<PAGE>
Rule 497(c)
File No. 2-78738
811-03530
PROSPECTUS
MAY 1, 1999
COMPASS I
Sun Life Assurance Company of Canada (U.S.) ("we" or the "Company") and Sun
Life of Canada (U.S.) Variable Account C (the "Variable Account") offer the
individual flexible payment deferred annuity contracts (the "Contracts")
described in this Prospectus. The Contracts are designed for use in connection
with retirement plans that 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 INTERNAL REVENUE CODE SINCE MAY 1, 1990.
Contract owners may choose among 11 variable investment options and a fixed
account option. The variable options are sub-accounts in the Variable Account,
each of which invests in shares in one of the following mutual funds advised by
our affiliate Massachusetts Financial Services Company (the "Funds"):
<TABLE>
<CAPTION>
<S> <C>
MFS Money Market Fund Massachusetts Investors Trust
MFS Government Money Market Fund MFS Research Fund
MFS Global Governments Fund Massachusetts Investors Growth Stock Fund
MFS Bond Fund MFS Growth Opportunities Fund
MFS High Income Fund MFS Emerging Growth Fund
MFS Total Return Fund
</TABLE>
The fixed account option pays interest at a guaranteed fixed rate.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR EACH OF THE
FUNDS. PLEASE READ THIS PROSPECTUS AND THE FUND PROSPECTUSES CAREFULLY BEFORE
INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE COMPASS I ANNUITY AND THE FUNDS.
We have filed a Statement of Additional Information dated May 1, 1999 (the
"SAI"), which is incorporated by reference in this Prospectus, with the
Securities and Exchange Commission (the "SEC"). The table of contents for the
SAI is on page 21 of this Prospectus. You may obtain a copy without charge by
writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215
or (617) 348-9600. In addition, the SEC maintains a website (HTTP://WWW.SEC.GOV)
that contains the SAI, materials incorporated by reference, and other
information regarding companies that file with the SEC.
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.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
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 Phase 9
Cash Withdrawals 11
Death Benefit 11
Contract Charges 13
Annuity Provisions 14
Other Contract Provisions 16
Federal Tax Status 18
Year 2000 Compliance 19
Distribution of the Contracts 19
Legal Proceedings 20
Owner Inquiries 20
Table of Contents for Statement of Additional Information 20
</TABLE>
DEFINITIONS
The Contract is a legal document that uses a number of specially defined
terms. We explain some of the terms that we use in this Prospectus in the
context where they arise, and others are self-explanatory. In addition, for
convenient reference, we have compiled the following list of terms used in this
Prospectus. If you come across a term that you do not understand, please refer
to this list of definitions for an explanation.
Accumulation Account: An account we establish for the Contract to which we
credit net Purchase Payments in the form of Accumulation Units.
Accumulation Phase: The period before the Annuity Commencement Date and during
the lifetime of the Annuitant. The Accumulation Phase will also terminate when
the Owner surrenders the Contract.
Accumulation Unit: A unit of measure we use 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 we are to make the first annuity
payment.
Annuity Unit: A unit of measure we use 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.
Company: Sun Life Assurance Company of Canada (U.S.) (also referred to in this
Prospectus as "we").
Contract Years and Contract Anniversaries: The first Contract Year is the period
of 12 months plus a part of a month as measured from the date we issue the
Contract to the first day of the calendar month that follows the calendar month
of issue. All Contract Years and Contract Anniversaries thereafter are 12 month
periods based upon the first day of the calendar month that 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 us.
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 that 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
2
<PAGE>
retirement plan that meets the requirements of Section 401 or Section 408
(excluding Section 408(b)) of the Internal Revenue Code.
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 the Owner pays to us, or that is paid to
us on the Owner's behalf, as consideration for the benefits provided by the
Contract.
Sub-Account: That portion of the Variable Account that invests in shares of a
specific 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 that vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
We: Sun Life Assurance Company of Canada (U.S.).
SYNOPSIS
We allocate Purchase Payments to Sub-Accounts of the Variable Account or to
the Fixed Account option or both, as the Owner selects. 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). During the Accumulation
Phase, the Owner may, without charge, transfer amounts among the Sub-Accounts
and between the Sub-Accounts and the Fixed Account, subject to certain
conditions (see "Transfers" on page 10).
We do not deduct a sales charge from Purchase Payments; however, if the
Owner makes a cash withdrawal, we will, with certain exceptions, deduct a 5%
withdrawal charge. The Owner may withdraw a portion of the Accumulation Account
each year before we assess the withdrawal charge and after we have held a
Purchase Payment for five years the Owner may withdraw it without charge. We do
not assess a withdrawal charge upon annuitization or upon the transfers
described above (see "Cash Withdrawals" and "Withdrawal Charges" on pages 11 and
13, respectively).
If the Annuitant dies before the Annuity Commencement Date, we will pay a
death benefit to the Beneficiary. If the Annuitant dies on or after the Annuity
Commencement Date, we will not pay a death benefit, except as may be provided
under the annuity option elected (see "Death Benefit" on page 11).
We deduct a contract maintenance charge of $25 on each Contract Anniversary
and on a surrender of the Contract for full value. After the Annuity
Commencement Date, we deduct this charge pro rata from each annuity payment we
make during the year. (See "Contract Maintenance Charge" on page 13.)
We also deduct a mortality and expense risk charge equal to an annual rate
of 1.30% of the daily net assets of the Variable Account (see "Mortality and
Expense Risk Charge" on page 13).
We will deduct a charge for premium taxes payable to any governmental entity
(see "Premium Taxes" on page 14).
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, the Owner may return it to
the Company at our Annuity Service Mailing Address within ten days after we
deliver the Contract to the Owner. When we receive the returned Contract we will
cancel it and refund the full amount of any Purchase Payment(s) we have
received.
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 you 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. We have
restated the expense information for certain Funds 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 MMM MMG MWG MFB MFH MTR MIT MFR
- ---------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases 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%
more than 5......................... 0% 0% 0% 0% 0% 0% 0% 0%
Exchange Fee............................ 0 0 0 0 0 0 0 0
ANNUAL CONTRACT FEE
- ---------------------------------------- -----------------$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%
Other Account Fees and Expenses......... 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%
FUND ANNUAL EXPENSES
- ----------------------------------------
(as a percentage of Fund average net assets)
Management Fees......................... 0.45% 0.47% 0.75% 0.38% 0.45% 0.34% 0.33% 0.43%
12b-1 Fees(2)........................... -- -- 0.25%(3) 0.30%(5) 0.30%(5) 0.35% 0.35% 0.35%
Other Expenses(6)....................... 0.22% 0.25% 0.32% 0.26% 0.24% 0.21% 0.19% 0.23%
Total Fund Annual Expenses.............. 0.67% 0.72% 1.32% 0.94% 0.99% 0.90% 0.87% 1.01%
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES MIG MGO MEG
- ---------------------------------------- -------- ----------- -----------
<S> <C> <C> <C>
Sales Load Imposed on Purchases 0 0 0
Deferred Sales Load (as a percentage of
Purchase Payments withdrawn)(1)
Years Payment in Account
0-5................................. 5% 5% 5%
more than 5......................... 0% 0% 0%
Exchange Fee............................ 0 0 0
ANNUAL CONTRACT FEE
- ----------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ----------------------------------------
(as a percentage of average separate acc
Mortality and Expense Risk Fees......... 1.30% 1.30% 1.30%
Other Account Fees and Expenses......... 0.00% 0.00% 0.00%
Total Separate Account Annual
Expenses.............................. 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ----------------------------------------
(as a percentage of Fund average net ass
Management Fees......................... 0.33% 0.42% 0.69%
12b-1 Fees(2)........................... 0.35% 0.18%(3)(4) 0.25%(3)
Other Expenses(6)....................... 0.21% 0.18% 0.21%
Total Fund Annual Expenses.............. 0.89% 0.78% 1.15%
</TABLE>
- ------------
(1) A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after we have held a
Purchase Payment for five years it may be withdrawn free of any withdrawal
charge.
