- -----------------------------
1997 1996 1997 1996 1997 1996
------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income............ $ 1,084,136 $ 1,193,000 $ 1,201,248 $ 1,521,770 $ 2,494,923 $ 2,283,612
Net realized gains............... 391,861 50,400 20,166 392,892 1,165,431 869,395
Net unrealized gains (losses).... 2,436,981 1,596,117 1,533,779 (536,315) 440,641 (264,098)
------------- ------------- ------------- ------------ ------------- -------------
Increase in net assets from
operations.................. $ 3,912,978 $ 2,839,517 $ 2,755,193 $ 1,378,347 $ 4,100,995 $ 2,888,909
------------- ------------- ------------- ------------ ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received..... $ 295,282 $ 336,122 $ 161,450 $ 205,998 $ 375,661 $ 528,206
Net transfers between
Sub-Accounts and
Fixed Account................. 443,283 88,376 190,511 (203,622) (117,230) (145,482)
Withdrawals, surrenders,
annuitizations and contract
charges....................... (2,182,271) (1,397,434) (1,420,037) (2,057,962) (4,140,788) (3,143,002)
------------- ------------- ------------- ------------ ------------- -------------
Net accumulation activity.... $ (1,443,706) $ (972,936) $ (1,068,076) $(2,055,586) $ (3,882,357) $ (2,760,278)
------------- ------------- ------------- ------------ ------------- -------------
Annuitization activity:
Annuitizations................. $ 73,820 $ 33,004 $ -- $ -- $ -- $ 8,227
Annuity payments............... (26,781) (17,495) (24,415) (3,060) (132,212) (8,688)
Adjustments to annuity
reserve....................... 12,259 11,899 4,039 1,203 (139,226) (41,600)
------------- ------------- ------------- ------------ ------------- -------------
Net annuitization activity... $ 59,298 $ 27,408 $ (20,376) $ (1,857) $ (271,438) $ (42,061)
------------- ------------- ------------- ------------ ------------- -------------
Decrease in net assets from
participant transactions........ $ (1,384,408) $ (945,528) $ (1,088,452) $(2,057,443) $ (4,153,795) $ (2,802,339)
------------- ------------- ------------- ------------ ------------- -------------
Increase (decrease) in net
assets........................ $ 2,528,570 $ 1,893,989 $ 1,666,741 $ (679,096) $ (52,800) $ 86,570
NET ASSETS:
Beginning of year................ 13,987,341 12,093,352 6,804,168 7,483,264 23,703,876 23,617,306
------------- ------------- ------------- ------------ ------------- -------------
End of year...................... $ 16,515,911 $ 13,987,341 $ 8,470,909 $ 6,804,168 $ 23,651,076 $ 23,703,876
------------- ------------- ------------- ------------ ------------- -------------
------------- ------------- ------------- ------------ ------------- -------------
</TABLE>
9
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
MGO MFR MFB
Sub-Account Sub-Account Sub-Account
----------------------------- ---------------------------- -----------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------------------------- ---------------------------- -----------------------------
1997 1996 1997 1996 1997 1996
------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income............ $ 3,877,405 $ 3,016,977 $ 292,042 $ 313,648 $ 343,280 $ 413,938
Net realized gains (losses)...... 1,192,014 686,961 645,408 710,834 (100,223) (158,835)
Net unrealized gains (losses).... 1,531,238 1,861,809 586,469 645,674 270,646 (113,191)
------------- ------------- ------------- ------------ ------------- -------------
Increase in net assets from
operations.................. $ 6,600,657 $ 5,565,747 $ 1,523,919 $ 1,670,156 $ 513,703 $ 141,912
------------- ------------- ------------- ------------ ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received..... $ 396,402 $ 446,789 $ 115,867 $ 143,449 $ 97,957 $ 155,303
Net transfers between
Sub-Accounts and Fixed
Account....................... (331,038) (284,146) 112,699 382,929 137,968 32,233
Withdrawals, surrenders,
annuitizations and contract
charges....................... (3,356,390) (3,282,766) (1,160,821) (1,327,739) (1,220,161) (1,500,550)
------------- ------------- ------------- ------------ ------------- -------------
Net accumulation activity.... $ (3,291,026) $ (3,120,123) $ (932,255) $ (801,361) $ (984,236) $ (1,313,014)