(2) Each of the Funds except MMM and MMG has adopted a distribution plan for its
shares in accordance with Rule 12b-1 under the Investment Company Act of
1940, as amended, which provides that it will pay distribution/service fees
aggregating up to (but not necessarily all of) 0.35% per annum of the
average daily net assets attributable to the Class A shares. See
"Information Concerning Shares of the Fund -- Distribution Plan" in the
Fund's Prospectus.
(3) Payment of the 0.10% per annum Class A distribution fee will be imposed on
such date as the Trustees of the Fund may determine.
(4) The 0.35% per annum distribution/service fee is reduced to 0.25% for shares
purchased prior to March 1, 1991.
(5) 0.05% of the Class A distribution fee is currently being paid by the Fund.
Payment of the remaining portion of the Class A distribution fee will become
payable upon such date as the Trustees of the Trust may determine.
(6) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such reductions are reflected
under "Other Expenses."
4
<PAGE>
EXAMPLES
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 $161 $240
MCG..................................... $68 $116 $164 $245
MWG..................................... $74 $133 $194 $305
MFB..................................... $70 $122 $175 $268
MFH..................................... $71 $124 $178 $273
MTR..................................... $70 $121 $173 $264
MIT..................................... $69 $120 $172 $261
MFR..................................... $71 $124 $179 $275
MIG..................................... $70 $121 $173 $263
MGO..................................... $69 $118 $167 $251
MEG..................................... $72 $128 $186 $289
</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..................................... $21 $ 65 $111 $240
MCG..................................... $22 $ 66 $114 $245
MWG..................................... $28 $ 84 $144 $305
MFB..................................... $24 $ 73 $125 $268
MFH..................................... $24 $ 75 $128 $273
MTR..................................... $23 $ 72 $123 $264
MIT..................................... $23 $ 71 $122 $261
MFR..................................... $24 $ 75 $129 $275
MIG..................................... $23 $ 72 $122 $261
MGO..................................... $22 $ 68 $117 $251
MEG..................................... $26 $ 79 $136 $289
</TABLE>
THE EXAMPLES 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,
------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MIT
Unit Value:
Beginning of period $ 20.3467 $ 27.3399 $ 26.9745 $ 34.0429 $ 36.0967 $ 39.2065 $38.3097 $52.6746 $65.4965 $ 85.1160
End of period $ 27.3399 $ 26.9745 $ 34.0429 $ 36.0967 $ 39.2065 $ 38.3097 $52.6746 $65.4965 $85.1160 $103.3129
Units outstanding end of period 367,624 366,752 316,483 299,263 263,601 233,419 228,398 211,924 191,532 156,406
MIG
Unit Value:
Beginning of period $ 15.8380 $ 21.2145 $ 19.9645 $ 29.1252 $ 30.6143 $ 34.5944 $31.8549 $40.3897 $48.9432 $ 71.6206
End of period $ 21.2145 $ 19.9645 $ 29.1252 $ 30.6143 $ 34.5944 $ 31.8549 $40.3897 $48.9432 $71.6206 $ 98.9683
Units outstanding end of period 292,277 264,246 234,979 237,389 210,268 191,666 183,386 137,226 116,839 110,261
MTR
Unit Value:
Beginning of period $ 22.1974 $ 26.9600 $ 26.0022 $ 31.2350 $ 33.9389 $ 38.5828 $37.0619 $46.4569 $52.6180 $ 62.6622
End of period $ 26.9600 $ 26.0022 $ 31.2350 $ 33.9389 $ 38.5828 $ 37.0619 $46.4569 $52.6180 $62.6622 $ 69.2493
Units outstanding end of period 1,022,129 1,028,444 761,746 699,832 646,262 580,826 502,308 445,574 376,845 308,476
MGO
Unit Value:
Beginning of period $ 15.6008 $ 19.7926 $ 18.6788 $ 22.6160 $ 24.0443 $ 27.4921 $26.0211 $34.5473 $41.5395 $ 50.5718
End of period $ 15.6008 $ 19.7926 $ 18.6788 $ 22.6160 $ 24.4921 $ 26.0211 $34.5473 $41.5395 $50.5718 $ 64.4932
Units outstanding end of period 2,184,592 1,827,215 1,517,720 1,303,035 1,126,904 952,138 835,555 752,698 682,668 617,973
MFR
Unit Value:
Beginning of period $ 17.8986 $ 22.2941 $ 20.6700 $ 27.1037 $ 29.7380 $ 35.7429 $35.2820 $48.2543 $59.3112 $ 70.5612
End of period $ 22.2941 $ 20.6700 $ 27.1037 $ 29.7380 $ 35.7429 $ 35.2820 $48.2543 $59.3112 $70.5612 $ 85.6092
Units outstanding end of period 435,924 340,420 285,749 253,146 232,537 189,988 158,916 143,843 129,195 121,411
MFB
Unit Value:
Beginning of period $ 18.2668 $ 20.4642 $ 21.4953 $ 25.2705 $ 26.5208 $ 29.8082 $27.9595 $33.5161 $34.3871 $ 37.4559
End of period $ 20.4642 $ 21.4953 $ 25.2705 $ 26.5208 $ 29.8082 $ 27.9595 $33.5161 $34.3871 $37.4559 $ 38.6443
Units outstanding end of period 689,054 577,242 461,410 421,711 368,774 233,449 226,571 186,637 158,314 139,906
MMM
Unit Value:
Beginning of period $ 14.5714 $ 15.6562 $ 16.6504 $ 17.3549 $ 17.6517 $ 17.8424 $18.2359 $18.9505 $19.5956 $ 20.2949
End of period $ 15.6562 $ 16.6504 $ 17.3549 $ 17.6517 $ 17.8424 $ 18.2359 $18.9505 $19.5956 $20.2949 $ 21.0291
Units outstanding end of period 1,661,689 1,574,435 1,090,472 646,162 512,329 480,850 371,369 401,141 301,313 247,311
MCG
Unit Value:
Beginning of period $ 14.2436 $ 15.2737 $ 16.1947 $ 16.8311 $ 17.1053 $ 17.2531 $17.5882 $18.2642 $18.8643 $ 19.4875
End of period $ 15.2737 $ 16.1947 $ 16.8311 $ 17.1053 $ 17.2531 $ 17.5882 $18.2642 $18.8643 $19.4875 20.1619
Units outstanding end of period 545,293 538,594 375,155 218,074 162,009 139,248 108,206 73,345 68,686 67,794
MFH
Unit Value:
Beginning of period $ 19.3661 $ 18.7620 $ 15.1874 $ 22.6883 $ 26.2356 $ 30.9007 $29.6848 $34.3557 $38.2245 $ 42.8235
End of period $ 18.7620 $ 15.1874 $ 22.6883 $ 26.2356 $ 30.9007 $ 29.6848 $34.3557 $38.2245 $42.8235 $ 42.6829
Units outstanding end of period 1,079,466 624,184 515,396 450,376 408,637 339,549 264,391 229,079 200,252 168,359
MWG
Unit Value:
Beginning of period $ 21.6384 $ 22.9549 $ 26.7105 $ 29.9468 $ 29.9680 $ 34.9430 $32.3034 $36.8194 $38.3007 $ 37.9444
End of period $ 22.9549 $ 26.7105 $ 29.9468 $ 29.9680 $ 34.9430 $ 32.3034 $36.8194 $38.3007 $37.9444 $ 38.9935
Units outstanding end of period 248,462 227,935 200,763 157,841 125,704 101,661 83,177 70,278 55,822 49,718
MEG
Unit Value:
Beginning of period $ 12.8148 $ 15.9033 $ 13.8995 $ 23.3793 $ 24.8430 $ 31.1131 $32.2107 $44.8831 $50.8597 $ 60.5646
End of period $ 15.9033 $ 13.8995 $ 23.3793 $ 24.8430 $ 31.1131 $ 32.2107 $44.8831 $50.8597 $60.5646 $ 74.4225
Units outstanding end of period 830,401 585,909 511,153 439,127 405,542 390,605 372,726 321,077 280,589 249,765
</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.) is a stock life insurance
company incorporated under the laws of Delaware on January 12, 1970. Our
Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02481.
We are 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
We established the Variable Account as a separate account of the Company on
March 31, 1982, pursuant to a resolution of our 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 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. We will make 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, in effect, 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
together with this Prospectus.
MFS-REGISTERED TRADEMARK- MONEY MARKET FUND ("MMM")
MMM seeks high current income consistent with preservation of capital and
liquidity. MMM is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. MMM invests in money
market instruments, which are short-term notes or other fixed income securities
issued by banks or other corporations or the U.S. Government or other
governmental entities. Money market instruments purchased by MMM have maturities
of 13 months or less.
MFS-REGISTERED TRADEMARK- GOVERNMENT MONEY MARKET FUND ("MMG")
MMG will seek high current income consistent with preservation of capital
and liquidity. MMG is a money market fund, meaning it tries to maintain a share
price of $1.00 while paying income to its shareholders. MMG invests its total
assets in U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by, the U.S.
Government or one of its agencies or instrumentalities, including repurchase
agreements collateralized
7
<PAGE>
by such securities. U.S. Government securities purchased by MMG must have
maturities of 13 months or less.
MFS-REGISTERED TRADEMARK- GLOBAL GOVERNMENTS FUND ("MWG")
MWG will seek income and capital appreciation. MWG invests, under normal
conditions, at least 65% of its total assets in U.S. Government securities and
foreign government securities (including emerging market securities). MWG may
also invest in corporate bonds, including lower rated bonds (junk bonds), and
mortgage-backed and asset-backed securities.
MFS-REGISTERED TRADEMARK- BOND FUND ("MFB")
MFB will primarily seek to provide as high a level of current income as is
believed to be consistent with prudent risk. MFB's secondary objective is to
protect shareholders' capital. MFB invests, under normal market conditions, at
least 65% of its total assets in corporate bonds, U.S. Government securities and
mortgage-backed and asset-backed securities.
MFS-REGISTERED TRADEMARK- HIGH INCOME FUND ("MFH")
MFH will seek high current income by investing primarily in professionally
managed diversified portfolio of fixed income securities, some of which may
involve equity features. MFH invests, under normal market conditions, at least
80% of its total assets in high yield fixed income securities. Fixed income
securities offering the high current income level sought by MFH are lower rated
bonds (junk bonds).
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 the prudent employment
of capital. Its secondary objective is to seek reasonable opportunity for growth
of capital and income. MTR is a "balanced fund" and invests in a combination of
equity and fixed income securities. Under normal market conditions, MTR invests:
(i) at least 40%, but not more than 75%, of its net assets in common stocks and
related securities (referred to as equity securities), such as preferred stock,
bonds, warrants or tights convertible into stock, and depositary receipts for
those securities, and (ii) at least 25% of its net assets in non-convertible
fixed income securities.
MASSACHUSETTS INVESTORS TRUST ("MIT")
MIT will seek reasonable current income and long-term growth of capital and
income. MIT invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
convertible securities, and depositary receipts. While MIT may invest in
companies of any size, it generally focuses on companies with larger market
capitalizations that its investment adviser believes have sustainable growth
prospects and attractive valuations based on current and expected earnings or
cash flow.
MFS-REGISTERED TRADEMARK- RESEARCH FUND ("MFR")
MFR will seek long-term growth of capital and future income. MFR invests,
under normal market conditions, at least 80% of its total assets in common
stocks and related securities, such as preferred stock, convertible securities
and depositary receipts. MFR focuses on companies that its investment adviser
believes have favorable prospects for long-term growth, attractive valuations
based on current and expected earnings or cash flow, dominant or growing market
share, and superior management.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND ("MIG")
MIG will seek long-term growth of capital and future income rather than
current income. MIG invests its assets (except for working cash balances) in the
common stocks, or securities convertible into common stocks, of companies which
its investment adviser believes offer better-than-average prospects for
long-term growth.
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MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND ("MGO")
MGO will seek growth of capital. MGO invests, under normal market
conditions, at least 65% of its total assets in common stocks and related
securities (such as preferred stock, convertible securities, and depositary
receipts) of companies with MGO's investment adviser believes possess
above-average growth opportunities. MGO also invests in fixed income securities
when relative values or economic conditions make these securities attractive.
MFS-REGISTERED TRADEMARK- EMERGING GROWTH FUND ("MEG")
MEG will seek long-term growth of capital by investing primarily in common
stocks and related securities (such as preferred stocks, convertible securities
and depositary receipts) of emerging growth companies. These companies are
companies which MEG's adviser believes are either early in their life cycle but
which have the potential to become major enterprises or are major enterprises
whose rates of earnings growth are expected to accelerate. 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 PHASE
PURCHASE PAYMENTS
All Purchase Payments are to be paid to us at our Annuity Service Mailing
Address. Purchase Payments may be made annually, semi-annually, quarterly,
monthly or on any other frequency acceptable to us. Unless the Owner has
surrendered the Contract, 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, our approval is required before we will accept a
Purchase Payment if the value of a Contract's Accumulation Account exceeds
$1,000,000 or if the Purchase Payment would cause the value of a Contract's
Accumulation Account to exceed $1,000,000.
Completed application forms, together with the initial Purchase Payment, are
forwarded to us. Upon acceptance, we issue the Contract to the Owner and credit
the initial Purchase Payment to the Contract in the form of Accumulation Units.
We will credit the initial Purchase Payment within two business days of our
receipt of a completed application. If an application is incomplete, we may
retain the Purchase Payment for up to five business days while we attempt to
complete the application. If we cannot complete the application within five
business days, we will inform the applicant of the reasons for the delay and
return the Purchase Payment immediately, unless the applicant specifically
consents to our retaining the Purchase Payment until the application is made
complete. Once the application is completed, we will credit the Purchase Payment
within two business days. We will apply all subsequent Purchase Payments using
the Accumulation Unit values for the Valuation Period during which we receive
the Purchase Payment.
We 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.
We will allocate each net Purchase Payment to either 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 that the Owner specifies in
the application or as subsequently changed (see Appendix A to the Statement of
Additional Information for a description of the Fixed Account). Upon receipt of
a Purchase Payment, we will credit all or that portion, if any, of the net
Purchase Payment to be allocated to the Sub-Accounts to the Accumulation Account
in the form of Variable Accumulation Units. The number of Variable Accumulation
Units we credit is determined by dividing the dollar amount allocated to a Sub-
Account by the Variable Accumulation Unit value for that Sub-Account for the
Valuation Period during which we received the Purchase Payment.
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We established the Variable Accumulation Unit value for each Sub-Account at
$10.00 for the first Valuation Period of that Sub-Account. We determine the
Variable Accumulation Unit value for the Sub-Account for any subsequent
Valuation Period by multiplying the Variable Accumulation Unit value for the
immediately preceding Valuation Period by the Net Investment Factor for the
subsequent Valuation Period. The Variable Accumulation Unit value for each
Sub-Account for any Valuation Period is determined at the end of the 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 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
During the Accumulation Phase, the Owner may transfer all or part of the
Contract's Accumulation Account Value to one or more Sub-Accounts then available
or to the Fixed Account, or to any combination of these options. We make these
transfers by converting the value of the Accumulation Units the Owner wishes to
transfer into Variable Accumulation Units of Sub-Accounts and/or Fixed
Accumulation Units of the same aggregate value, as the Owner chooses. These
transfers are subject to the following conditions:
(1) Transfers 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 transfers may be made in any Contract Year; and
(3) The value of Accumulation Units transferred 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 transferred.
In addition, these transfers will be subject to such terms and conditions as
each Fund may impose. We will make these transfers using the Accumulation Unit
values for the Valuation Period during which we receive the request for
transfer. You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for transfer made by telephone.
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We will not be liable for following instructions communicated by telephone that
we reasonably believe are genuine.