------------- ------------- ------------- ------------ ------------- -------------
Annuitization activity:
Annuitizations................. $ 40,042 $ 4,584 $ -- $ -- $ 52,142 $ --
Annuity payments............... (22,778) (30,270) (9,402) (662) (12,112) (8,224)
Adjustments to annuity
reserve....................... 12,645 17,719 1,887 10,666 11,228 1,076
------------- ------------- ------------- ------------ ------------- -------------
Net annuitization activity... $ 29,909 $ (7,967) $ (7,515) $ 10,004 $ 51,258 $ (7,148)
------------- ------------- ------------- ------------ ------------- -------------
Decrease in net assets from
participant transactions........ $ (3,261,117) $ (3,128,090) $ (939,770) $ (791,357) $ (932,978) $ (1,320,162)
------------- ------------- ------------- ------------ ------------- -------------
Increase (decrease) in net
assets........................ $ 3,339,540 $ 2,437,657 $ 584,149 $ 878,799 $ (419,275) $ (1,178,250)
NET ASSETS:
Beginning of year................ 31,564,329 29,126,672 8,578,745 7,699,946 6,551,812 7,730,062
------------- ------------- ------------- ------------ ------------- -------------
End of year...................... $ 34,903,869 $ 31,564,329 $ 9,162,894 $ 8,578,745 $ 6,132,537 $ 6,551,812
------------- ------------- ------------- ------------ ------------- -------------
------------- ------------- ------------- ------------ ------------- -------------
</TABLE>
See notes to financial statements
10
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
MCM MCG MFH
Sub-Account Sub-Account Sub-Account
------------------------------ ----------------------------- ------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
------------------------------ ----------------------------- ------------------------------
1997 1996 1997 1996 1997 1996
------------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income........ $ 243,804 $ 240,460 $ 41,525 $ 53,885 $ 620,612 $ 663,084
Net realized gains........... -- -- -- -- 19,181 52,257
Net unrealized gains......... -- -- -- -- 271,258 222,093
------------- -------------- ------------- ------------- ------------- --------------
Increase in net assets
from operations......... $ 243,804 $ 240,460 $ 41,525 $ 53,885 $ 911,051 $ 937,434
------------- -------------- ------------- ------------- ------------- --------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments
received.................. $ 107,567 $ 136,550 $ 29,140 $ 80,866 $ 66,166 $ 121,432
Net transfers between Sub-
Accounts and Fixed
Account................... (678,009) 1,635,082 55,363 (278,103) (76,758) (411,820)
Withdrawals, surrenders,
annuitizations and
contract charges.......... (1,416,396) (1,188,558) (171,168) (449,456) (1,125,638) (968,697)
------------- -------------- ------------- ------------- ------------- --------------
Net accumulation
activity................ $(1,986,838) $ 583,074 $ (86,665) $ (646,693) $(1,136,230) $(1,259,085)
------------- -------------- ------------- ------------- ------------- --------------
Annuitization activity:
Annuitizations............. $ 49,826 -- -- -- -- --
Annuity payments........... (7,711) (4,013) (194) (196) (19,721) (21,880)
Annuity transfers.......... -- -- -- -- (3,495) --
Adjustments to annuity
reserve................... 9,057 543 76 67 9,135 (927)
------------- -------------- ------------- ------------- ------------- --------------
Net annuitization
activity................ $ 51,172 $ (3,470) $ (118) $ (129) $ (14,081) $ (22,807)
------------- -------------- ------------- ------------- ------------- --------------
Increase (decrease) in net
assets from participant
transactions................ $(1,935,666) $ 579,604 $ (86,783) $ (646,822) $(1,150,311) $(1,281,892)
------------- -------------- ------------- ------------- ------------- --------------
Increase (decrease) in net
assets.................... $(1,691,862) $ 820,064 $ (45,258) $ (592,937) $ (239,260) $ (344,458)
NET ASSETS:
Beginning of year............ 7,888,630 7,068,566 1,384,478 1,977,415 8,873,661 9,218,119
------------- -------------- ------------- ------------- ------------- --------------
End of year.................. $ 6,196,768 $ 7,888,630 $1,339,220 $1,384,478 $ 8,634,401 $ 8,873,661