CASH WITHDRAWALS
At any time during the Accumulation Phase, the Owner may elect to receive a
cash withdrawal payment under the Contract. Withdrawals may be subject to a
withdrawal charge (see "Withdrawal Charges"). Withdrawals also may have adverse
federal income tax consequences, including a 10% penalty tax (see "Federal Tax
Status"). Since the Contracts will be issued only in connection with retirement
plans that meet the requirements of Section 401 or Section 408 (excluding
Section 408(b)) of the Internal Revenue Code, you should refer to the terms of
the particular retirement plan for any limitations or restrictions on cash
withdrawals.
A withdrawal request will be effective on the date we receive it. If the
Owner requests a withdrawal of more than $5,000, we may require a signature
guarantee. The request must specify the amount the Owner wishes to withdraw. For
a partial withdrawal, the Owner may specify the amount to be withdrawn from the
Fixed Account and/or each Sub-Account to which the Contract's Accumulation
Account is allocated. If the Owner does not so specify, we will deduct the total
amount requested pro rata based on the allocations at the end of the Valuation
Period during which we receive the withdrawal request.
If the Owner requests a full withdrawal, we will pay the value of the
Accumulation Account at the end of the Valuation Period during which we receive
the request, minus the contract maintenance charge for the current Contract Year
and any applicable withdrawal charge. If the Owner requests a partial
withdrawal, we will pay the amount requested less any applicable withdrawal
charge and we will reduce the value of the Contract's Accumulation Account by
deducting the amount requested. If the Owner requests a partial withdrawal that
would result in the value of the Accumulation Account being reduced to an amount
less than the contract maintenance charge for the current Contract Year, we will
treat it as a request for a full withdrawal.
We will pay you the applicable amount of any full or partial withdrawal
within seven days after we receive the Owner's withdrawal request, except in
cases where we are permitted to defer payment under the Investment Company Act
of 1940 and applicable state insurance law. Currently, we may defer payment of
amounts withdrawn only for following periods:
- when the New York Stock Exchange is closed, except weekends and holidays
or when trading on the New York Stock Exchange is restricted;
- when it is not reasonably practical to dispose of securities held by the
Funds or to determine the value of the net assets of the Funds because an
emergency exists; or
- when an SEC order permits us to defer payment for the protection of
securities holders.
DEATH BENEFIT
If the Annuitant dies before the Annuity Commencement Date, we will pay a
death benefit to the Beneficiary. If the Annuitant dies on or after the Annuity
Commencement Date, we will not pay a death benefit, except as may be provided
under Annuity Options B, D, or E, if elected. (Under these options, the
Beneficiary may choose to receive remaining payments as they become due or a
single lump sum payment of their discounted value.)
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. If there is no designated Beneficiary living on the
date of death of the Annuitant, we will pay the death benefit in one lump sum to
the Owner, or if the Owner is the Annuitant, to the estate of the
Owner/Annuitant.
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During the lifetime of the Annuitant and before the Annuity Commencement
Date, the Owner may elect to have the death benefit payable under one or more of
our annuity options listed under "Annuity Provisions" in this Prospectus, for
the Beneficiary as Payee. If the Owner has not elected a method of settlement of
the death benefit that is in effect on the date of death of the Annuitant, the
Beneficiary may elect to receive the death benefit in the form of either a cash
payment or one or more of our annuity options. If we do not receive an election
by the Beneficiary within 60 days after the date we receive Due Proof of Death
of the Annuitant and any required release or consent, 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 will be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code.
You should refer 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, we will make
payment within seven days of the date the election becomes effective or is
deemed to become effective, except as we 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 Owner/Annuitant, we will make
payment within seven days of the date we receive Due Proof of Death of the
Annuitant and the Beneficiary.
If the death benefit is to be paid under one or more of our annuity options,
the Annuity Commencement Date will be the first day of the second calendar month
following the effective date or the deemed effective date of the election, and
we will maintain the Contract's Accumulation Account in effect until the Annuity
Commencement Date. The Owner or Beneficiary may elect an Annuity Commencement
Date later than that described above, 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 after the fifth
(5th) Contract Anniversary.
To determine the amount of the death benefit under (1) above, we will use
Accumulation Values for the Valuation Period during which we receive Due Proof
of Death of the Annuitant if the Owner has elected settlement under one or more
of the annuity options; if no election by the Owner is in effect, we will use
either the values for the Valuation Period during which an election by the
Beneficiary becomes or is deemed effective or, if the death benefit is to be
paid in one sum to the Owner or to the Owner/Annuitant's estate, the values for
the Valuation Period during which we receive Due Proof of Death of both the
Annuitant and the designated Beneficiary.
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CONTRACT CHARGES
We will assess contract charges under the Contract as follows:
CONTRACT MAINTENANCE CHARGE
We deduct an annual contract maintenance charge of $25 as partial
reimbursement for administrative expenses relating to the issuance and
maintenance of the Contract. Prior to the Annuity Commencement Date, we deduct
this charge on each Contract Anniversary. We will also deduct this charge on
surrender of the Contract for full value on a date other than the Contract
Anniversary. We deduct the contract maintenance charge 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, we will reduce the value of the Contract's
Accumulation Account 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,
we will deduct the contract maintenance charge pro rata from each annuity
payment made during the year.
We will not increase the amount of the contract maintenance charge. We
reserve 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. We do not expect to make a profit from the contract maintenance
charge.
MORTALITY AND EXPENSE RISK CHARGE
We assume the risk that Annuitants may live for a longer period of time than
we have estimated in establishing the guaranteed annuity rates incorporated into
the Contract, and the risk that administrative charges assessed under the
Contract may be insufficient to cover our actual administrative expenses
incurred.
For assuming these risks, we make a deduction from the Variable Account at
the end of each Valuation Period both during the Accumulation Phase and after
the annuity payments begin at an effective annual rate of 1.30%. We may change
the rate of this deduction annually but it will not exceed 1.30% on an annual
basis. If the deduction is insufficient to cover the actual cost of the
mortality and expense risk undertaking, we will bear the loss. Conversely, if
the deduction proves more than sufficient, the excess will be profit to us and
would be available for any proper corporate purpose including, among other
things, payment of distribution expenses. If the withdrawal charges described
below prove insufficient to cover expenses associated with the distribution of
the Contracts, we will meet the deficiency from our general corporate funds,
which may include amounts derived from the mortality and expense risk charges.
For the year ended December 31, 1998, mortality and expense risk charges were
the only expenses of the Variable Account.
WITHDRAWAL CHARGES
We do not deduct a sales charge from Purchase Payments. However, we will
assess a withdrawal charge (contingent deferred sales charge) on certain amounts
you withdraw as reimbursement 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.
The Owner may withdraw a portion of the Accumulation Account value each year
without imposition of any withdrawal charge, and after we have held a Purchase
Payment for five years it may be withdrawn free of any withdrawal charge. In
addition, we do not assess a withdrawal charge upon annuitization or upon the
transfer of Accumulation Account values among the Sub-Accounts or between the
Sub-Accounts and the Fixed Account.
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All other full or partial withdrawals are subject to a withdrawal charge
equal to 5% of the amount withdrawn that is subject to the charge. We will apply
the charge as follows:
(1) Old Payments, New Payments and "accumulated value": In a given
Contract Year, "New Payments" are Payments made in that Contract Year
or in the previous four Contract Years; "Old Payments" are Payments
made before the previous four Contract Years. The remainder of the
Accumulation Account value -- that is, the value of the Accumulation
Account minus the total of Old Payments and New Payments -- is called
the "accumulated value."
(2) Order of withdrawal: When the Owner makes a full surrender or
partial withdrawal, we consider the oldest Payment not previously
withdrawn to be withdrawn first, then the next oldest, and so forth.
Once all Old Payments and New Payments have been withdrawn,
additional amounts withdrawn will be attributed to accumulated value.
(3) Free withdrawal amount: In any Contract Year, the Owner may withdraw
the following amount before we impose a withdrawal charge: (a) any
Old Payments not previously withdrawn plus (b) 10% of any New
Payments, whether or not these New Payments have been previously
withdrawn.
(4) Amount subject to withdrawal charge: We will impose the 5%
withdrawal charge on the excess, if any, of (a) Old Payments and New
Payments being withdrawn over (b) the remaining free withdrawal
amount at the time of the withdrawal. We do not impose the withdrawal
charge on amounts attributed to accumulated value.