------------- -------------- ------------- ------------- ------------- --------------
------------- -------------- ------------- ------------- ------------- --------------
</TABLE>
See notes to financial statements
11
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
MWG MEG
Sub-Account Sub-Account Total
----------------------------- ------------------------------- -------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------------------------- ------------------------------- -------------------------------
1997 1996 1997 1996 1997 1996
------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income........ $ 67,492 $ 38,593 $ (60,819) $ (27,082) $ 10,205,648 $ 9,711,885
Net realized gains
(losses).................... (50,885) (108,086) 1,959,202 1,792,780 5,242,155 4,288,598
Net unrealized gains
(losses).................... (48,770) 174,859 1,077,568 341,977 8,099,810 3,928,925
------------- ------------- -------------- -------------- -------------- --------------
Increase (decrease) in
net assets from
operations.............. $ (32,163) $ 105,366 $ 2,975,951 $ 2,107,675 $ 23,547,613 $ 17,929,408
------------- ------------- -------------- -------------- -------------- --------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments
received.................. $ 20,613 $ 32,241 $ 273,824 $ 413,103 $ 1,939,929 $ 2,600,059
Net transfers between Sub-
Accounts and Fixed
Account................... (57,194) (103,978) 180,160 (785,333) (140,245) (73,864)
Withdrawals, surrenders,
annuitizations and
contract charges.......... (504,226) (400,559) (2,750,634) (2,122,298) (19,448,530) (17,839,021)
------------- ------------- -------------- -------------- -------------- --------------
Net accumulation
activity................ $ (540,807) $ (472,296) $(2,296,650) $(2,494,528) $(17,648,846) $(15,312,826)
------------- ------------- -------------- -------------- -------------- --------------
Annuitization activity:
Annuitizations............. $ 12,236 $ -- $ 4,465 $ -- $ 232,531 $ 45,815
Annuity payments........... (5,464) (7,791) (22,268) (19,817) (283,058) (122,096)
Annuity transfers.......... -- -- 3,495 -- -- --
Adjustments to annuity
reserve................... 2,064 (2,303) 2,764 1,874 (74,072) 217
------------- ------------- -------------- -------------- -------------- --------------
Net annuitization
activity................ $ 8,836 $ (10,094) $ (11,544) $ (17,943) $ (124,599) $ (76,064)
------------- ------------- -------------- -------------- -------------- --------------
Decrease in net assets from
participant transactions.... $ (531,971) $ (482,390) $(2,308,194) $(2,512,471) $(17,773,445) $(15,388,890)
------------- ------------- -------------- -------------- -------------- --------------
Increase (decrease) in net
assets.................... $ (564,134) $ (377,024) $ 667,757 $ (404,796) $ 5,774,168 $ 2,540,518
NET ASSETS:
Beginning of year............ 2,724,989 3,102,013 16,423,948 16,828,744 128,485,977 125,945,459
------------- ------------- -------------- -------------- -------------- --------------
End of year.................. $2,160,855 $2,724,989 $17,091,705 $16,423,948 $134,260,145 $128,485,977
------------- ------------- -------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- -------------- --------------
</TABLE>
See notes to financial statements
12
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account C (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on March 31, 1982 as a funding vehicle for individual variable
annuities issued in connection with qualified retirement plans. The Variable
Account is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as a unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a specific mutual fund or series thereof
selected by contract owners from among available mutual funds (the "Funds")
advised by Massachusetts Financial Services Company ("MFS"), an affiliate of the
Sponsor.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in the Funds are recorded at their net asset value. Realized gains
and losses on sales of shares of the Funds are determined on the identified cost
basis. Dividend income and capital gain distributions received by the
Sub-Accounts are reinvested in additional Fund shares and are recognized on the
ex-dividend date.
Exchanges between Sub-Accounts requested by contract owners are recorded in the
new Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the Sponsor
and are not taxed separately. The Variable Account is not taxed as a regulated
investment company. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Under existing federal income tax law, investment income and capital gains
earned by the Variable Account on contract owner reserves are not subject to
tax.
(3) CONTRACT CHARGES
A mortality and expense risk charge based on the value of the Variable Account
is deducted from the Variable Account at the end of each valuation period for
the mortality and expense risks assumed by the Sponsor. The deduction is at an
effective annual rate of 1.3%.
Each year on the contract anniversary, a contract maintenance charge of $25 is
deducted from each contract's accumulation account to cover administrative
expenses relating to the contract. After the annuity commencement date the
charge is deducted pro rata from each annuity payment made during the year.
13
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS -- continued
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges exceed 5% of the purchase payments made under the
contract.
A deduction, when applicable, is made for premium or similar state or local
taxes. It is currently the policy of the Sponsor to deduct the taxes from the
amount applied to provide an annuity at the time annuity payments commence;
however, the Sponsor reserves the right to deduct such taxes when incurred.
(4) ANNUITY RESERVES
Annuity reserves for contracts with annuity commencement dates prior to February
1, 1987 are calculated using the 1971 Individual Annuitant Mortality Table.
Annuity reserves for contracts with annuity commencement dates on or after
February 1, 1987 are calculated using the 1983 Individual Annuitant Mortality
Table. All annuity reserves are calculated using an assumed interest rate of 4%.
Required adjustments to the reserve are accomplished by transfers to or from the
Sponsor.
(5) TRANSACTIONS IN UNITS OUTSTANDING
<TABLE>
<CAPTION>
MIT MIG MTR MGO MFR
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
---------------- ---------------- ---------------- ------------------ ----------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
---------------- ---------------- ---------------- ------------------ ----------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding,
beginning of year........ 211,924 228,398 137,226 183,386 445,574 502,308 752,698 835,555 143,843 158,916
Units purchased......... 3,952 5,745 2,689 4,638 6,597 10,862 8,648 11,777 1,771 2,691
Units transferred
between Sub-Accounts
and Fixed Account...... 5,860 1,726 2,571 (4,521) (1,968) (2,602) (6,742) (8,450) 2,007 6,223
Units withdrawn,
surrendered and
annuitized............. (30,204) (23,945) (25,647) (46,277) (73,358) (64,994) (71,936) (86,184) (18,426) (23,987)
------- ------- ------- ------- ------- ------- ------- --------- ------- -------
Units outstanding, end of
year..................... 191,532 211,924 116,839 137,226 376,845 445,574 682,668 752,698 129,195 143,843
------- ------- ------- ------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- ------- ------- ------- --------- ------- -------
<CAPTION>
MFB
Sub-Account
----------------
Year Ended
December 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Units outstanding,
beginning of year........ 186,637 226,571
Units purchased......... 2,751 4,694
Units transferred
between Sub-Accounts
and Fixed Account...... 3,481 970
Units withdrawn,
surrendered and
annuitized............. (34,555) (45,598)
------- -------
Units outstanding, end of
year..................... 158,314 186,637
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
MCM MCG MFH MWG
Sub-Account Sub-Account Sub-Account Sub-Account
-------------------- -------------------- -------------------- --------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
-------------------- -------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of year...... 401,141 371,369 73,345 108,206 229,079 264,391 70,278 83,177
Units purchased......................... 5,399 7,091 1,523 4,338 1,652 3,422 554 882
Units transferred between Sub-Accounts
and Fixed Account...................... (33,845) 84,305 2,802 (14,954) (2,180) (11,805) (1,541) (2,797)
Units withdrawn, surrendered and
annuitized............................. (71,382) (61,624) (8,984) (24,245) (28,299) (26,929) (13,469) (10,984)
--------- --------- --------- --------- --------- --------- --------- ---------
Units outstanding, end of year............ 301,313 401,141 68,686 73,345 200,252 229,079 55,822 70,278
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
MEG
Sub-Account
--------------------
Year Ended
December 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Units outstanding, beginning of year...... 321,077 372,726
Units purchased......................... 4,900 8,398
Units transferred between Sub-Accounts
and Fixed Account...................... 4,053 (16,860)
Units withdrawn, surrendered and
annuitized............................. (49,441) (43,187)
--------- ---------
Units outstanding, end of year............ 280,589 321,077
--------- ---------
--------- ---------
</TABLE>