Aggregate withdrawal charges assessed against a Contract will never exceed
5% of the total amount of Purchase Payments made under the Contract (see
Appendix C in the Statement of Additional Information for examples of
withdrawals and withdrawal charges).
PREMIUM TAXES
We will make a deduction, when applicable, for premium taxes or similar
state or local taxes. The amount of such applicable tax varies by jurisdiction
and in many jurisdictions there is no premium tax at all. We believe that such
premium taxes or similar taxes currently range from 0% to 3.5%. It is currently
our policy to deduct the tax from the amount applied to provide an annuity at
the time annuity payments commence. However, we reserve 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.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
We begin making annuity payments under a Contract on the Annuity
Commencement Date, which the Owner selects in the Contract application. The
Owner may change this date 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 certain minimum distributions
commence no later than April 1 following the year the
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Annuitant reaches age 70 1/2. In addition, 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". Any new
Annuity Commencement Date must be at least 30 days after we receive notice of
the change.
On the Annuity Commencement Date, we will cancel the Contract's Accumulation
Account and apply its adjusted value to provide an annuity. The adjusted value
will be equal to the value of the Accumulation Account for the Valuation Period
that ends immediately before the Annuity Commencement Date, reduced by any
applicable premium taxes 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 ANNUITY OPTION B, D, OR E, IF ELECTED. (Under these options,
the if the Annuitant dies on or after the Annuity Commencement Date, the
Beneficiary may choose to receive the remaining payments as they become due or
in a single lump sum payment of their discounted value.)
ANNUITY OPTIONS
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 we may agree to for the Annuitant as Payee,
except as restricted by the particular retirement plan or any applicable
legislation. These 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 before 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 before
the Annuity Commencement Date, we will deem Annuity Option B, for a Life Annuity
with 120 monthly payments certain, 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. If the election does not so specify, 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: We make monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because we do not make further payments 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: We
make 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 was elected.
Annuity Option C. Joint and Survivor Annuity: We make monthly payments 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
this option was elected 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: We make fixed
monthly payments for a specified period of time (at least three years but not
exceeding 30 years), as elected.
Annuity Option E. Fixed Payments: We will hold the amount applied to provide
fixed payments in accordance with this option at interest. We will make fixed
payments in such amounts and at such times as we have agreed upon and will
continue until the amount we hold with interest is exhausted. We will credit
interest yearly on the amount remaining unpaid at a rate which we shall
determine from
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time to time but which shall not be less than 4% per year, compounded annually.
We may change the rate so determined at any time; however, the rate may not be
reduced more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
We will determine the dollar amount of the first Variable Annuity payment in
accordance with the annuity payment rates found in the Contract, which are based
on an assumed interest rate of 4% per year. We determine all Variable Annuity
payments other than the first 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 that ends immediately before the Annuity
Commencement Date. The number of Annuity Units of each 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 Variable Annuity
Units from one Sub-Account to another, up to a maximum of 12 such exchanges each
Contract Year. We calculate the number of new Variable Account units so that the
dollar amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange.
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.
If net investment return of the Sub-Accounts was exactly equal to the
assumed interest rate of 4%, the amount of each Variable Annuity payment would
remain level. If a net investment return is greater than 4%, the amount of each
variable annuity payment would increase; conversely, if the net investment
return is less than 4%, the amount of each variable annuity payment would
decrease.
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.
Transfer of ownership of a Contract is governed by the laws and regulations
applicable to the retirement plan for which we issue the Contract. 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.
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VOTING OF FUND SHARES
We 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. We will vote Fund shares for which no timely voting instructions
are received 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.
We will determine the number of particular Fund shares as to which each such
person is entitled to give instructions on a date not more than 90 days prior to
each such meeting. Prior to the Annuity Commencement Date, we determine the
number of particular Fund shares as to which voting instructions may be given 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, we determine the number of particular Fund shares as to which
such instructions may be given by a Payee 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 Phase, we 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 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 us, 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 we receive notice of any
such error or discrepancy from the Owner within such time period, we 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. We 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, we will provide the Owner with information regarding fixed and
variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any of the Funds may not always be available for purchase by the
Variable Account or we 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, we may substitute shares of another registered open-end
investment company 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, we may
make appropriate endorsement to the Contract to reflect the substitution.
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<PAGE>
MODIFICATION
Upon notice to the Owner, or to the Payee during the annuity period, we may
modify the Contract, 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 we are subject, (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,
(iii) is necessary to reflect a change in the operation of the Variable Account
or the Sub-Accounts, (iv) provides additional Variable Account and/or fixed
accumulation options, or (v) may otherwise be in the best interests of Owners or
Payees, as applicable. In the event of any such modification, we 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 such change in the
operation of the Variable Account, we 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
We reserve 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 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 a
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 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.
18
<PAGE>
TAXATION OF ANNUITIES IN GENERAL
The Contracts 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 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 ("IRAs") permitted by Sections 219 and 408 of the Code (excluding IRAs
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 IRAs 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.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations could
be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to properly
operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. As of December 31, 1998,
over 90% of the system components had been remediated, tested and certified as
Year 2000 compliant. The majority of the remaining components are in the testing
phase and are expected to be certified by March 31, 1999. While it is believed
that these efforts do involve substantial costs, the Company closely monitors
associated costs and continues to evaluate associated risks based on actual
testing. Based on available information, the Company believes that it will be
able to manage its total Year 2000 transition without a material adverse effect
on its business operations, financial condition, or results of operations.
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
19
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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 02481, our wholly-owned subsidiary. We will pay commissions and
other distribution compensation that will not be more than 5.11% of the Purchase
Payments. In addition, after the fifth (5th) Contract Year, we may pay
broker-dealers who have entered into distribution agreements with us an annual
renewal commission of no more than 0.20% of the Contract's Accumulation Account
value.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
are 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....................................................................
Annuity Provisions.....................................................................
Other Contract Provisions..............................................................
Federal Tax Status.....................................................................
Administration of the Contracts........................................................
Distribution of the Contracts..........................................................
Accountants............................................................................
Financial Statements...................................................................
Appendix A--The Fixed Account..........................................................
Appendix B--Illustrative Examples of Variable Accumulation Unit Value, Variable Annuity
Unit Value and Variable Annuity Payment Calculations..................................
Appendix C--Withdrawals and Withdrawal Charges.........................................
</TABLE>
20
<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, 1999 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
- ---------------------------------------------------------------------------
21
<PAGE>
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22
<PAGE>
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<PAGE>
PROSPECTUS [LOGO]
MAY 1, 1999
COMBINATION FIXED/VARIABLE
ANNUITY FOR QUALIFIED
RETIREMENT PLANS
ISSUED IN CONNECTION WITH
SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT C
CO1US-1 5/99
ISSUED BY
SUN LIFE INSURANCE 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 02481
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
Attached hereto and made a part hereof is a Statement of Additional
Information dated May 1, 1999.
<PAGE>
Rule 497(c)
File No. 2-78738
811-03530
MAY 1, 1999
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........................................ 41
Appendix B--Illustrative Examples of Variable Accumulation Unit
Value Calculations, Variable Annuity Unit Value Calculations and
Variable Annuity Payment Calculations............................... 43
Appendix C--Withdrawals and Withdrawal Charges....................... 44
</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, 1999. 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 02481.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of
Sun Life Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S.
Holdco"). U.S. Holdco is a 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 taxes or similar taxes and a proportionate amount of the contract
maintenance charge to reflect the time elapsed between the last Contract
Anniversary and theday 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 seventh (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 seventh (7) 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 or custodian 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
3
<PAGE>
New York, 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 Contract 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 at its Annuity
Service Mailing Address. 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 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 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 hardship distribution or a distribution that is part of a series of
payments made for life or for a specified period of ten years or more. Only
the plan participant or the participant's spouse may elect to roll over a
distribution to an eligible retirement plan.
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.