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account C
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of Sun Life of Canada
(U.S.) Variable Account C (the Variable Account) as of December 31, 1997, the
related statements of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of 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. Our procedures included
confirmation of securities held at December 31, 1997 by correspondence with the
custodian. 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, such financial statements present fairly, in all material
respects, the financial position of the Variable Account as of December 31,
1997, the results of its operations and the changes in its net assets for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
15
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
16
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
17
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
18
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
19
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is engaged in the sale of individual variable life
insurance, individual fixed and variable annuities, group fixed and variable
annuities and group pension contracts. The Company also underwrites a block of
individual life insurance business through a reinsurance contract with the
Company's ultimate parent, Sun Life Assurance Company of Canada ("SLOC"). SLOC
is a mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
20
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
21
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited, ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC issues only individual disability income policies. Sundisco is a
registered investment adviser and broker-dealer. NLT is a federally chartered
savings bank. SLFSL serves as the marketing administrator for the distribution
of the offshore products of SLOC, an affiliate. Sun Capital is a registered
investment adviser. Sunfinco and Sunbesco are currently inactive. Clarendon is a
registered broker-dealer that acts as the general distributor of certain annuity
and life insurance contracts issued by the Company and its affiliates.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
22
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
23
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this
24
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
25
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold. The net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes and notes payable (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
26
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of
27
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
10. REINSURANCE:
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
28
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25%
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
29
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non-contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits, the Company provides certain health, dental,
and life insurance benefits ("post-retirement benefits") for retired employees
and dependents. Substantially all employees may become eligible for these
benefits if they reach normal retirement age while working for the Company, or
retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
30
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
31
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1996
1997 --------------------
-------------------- IMR
AVR IMR AVR -
--------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE):
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
32
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 and in 1997 also requires the consents of
the Delaware Insurance Commissioner and Canadian Office of the Superintendent of
Financial Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes and notes payable for the years
ended December 31, 1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP - deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long
33
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1997 and 1996, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1997
and 1996, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1997 on the basis of accounting
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1997 and 1996 or the results of its operations or its cash flow for each of
the three years in the period ended December 31, 1997.
As management has stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1998
35
<PAGE>
APPENDIX A
THE FIXED ACCOUNT
THAT PORTION OF THE CONTRACT RELATING TO THE FIXED ACCOUNT IS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") AND THE FIXED ACCOUNT IS NOT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940
("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN
ARE SUBJECT TO THE PROVISIONS OR RESTRICTIONS OF THE 1933 ACT OR THE 1940 ACT,
AND THE DISCLOSURE IN THIS APPENDIX A HAS NOT BEEN REVIEWED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION. HOWEVER, THE FOLLOWING DISCLOSURE ABOUT THE
FIXED ACCOUNT MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE
FEDERAL SECURITIES LAWS REGARDING THE ACCURACY AND COMPLETENESS OF DISCLOSURE.
A WORD ABOUT THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to the Fixed Account as elected by the Owner at the time of purchase
or as subsequently changed. The Company will invest the assets of the Fixed
Account in those assets chosen by the Company and allowed by applicable state
law regarding the nature and quality of investments that may be made by life
insurance companies and the percentage of their assets that may be committed to
any particular type of investment. In general, these laws permit investments,
within specified limits and subject to certain qualifications, in federal, state
and municipal obligations, corporate bonds, preferred and common stocks, real
estate mortgages, real estate and certain other investments. Investment income
from such Fixed Account assets will be allocated between the Company and the
contracts participating in the Fixed Account, in accordance with the terms of
such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contracts which cannot be
changed. In addition, the Company guarantees that it will not increase charges
for maintenance of the Contracts regardless of its actual expenses.
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks, distribution expenses and
administrative expenses borne by the Company in connection with Fixed Account
Contracts. The Company expects to derive a profit from this compensation. The
amount of investment income allocated to the Contracts will vary from year to
year in the sole discretion of the Company. However, the Company guarantees that
it will credit interest at a rate of not less than 4% per year, compounded
annually, to amounts allocated to the Fixed Account under the Contracts. The
Company may credit interest at a rate in excess of 4% per year; however, the
Company is not obligated to credit any interest in excess of 4% per year. There
is no specific formula for the determination of excess interest credits. Such
credits, if any, will be determined by the Company based on information as to
expected investment yields. Some of the factors that the Company may consider in
determining whether to credit interest to amounts allocated to the Fixed Account
and the amount thereof are: general economic trends; rates of return currently
available and anticipated on the Company's investments; regulatory and tax
requirements; and competitive factors. ANY INTEREST CREDITED TO AMOUNTS
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 4% PER YEAR WILL BE DETERMINED IN
THE SOLE DISCRETION OF THE COMPANY. THE OWNER ASSUMES THE RISK THAT INTEREST
CREDITED TO FIXED ACCOUNT ALLOCATIONS MAY NOT EXCEED THE MINIMUM GUARANTEE OF 4%
FOR ANY GIVEN YEAR.
36
<PAGE>
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus among its various
policyholders and contract owners and to its sole stockholder.
Excess interest, if any, will be credited on the fixed accumulation value.
The Company guarantees that, at any time, the fixed accumulation value will not
be less than the amount of Purchase Payments allocated to the Fixed Account,
plus interest at the rate of 4% per year, compounded annually, plus any
additional interest which the Company may, in its discretion, credit to the
Fixed Account, less the sum of all administrative or withdrawal charges, any
applicable premium taxes, and less any amounts surrendered. If the Owner
surrenders the Contract, the amount available from the Fixed Account will be
reduced by any applicable withdrawal charge (See "Withdrawal Charges" in the
Prospectus).
If on any Contract Anniversary the rate at which the Company credits
interest to amounts allocated to the Fixed Account under the Contract is less
than 80% of the average discount rate on 52-week United States Treasury Bills
for the most recent auction prior to the Contract Anniversary on which the
declared interest rate becomes applicable, then during the 45-day period after
the Contract Anniversary the Owner may elect to receive the value of the
Contract's Accumulation Account without assessment of a withdrawal charge. Such
withdrawal may, however, result in adverse tax consequences. (See "Federal Tax
Status").
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
FIXED ACCUMULATION VALUE
(1) CREDITING FIXED ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the net Purchase Payment to be allocated to the Fixed Account in
accordance with the allocation factor will be credited to the Accumulation
Account in the form of Fixed Accumulation Units. The number of Fixed
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the Fixed Account by the Fixed Accumulation Unit value for the
Contract for the Valuation Period during which the Purchase Payment is received
by the Company.
(2) FIXED ACCUMULATION UNIT VALUE
A Fixed Accumulation Unit value is established at $10.00 for the first
Valuation Period of the calendar month in which the Contract is issued and will
increase for each successive Valuation Period as interest is accrued. All
Contracts issued in a particular calendar month and at a particular rate of
interest, as specified in advance by the Company from time to time, will use the
same series of Fixed Accumulation Unit values throughout the first Contract
Year.