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 02481, 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 1996, 1997 and 1998, approximately $32,000, $22,500, and
$19,686, 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 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, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
-------------- --------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
-------------- --------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
-------------- --------------
Total liabilities 15,992,697 15,092,662
-------------- --------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
-------------- --------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
-------------- --------------
Surplus 904,024 826,795
-------------- --------------
Total common capital stock and surplus 909,924 832,695
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
7
<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, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
8
<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, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation
basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate
Accounts during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
9
<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, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
10
<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, 1998, 1997 AND 1996
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 currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
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 Sun Life Assurance Company of Canada
("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
20 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
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 mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
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.
11
<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, 1998, 1997 AND 1996
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 as determined
by quoted market prices of the underlying investments.
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 $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
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.
12
<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, 1998, 1997 AND 1996
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"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
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.
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.
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 Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
13
<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, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. 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, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
14
<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, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
15
<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, 1998, 1997 AND 1996
3. BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1998 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, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, 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.
16
<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, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED):
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
17
<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, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED):
Realized capital gains and losses on bonds and mortgages and interest rate swaps
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 $8,943,000 in 1998, $6,321,000
in 1997, and $7,710,000 in 1996. 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,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate 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 or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 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 the IMR and amortized over the shorter of the remaining life of
the hedged asset sold 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.
18
<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, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED):
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, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<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 75,000 693
</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 nonperformance 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 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.
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 (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance sheet.
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 $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, 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, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
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, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</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 increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
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, 1998, 1997 AND 1996
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, 1998
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN THOUSANDS)
<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>
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
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, 1998, 1997 AND 1996
12. SEGMENT INFORMATION (CONTINUED):
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
REVENUES EXPENDITURES INCOME TAXES ASSETS
- --------------------------------------------------- ------------ ------------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ ------------- ---------- ---------- --------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ ------------- ---------- ---------- --------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ ------------- ---------- ---------- --------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ ------------- ---------- ---------- --------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ ------------- ---------- ---------- --------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ ------------- ---------- ---------- --------------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory 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 was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, 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 $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, 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.
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, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of
retiree benefit payments during the years the employee provides services. SFAS
No. 106 allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to 20
years. The obligation of approximately $455,000 is recognized over a period of
ten years. The Company's cash flows are not affected by implementation of this
standard, but implementation decreased net income by $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
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, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
For measurement purposes, a 10.1% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 (5.7% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
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, 1998, 1997 AND 1996
14. 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, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<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)
</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.
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, 1998, 1997 AND 1996
15. 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 table shown below presents changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. 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 $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. 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.
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
semiannually.
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.
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, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
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 $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. 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,
1998, 1997 and 1996.
20. 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 nonadmitted 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.
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, 1998, 1997 AND 1996
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
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 Duration Participating Contracts", exceeds 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.
29
<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.) (the "Company") as of December 31, 1998 and 1997, 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, 1998.
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 20 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 is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory 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, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory 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, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, 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, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, 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, 1999
30
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENT OF CONDITION-- December 31, 1998
<TABLE>
<CAPTION>
ASSETS:
<S> <C> <C> <C>
Investments in mutual funds: Shares Cost Value
--------- ------------ ------------
Massachusetts Investors Trust
("MIT")*............................ 807,736 $ 11,113,878 $ 16,355,408
Massachusetts Investors Growth Stock
Fund ("MIG")*....................... 691,857 8,020,219 11,007,164
MFS Total Return Fund ("MTR")*........ 1,435,169 20,416,046 21,475,555
MFS Growth Opportunities Fund
("MGO")*............................ 2,525,400 30,904,315 40,286,399
MFS Reseach Fund ("MFR")*............. 414,608 6,483,244 10,426,759
MFS Bond Fund ("MFB")*................ 420,440 5,496,552 5,588,040
MFS Money Market Fund ("MCM")......... 5,268,810 5,268,810 5,268,810
MFS Government Money Market Fund
("MCG")............................. 1,370,147 1,370,147 1,370,147
MFS High Income Fund ("MFH")*......... 1,405,043 7,262,724 7,189,492