At the first Contract Anniversary the Fixed Accumulation Units credited to a
Contract's Accumulation Account will be exchanged for a second type of Fixed
Accumulation Unit with an equal aggregate value. The value of this second type
of Fixed Accumulation Unit will increase for each Valuation Period during each
Contract Year as interest is accrued at a rate which shall have been determined
by the Company prior to the first day of each Contract Year.
The Company will credit interest to the Contract's Fixed Accumulation
Account at a rate of not less than 4% per year, compounded annually. Once the
rate applicable to a specific Contract is established by the Company, it may not
be changed for the balance of the Contract Year. Additional Payments made during
the Contract Year will be credited with interest for the balance of the Contract
Year at the rate applicable at the beginning of that Contract Year. The Fixed
Accumulation Unit value for the Contract for any Valuation Period is the value
determined as of the end of such Valuation Period.
(3) FIXED ACCUMULATION VALUE
The fixed accumulation value of a Contract, if any, for any Valuation Period
is equal to the value of the Fixed Accumulation Units credited to the
Accumulation Account for such Valuation Period.
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LOANS FROM THE FIXED ACCOUNT
Loans will be permitted from the Contract's Fixed Accumulation Account (to
the extent permitted by the retirement plan for which the Contract is
purchased). The maximum loan amount is the amount determined under the Company's
maximum loan formula for qualified plans. The minimum loan amount is $1,000.
Loans will be secured by a security interest in the Contract. Loans are subject
to applicable retirement program legislation and their taxation is determined
under the federal income tax laws. The amount borrowed will be transferred to a
fixed minimum guarantee accumulation account in the Company's general account
where it will accrue interest at a specified rate below the then current loan
interest rate. Generally, loans must be repaid within five years.
The amount of the death benefit, the amount payable on a full surrender and
the amount applied to provide an annuity on the Annuity Commencement Date will
be reduced to reflect any outstanding loan balance (plus accrued interest
thereon). Partial withdrawals may be restricted by the maximum loan limitation.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the annuity payment rates found in the Contract which are based
on a minimum guaranteed interest rate of 4% per year, or, if more favorable to
the Payee(s), in accordance with the Single Premium Immediate Settlement Rates
published by the Company and in use on the Annuity Commencement Date.
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APPENDIX B
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS
Suppose the net asset value of a Fund share at the end of the current
Valuation Period is $18.38; at the end of the immediately preceding Valuation
Period is $18.32; the Valuation Period is one day; no dividends or distributions
caused Fund shares to go "ex-dividend" during the current Valuation Period.
$18.38 divided by $18.32 is 1.00327511. Subtracting the one day risk factor for
mortality and expense risks of .00003539 (the daily equivalent of the current
charge of 1.3% on an annual basis) gives a net investment factor of 1.00323972.
If the value of the Variable Accumulation Unit for the immediately preceding
Valuation Period had been 14.5645672, the value for the current Valuation Period
would be 14.6117523 (14.5645672 x 1.00323972).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS
Suppose the circumstances of the first example exist, and the value of an
Annuity Unit for the immediately preceding Valuation Period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the Annuity Unit
for the current Valuation Period would be 12.3843446 (12.3456789 x 1.00323972 x
0.99989255).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS
Suppose that the Accumulation Account of a deferred Contract is credited
with 8,765.4321 Variable Accumulation Units of a particular Sub-Account but is
not credited with any Fixed Accumulation Units; that the Variable Accumulation
Unit value and the Annuity Unit value for the particular Sub-Account for the
Valuation Period which ends immediately preceding the Annuity Commencement Date
are 14.5645672 and 12.3456789, respectively; that the annuity payment rate for
the age and option elected is $6.78 per $1,000; and that the Annuity Unit value
on the day prior to the second variable annuity payment date is 12.3843446. The
first variable annuity payment would be $865.57 (8,765.4321 x 14.5645672 x 6.78
divided by 1,000). The number of Annuity Units credited would be 70.1112
($865.57 divided by 12.3456789) and the second variable annuity payment would be
$868.28 (70.1112 x 12.3843446).