MFS World Governments Fund ("MWG")*... 191,273 2,205,725 2,019,644
MFS Emerging Growth Fund ("MEG")*..... 418,563 9,294,412 18,667,509
------------ ------------
$107,836,072 $139,654,927
------------
------------
<CAPTION>
LIABILITY:
<S> <C> <C> <C>
Payable to sponsor............................................... (134,935)
------------
Net assets................................................. $139,519,992
------------
------------
</TABLE>
NET ASSETS OF CONTRACT OWNERS:
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
------------------------------------- Variable
Units Unit Value Value Annuities Total
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
MIT......................... 156,406 $ 103.312858 $ 16,155,645 $ 225,310 $ 16,380,955
MIG......................... 110,261 98.968251 10,906,738 114,384 11,021,122
MTR......................... 304,876 69.249292 21,081,700 114,427 21,196,127
MGO......................... 617,973 64.493151 40,084,465 241,640 40,326,105
MFR......................... 121,411 85.609177 10,396,344 43,987 10,440,331
MFB......................... 139,906 38.644340 5,497,200 109,729 5,606,929
MCM......................... 247,311 21.029066 5,197,045 80,381 5,277,426
MCG......................... 67,794 20.161924 1,366,562 3,861 1,370,423
MFH......................... 168,359 42.682892 7,109,897 120,420 7,230,317
MWG......................... 49,718 38.993543 1,938,539 38,894 1,977,433
MEG......................... 249,765 74.422527 18,587,882 104,942 18,692,824
------------ ------------- ------------
Net assets....................................... $138,322,017 $ 1,197,975 $139,519,992
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
*Investments are made in Class A shares of the Fund.
See notes to financial statements
31
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
STATEMENT OF OPERATIONS-- Year Ended December 31, 1998
<TABLE>
<CAPTION>
MIT MIG MTR MGO MFR MFB
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
---------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $1,040,778 $ 888,114 $ 3,432,291 $4,344,859 $ 380,158 $ 404,022
Mortality and expense risk charges.... (219,444 ) (123,343 ) (289,448) (475,498 ) (125,144 ) (73,722)
---------- ---------- ------------ ---------- ---------- -----------
Net investment income............. $ 821,334 $ 764,771 $ 3,142,843 $3,869,361 $ 255,014 $ 330,300
---------- ---------- ------------ ---------- ---------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $4,384,806 $1,715,133 $ 5,702,621 $5,412,285 $1,176,296 $ 1,530,276
Cost of investments sold............ (2,879,524) (1,355,069) (4,172,148) (3,821,380) (592,744 ) (1,591,682)
---------- ---------- ------------ ---------- ---------- -----------
Net realized gains (losses)....... $1,505,282 $ 360,064 $ 1,530,473 $1,590,905 $ 583,552 $ (61,406)
---------- ---------- ------------ ---------- ---------- -----------
Net unrealized appreciation on
investments:
End of year......................... $5,241,530 $2,986,945 $ 1,059,509 $9,382,084 $3,943,515 $ 91,488
Beginning of year................... 4,329,519 1,007,405 3,446,969 5,707,322 2,911,315 172,676
---------- ---------- ------------ ---------- ---------- -----------
Change in unrealized
appreciation.................... $ 912,011 $1,979,540 $(2,387,460) $3,674,762 $1,032,200 $ (81,188)
---------- ---------- ------------ ---------- ---------- -----------
Realized and unrealized gains
(losses).......................... $2,417,293 $2,339,604 $ (856,987) $5,265,667 $1,615,752 $ (142,594)
---------- ---------- ------------ ---------- ---------- -----------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $3,238,627 $3,104,375 $ 2,285,856 $9,135,028 $1,870,766 $ 187,706
---------- ---------- ------------ ---------- ---------- -----------
---------- ---------- ------------ ---------- ---------- -----------
<CAPTION>
MCM MCG MFH MWG MEG
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Total
---------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 268,930 $ 58,364 $ 693,908 $ 132,870 $ 170,889 $11,815,183
Mortality and expense risk charges.... (70,630 ) (15,974 ) (103,145) (26,129 ) (224,649 ) (1,747,126)
---------- ---------- ------------ ---------- ---------- -----------
Net investment income (loss)...... $ 198,300 $ 42,390 $ 590,763 $ 106,741 $ (53,760 ) $10,068,057
---------- ---------- ------------ ---------- ---------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $4,851,493 $ 629,960 $ 1,859,134 $ 288,916 $3,528,393 $31,079,313
Cost of investments sold............ (4,851,493) (629,960 ) (1,710,227) (303,761 ) (1,335,644) (23,243,632)
---------- ---------- ------------ ---------- ---------- -----------
Net realized gains (losses)....... $ -- $ -- $ 148,907 $ (14,845 ) $2,192,749 $ 7,835,681
---------- ---------- ------------ ---------- ---------- -----------
Net unrealized appreciation
(depreciation) on investments:
End of year......................... $ -- $ -- $ (73,232) $(186,081 ) $9,373,097 $31,818,855
Beginning of year................... -- -- 655,044 (153,917 ) 7,828,944 25,905,277
---------- ---------- ------------ ---------- ---------- -----------
Change in unrealized appreciation
(depreciation).................. $ -- $ -- $ (728,276) $ (32,164 ) $1,544,153 $ 5,913,578
---------- ---------- ------------ ---------- ---------- -----------
Realized and unrealized gains
(losses).......................... $ -- $ -- $ (579,369) $ (47,009 ) $3,736,902 $13,749,259
---------- ---------- ------------ ---------- ---------- -----------
INCREASE IN NET ASSETS FROM
OPERATIONS............................. $ 198,300 $ 42,390 $ 11,394 $ 59,732 $3,683,142 $23,817,316
---------- ---------- ------------ ---------- ---------- -----------
---------- ---------- ------------ ---------- ---------- -----------
</TABLE>
See notes to financial statements
32
<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,
------------------------ ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 821,334 $ 1,084,136 $ 764,771 $ 1,201,248 $ 3,142,843 $ 2,494,923
Net realized gains.................... 1,505,282 391,861 360,064 20,166 1,530,473 1,165,431
Net unrealized gains (losses)......... 912,011 2,436,981 1,979,540 1,533,779 (2,387,460) 440,641
----------- ----------- ----------- ----------- ----------- -----------
Increase in net assets from
operations...................... $ 3,238,627 $ 3,912,978 $ 3,104,375 $ 2,755,193 $ 2,285,856 $ 4,100,995
----------- ----------- ----------- ----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.......... $ 250,927 $ 295,282 $ 182,818 $ 161,450 $ 289,514 $ 375,661
Net transfers between Sub-Accounts
and Fixed Account.................. 175,482 443,283 520,045 190,511 (1,127,992) (117,230)
Withdrawals, surrenders,
annuitizations and contract
charges............................ (3,770,189) (2,182,271) (1,231,561) (1,420,037) (3,913,196) (4,140,788)
----------- ----------- ----------- ----------- ----------- -----------
Net accumulation activity......... $(3,343,780) $(1,443,706) $ (528,698) $(1,068,076) $(4,751,674) $(3,882,357)
----------- ----------- ----------- ----------- ----------- -----------
Annuitization activity:
Annuitizations...................... $ -- $ 73,820 $ -- $ -- $ 50,954 $ --
Annuity payments.................... (33,722) (26,781) (28,970) (24,415) (9,910) (132,212)
Adjustments to annuity reserve...... 3,919 12,259 3,506 4,039 (30,175) (139,226)
----------- ----------- ----------- ----------- ----------- -----------
Net annuitization activity........ $ (29,803) $ 59,298 $ (25,464) $ (20,376) $ 10,869 $ (271,438)
----------- ----------- ----------- ----------- ----------- -----------
Decrease in net assets from
participant transactions............. $(3,373,583) $(1,384,408) $ (554,162) $(1,088,452) $(4,740,805) $(4,153,795)
----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) in net assets... $ (134,956) $ 2,528,570 $ 2,550,213 $ 1,666,741 $(2,454,949) $ (52,800)
NET ASSETS:
Beginning of year..................... 16,515,911 13,987,341 8,470,909 6,804,168 23,651,076 23,703,876
----------- ----------- ----------- ----------- ----------- -----------
End of year........................... $16,380,955 $16,515,911 $11,021,122 $ 8,470,909 $21,196,127 $23,651,076
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements
33
<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,
------------------------ ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 3,869,361 $ 3,877,405 $ 255,014 $ 292,042 $ 330,300 $ 343,280
Net realized gains (losses)........... 1,590,905 1,192,014 583,552 645,408 (61,406) (100,223)
Net unrealized gains (losses)......... 3,674,762 1,531,238 1,032,200 586,469 (81,188) 270,646
----------- ----------- ----------- ----------- ----------- -----------
Increase in net assets from
operations...................... $ 9,135,028 $ 6,600,657 $ 1,870,766 $ 1,523,919 $ 187,706 $ 513,703
----------- ----------- ----------- ----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.......... $ 511,586 $ 396,402 $ 92,604 $ 115,867 $ 229,930 $ 97,957
Net transfers between Sub-Accounts
and Fixed Account.................. (246,517) (331,038) 251,933 112,699 (137,088) 137,968
Withdrawals, surrenders,
annuitizations and contract
charges............................ (3,973,370) (3,356,390) (930,243) (1,160,821) (795,428) (1,220,161)
----------- ----------- ----------- ----------- ----------- -----------
Net accumulation activity......... $(3,708,301) $(3,291,026) $ (585,706) $ (932,255) $ (702,586) $ (984,236)
----------- ----------- ----------- ----------- ----------- -----------
Annuitization activity:
Annuitizations...................... $ 57,163 $ 40,042 $ -- $ -- $ -- $ 52,142
Annuity payments.................... (31,779) (22,778) (9,455) (9,402) (11,729) (12,112)
Adjustments to annuity reserve...... (29,875) 12,645 1,832 1,887 1,001 11,228
----------- ----------- ----------- ----------- ----------- -----------
Net annuitization activity........ $ (4,491) $ 29,909 $ (7,623) $ (7,515) $ (10,728) $ 51,258
----------- ----------- ----------- ----------- ----------- -----------
Decrease in net assets from
participant transactions............. $(3,712,792) $(3,261,117) $ (593,329) $ (939,770) $ (713,314) $ (932,978)
----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) in net assets... $ 5,422,236 $ 3,339,540 $ 1,277,437 $ 584,149 $ (525,608) $ (419,275)
NET ASSETS:
Beginning of year..................... 34,903,869 31,564,329 9,162,894 8,578,745 6,132,537 6,551,812
----------- ----------- ----------- ----------- ----------- -----------
End of year........................... $40,326,105 $34,903,869 $10,440,331 $ 9,162,894 $ 5,606,929 $ 6,132,537
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements
34
<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,
------------------------ ------------------------ --------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 198,300 $ 243,804 $ 42,390 $ 41,525 $ 590,763 $ 620,612
Net realized gains.................... -- -- -- -- 148,907 19,181
Net unrealized gains (losses)......... -- -- -- -- (728,276) 271,258
----------- ----------- ----------- ----------- ------------ ------------
Increase in net assets from
operations...................... $ 198,300 $ 243,804 $ 42,390 $ 41,525 $ 11,394 $ 911,051
----------- ----------- ----------- ----------- ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.......... $ 95,793 $ 107,567 $ 172,988 $ 29,140 $ 47,917 $ 66,166
Net transfers between Sub-Accounts
and Fixed Account.................. 1,099,327 (678,009) 92,742 55,363 (234,750) (76,758)
Withdrawals, surrenders,
annuitizations and contract
charges............................ (2,304,486) (1,416,396) (279,549) (171,168) (1,213,505) (1,125,638)
----------- ----------- ----------- ----------- ------------ ------------
Net accumulation activity......... $(1,109,366) $(1,986,838) $ (13,819) $ (86,665) $ (1,400,338) $ (1,136,230)
----------- ----------- ----------- ----------- ------------ ------------
Annuitization activity:
Annuitizations...................... $ -- $ 49,826 $ 3,544 $ -- $ -- $ --
Annuity payments.................... (8,378) (7,711) (990) (194) (18,033) (19,721)
Annuity transfers................... -- -- -- -- -- (3,495)
Adjustments to annuity reserve...... 102 9,057 78 76 2,893 9,135
----------- ----------- ----------- ----------- ------------ ------------
Net annuitization activity........ $ (8,276) $ 51,172 $ 2,632 $ (118) $ (15,140) $ (14,081)
----------- ----------- ----------- ----------- ------------ ------------
Decrease in net assets from
participant transactions............ $(1,117,642) $(1,935,666) $ (11,187) $ (86,783) $ (1,415,478) $ (1,150,311)
----------- ----------- ----------- ----------- ------------ ------------
Increase (decrease) in net assets... $ (919,342) $(1,691,862) $ 31,203 $ (45,258) $ (1,404,084) $ (239,260)
NET ASSETS:
Beginning of year..................... 6,196,768 7,888,630 1,339,220 1,384,478 8,634,401 8,873,661
----------- ----------- ----------- ----------- ------------ ------------
End of year........................... $ 5,277,426 $ 6,196,768 $ 1,370,423 $ 1,339,220 $ 7,230,317 $ 8,634,401
----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ------------ ------------
</TABLE>
See notes to financial statements
35
<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,
------------------------ ------------------------ --------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).......... $ 106,741 $ 67,492 $ (53,760) $ (60,819) $ 10,068,057 $ 10,205,648
Net realized gains (losses)........... (14,845) (50,885) 2,192,749 1,959,202 7,835,681 5,242,155
Net unrealized gains (losses)......... (32,164) (48,770) 1,544,153 1,077,568 5,913,578 8,099,810
----------- ----------- ----------- ----------- ------------ ------------
Increase (decrease) in net assets
from operations................. $ 59,732 $ (32,163) $ 3,683,142 $ 2,975,951 $ 23,817,316 $ 23,547,613
----------- ----------- ----------- ----------- ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.......... $ 10,731 $ 20,613 $ 297,252 $ 273,824 $ 2,182,060 $ 1,939,929
Net transfers between Sub-Accounts
and Fixed Account.................. (79,290) (57,194) 87,481 180,160 401,373 (140,245)
Withdrawals, surrenders,
annuitizations and contract
charges............................ (167,294) (504,226) (2,456,028) (2,750,634) (21,034,849) (19,448,530)
----------- ----------- ----------- ----------- ------------ ------------
Net accumulation activity......... $ (235,853) $ (540,807) $(2,071,295) $(2,296,650) $(18,451,416) $(17,648,846)
----------- ----------- ----------- ----------- ------------ ------------
Annuitization activity:
Annuitizations...................... $ -- $ 12,236 $ -- $ 4,465 $ 111,661 $ 232,531
Annuity payments.................... (5,614) (5,464) (17,582) (22,268) (176,162) (283,058)
Annuity transfers................... -- -- -- 3,495 -- --
Adjustments to annuity reserve...... (1,687) 2,064 6,854 2,764 (41,552) (74,072)
----------- ----------- ----------- ----------- ------------ ------------
Net annuitization activity........ $ (7,301) $ 8,836 $ (10,728) $ (11,544) $ (106,053) $ (124,599)
----------- ----------- ----------- ----------- ------------ ------------
Decrease in net assets from
participant transactions............ $ (243,154) $ (531,971) $(2,082,023) $(2,308,194) $(18,557,469) $(17,773,445)
----------- ----------- ----------- ----------- ------------ ------------
Increase (decrease) in net assets... $ (183,422) $ (564,134) $ 1,601,119 $ 667,757 $ 5,259,847 $ 5,774,168
NET ASSETS:
Beginning of year..................... 2,160,855 2,724,989 17,091,705 16,423,948 134,260,145 128,485,977
----------- ----------- ----------- ----------- ------------ ------------
End of year........................... $ 1,977,433 $ 2,160,855 $18,692,824 $17,091,705 $139,519,992 $134,260,145
----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ------------ ------------
</TABLE>
See notes to financial statements
36
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
(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 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 the Sponsor's 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 taxable;
therefore, no provision has been made for federal income taxes.
(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%.
37
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
NOTES TO FINANCIAL STATEMENTS -- continued
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.
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 taxes 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.
38
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT C
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
MIT MIG MTR
Sub Account Sub Account Sub Account
--------------- ---------------- ---------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
--------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................ 191,532 211,924 116,839 137,226 376,845 445,574
Units purchased................ 2,680 3,952 2,161 2,689 4,393 6,597
Units transferred between
Sub-Accounts and Fixed
Account...................... 1,444 5,860 5,819 2,571 (16,851) (1,968)
Units withdrawn, surrendered
and annuitized............... (39,250) (30,204) (14,558) (25,647) (59,511) (73,358)
------- ------- -------- ------- ------- -------
Units outstanding, end of
year......................... 156,406 191,532 110,261 116,839 304,876 376,845
------- ------- -------- ------- ------- -------
------- ------- -------- ------- ------- -------
<CAPTION>
MCM MCG MFH
Sub Account Sub Account Sub Account
--------------- ---------------- ---------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
--------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................ 301,313 401,141 68,686 73,345 200,252 229,079
Units purchased................ 4,643 5,399 8,633 1,523 1,084 1,652
Units transferred between
Sub-Accounts and Fixed
Account...................... 53,161 (33,845) 4,580 2,802 (5,278) (2,180)
Units withdrawn, surrendered
and annuitized............... (111,806) (71,382) (14,105) (8,984) (27,699) (28,299)
------- ------- -------- ------- ------- -------
Units outstanding, end of
year......................... 247,311 301,313 67,794 68,686 168,359 200,252
------- ------- -------- ------- ------- -------
------- ------- -------- ------- ------- -------
<CAPTION>
MGO MFR MFB
Sub Account Sub Account Sub Account
--------------- --------------- ---------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
--------------- --------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................ 682,668 752,698 129,195 143,843 158,314 186,637
Units purchased................ 9,055 8,648 1,193 1,771 6,031 2,751
Units transferred between
Sub-Accounts and Fixed
Account...................... (4,580) (6,742) 3,013 2,007 (3,600) 3,481
Units withdrawn, surrendered
and annuitized............... (69,170) (71,936) (11,990) (18,426) (20,839) (34,555)
------- ------- ------- ------- ------- -------
Units outstanding, end of
year......................... 617,973 682,668 121,411 129,195 139,906 158,314
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
MWG MEG
Sub Account Sub Account
--------------- ---------------
Year Ended Year Ended
December 31, December 31,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding, beginning of
year............................ 55,822 70,278 280,589 321,077
Units purchased................ 277 554 4,313 4,900
Units transferred between
Sub-Accounts and Fixed
Account...................... (2,074) (1,541) 1,703 4,053
Units withdrawn, surrendered
and annuitized............... (4,307) (13,469) (36,840) (49,441)
------- ------- ------- -------
Units outstanding, end of
year......................... 49,718 55,822 249,765 280,589
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
39
<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 Massachusetts
Investors Trust Sub-Account, Massachusetts Investors Growth Stock Sub-Account,
MFS Total Return Sub-Account, MFS Growth Opportunities Sub-Account, MFS Research
Sub-Account, MFS Bond Sub-Account, MFS Money Market Sub-Account, MFS Government
Money Market Sub-Account, MFS High Income Sub-Account, MFS World Governments
Sub-Account, and MFS Emerging Growth Sub-Account of Sun Life of Canada (U.S.)
Variable Account C (the "Sub-Accounts") as of December 31, 1998, the related
statement of operations for the year then ended and the statements of changes in
net assets for the years ended December 31, 1998 and 1997. 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, 1998 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 Sub-Accounts as of December 31, 1998,
the results of their operations and the changes in their net assets for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 4, 1999
40
<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.
41
<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.
42
<PAGE>
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.
APPENDIX B
ILLUSTRATIVE EXAMPLES
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).
43
<PAGE>
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 Contract 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 Contract Year 1 and $2,000 from Contract 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 Contract 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.
44
<PAGE>
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 02481
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
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
45