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APPENDIX C
WITHDRAWALS AND WITHDRAWAL CHARGES
Suppose, for example, that the initial Purchase Payment under a Contract was
$2,000, and that $2,000 Purchase Payments were made on each Contract Anniversary
thereafter. The maximum free withdrawal amount would be $200, $400, $600, $800,
and $1,000 in Contract Years 1, 2, 3, 4, and 5, respectively; these amounts are
determined as 10% of the new Payments (as new Payments are defined in each
Contract Year).
In years after the 5th, the maximum free withdrawal amount will be increased
by any old Payments which have not already been liquidated. Continuing the
example, consider a partial withdrawal of $4,500 made during the 7th Contract
Year. Let us consider this withdrawal under two sets of circumstances, first
where there were no previous partial withdrawals, and second where there had
been an $800 cash withdrawal payment made in the 5th Contract Year.
1. In the first instance, there were no previous partial withdrawals. The
maximum free withdrawal amount in the 7th Contract Year is then $5,000,
which consists of $4,000 in old Payments ($2,000 from each of the first
two Contract Years) and $1,000 as 10% of the new Payments in years 3-7.
Because the $4,500 partial withdrawal is less than the maximum free
withdrawal amount of $5,000, no withdrawal charge would be imposed.
This withdrawal would liquidate the Purchase Payments which were made in
Contract Years 1 and 2, and would liquidate $500 of the Purchase Payment
which was made in Contract Year 3.
2. In the second instance, an $800 cash withdrawal payment had been made in
the 5th Contract Year. Because the cash withdrawal payment was less than
the $1,000 maximum free withdrawal amount in the 5th Contract Year, no
surrender charge would have been imposed. The $800 cash withdrawal
payment would have liquidated $800 of the Purchase Payment in the 1st
Contract Year.
As a consequence, the maximum free withdrawal amount in the 7th Contract
Year is only $4,200, consisting of $3,200 in old Payments ($1,200
remaining from year 1 and $2,000 from year 2) and $1,000 as 10% of new
Payments. A $4,500 partial withdrawal exceeds the maximum free withdrawal
amount by $300. Therefore the amount subject to the withdrawal charge is
$300 and the withdrawal charge is $300 X 0.05, or $15. The amount of the
cash withdrawal payment is the $4,500 partial withdrawal, minus the $15
withdrawal charge, or $4,485. The $4,500 partial withdrawal would be
charged to the Contract's Accumulation Account in the form of canceled
Accumulation Units.
This withdrawal would liquidate the remaining $1,200 from the Purchase
Payment in Contract Year 1, the full $2,000 Purchase Payment from
Contract Year 2, and $1,300 of the Payment from Contract Year 3.
Suppose that the Owner of the Contract wanted to make a full surrender of
the Contract in year 7 instead of a $4,500 partial withdrawal. The consequences
would be as follows:
1. In the first instance, where there were no previous cash withdrawal
payments, we know from above that the maximum free withdrawal amount in
the 7th Contract year is $5,000. The sum of the old and new Payments not
previously liquidated is $14,000 ($2,000 from each Contract Year). The
amount subject to the withdrawal charge is thus $9,000. The withdrawal
charge on full surrender would then be $9,000 X 0.05 or $450.
2. In the second instance, where $800 had previously been withdrawn, we know
from above that the maximum free withdrawal amount in the 7th Contract
Year is $4,200. The sum of old and new Payments not previously liquidated
is $14,000 less the $800 which was previously liquidated, or $13,200. The
amount subject to the withdrawal charge is still $9,000 ($13,200 -
$4,200). The withdrawal charge on full surrender would thus be the same
as in the first example.
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