<PAGE>
Registration Nos. 33-19628 33-19629
33-19631 33-19626
33-19632
33-19627
33-19630
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-3
POST-EFFECTIVE AMENDMENT NO. 8
to
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 9 / /
POST-EFFECTIVE AMENDMENT NO. 20 /X/
POST-EFFECTIVE AMENDMENT NO. 15 / /
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
(EXACT NAMES OF REGISTRANTS)
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(NAME OF INSURANCE COMPANY)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(ADDRESS OF INSURANCE COMPANY'S PRINCIPAL EXECUTIVE OFFICES)
INSURANCE COMPANY'S TELEPHONE NUMBER: (617) 237-6030
BONNIE S. ANGUS, SECRETARY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
DAVID N. BROWN, ESQ.
COVINGTON & BURLING
1201 PENNSYLVANIA AVENUE, N.W.
P.O. BOX 7566
WASHINGTON, D.C. 20044
/X/ It is proposed that this filing will become effective 60 days after
filing pursuant to paragraph (a) of Rule 485.
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, THE
REGISTRANT HAS REGISTERED AN INDEFINITE AMOUNT OF SECURITIES UNDER THE
SECURITIES ACT OF 1933. THE RULE 24f-2 NOTICE FOR THE REGISTRANT'S FISCAL YEAR
ENDED DECEMBER 31, 1994 WAS FILED ON FEBRUARY 27, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
Cross Reference Sheet Required by Rule 495(a) Under
The Securities Act of 1933
ITEM NUMBER IN FORM N-3 LOCATION IN PROSPECTUS; CAPTION
- ----------------------- -------------------------------
PART A
- ------
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Synopsis; Expense Summary
4. Condensed Financial Condensed Financial Information
Information
5. General Description of A Word About the Company and
Registrant and Insurance the Variable Accounts
Company
6. Management Management of the Variable
Accounts
7. Deductions and Expenses Contract Charges
8. General Description of Purchase Payments and Contract
Variable Annuity Contracts Values During Accumulation
Period; Other Contractual
Provisions
9. Annuity Period Annuity Provisions
10. Death Benefit Death Benefit
11. Purchases and Contract Purchase Payments and Contract
Value Values During Accumulation
Period
12. Redemptions Cash Withdrawals
13. Taxes Federal Tax Status
14. Legal Proceedings Legal Proceedings
15. Table of Contents of the Table of Contents for Statement
Statement of Additional of Additional Information
Information
C-3
<PAGE>
LOCATION IN STATEMENT OF
ITEM NUMBER IN FORM N-3 ADDITIONAL INFORMATION; CAPTION
- ------------------------- --------------------------------
PART B
- ------
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information and General Information and History
History
19. Investment Objectives The Variable Accounts' Investment
and Policies Objectives, Policies and
Restrictions; A Word About the
Company and the Variable
Accounts*
20. Management Management of the Variable
Accounts
21. Investment Advisory and Management of the Variable
Other Services Accounts
22. Brokerage Allocation Management of the Variable
Accounts
23. Purchase and Pricing of Purchase Payments and Contract
Securities Being Offered Values During Accumulation
Period*
24. Underwriters Distribution of the Contracts
25. Calculation of Performance Not Applicable
Data
26. Annuity Payments Annuity Provisions
27. Financial Statements Accountants and Financial
Statements
* In the Prospectus.
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1995.
<PAGE>
PROSPECTUS
MAY 1, 1995
COMPASS 3
The individual flexible payment deferred annuity contracts (the "Contracts")
offered by this Prospectus are designed for use in connection with personal
retirement plans, some of which may qualify for federal income tax advantages
available under Sections 401, 403 or 408 of the Internal Revenue Code. The
Contracts are issued by Sun Life Assurance Company of Canada (U.S.) (the
"Company") in connection with Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account, and
Managed Sectors Variable Account. The Company's Annuity Service Mailing Address
is: Sun Life Annuity Service Center, P.O. Box 1024, Boston, Massachusetts 02103.
The Owner of a Contract may elect to have Contract values accumulated on a
fixed basis in the Fixed Account (which is part of the Company's general account
and pays interest at a guaranteed fixed rate) or on a variable basis in one or
more of the Variable Accounts described in this Prospectus, or divided among the
Fixed Account and Variable Accounts. If the Owner elects certain forms of an
annuity as a retirement benefit, payments may be funded from all or any of the
Accounts. Contract values allocated to the Variable Accounts and annuity
payments elected on a variable basis will vary to reflect the investment
performance of the Variable Accounts selected by the Owner.
MONEY MARKET VARIABLE ACCOUNT will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months. AN INVESTMENT IN THIS ACCOUNT IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
HIGH YIELD VARIABLE ACCOUNT will seek high current income and capital
appreciation by investing primarily in fixed income securities of United States
and foreign issuers which may be in the lower rated categories or unrated
(commonly known as "junk bonds") and may include equity features. These
securities generally involve greater volatility of price and risk to principal
and income and less liquidity than securities in the higher rated categories.
CAPITAL APPRECIATION VARIABLE ACCOUNT will seek capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
GOVERNMENT SECURITIES VARIABLE ACCOUNT will seek current income and
preservation of capital by investing in U.S. Government and Government-related
Securities.
WORLD GOVERNMENTS VARIABLE ACCOUNT will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
TOTAL RETURN VARIABLE ACCOUNT will seek primarily to obtain above-average
income (compared to a portfolio entirely invested in equity securities)
consistent with prudent employment of capital; its secondary objective is to
take advantage of opportunities for growth of capital and income. Assets will be
allocated and reallocated from time to time between money market, fixed income
and equity securities. Generally at least 40% of its assets will be invested in
equity securities.
MANAGED SECTORS VARIABLE ACCOUNT will seek capital appreciation by varying
the weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
This Prospectus sets forth information about the Contracts and the Variable
Accounts that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Accounts has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1995, which is incorporated herein by reference. The Statement of
Additional Information is available from the Company without charge upon written
request to the above address or by telephoning (800) 752-7215. The Table of
Contents for the Statement of Additional Information is shown on page 31 of this
Prospectus.
THE CONTRACTS ARE NOT DEPOSITS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 2
Synopsis 3
Expense Summary 4
Condensed Financial Information 5
Financial Statements 9
A Word About the Company and the Variable Accounts 9
Portfolio Transactions 18
Management of the Variable Accounts 18
Purchase Payments and Contract Values During Accumulation Period 19
Cash Withdrawals 21
Death Benefit 22
Contract Charges 23
Annuity Provisions 25
Other Contractual Provisions 27
Federal Tax Status 29
Distribution of the Contracts 30
Legal Proceedings 31
Contract Owner Inquiries 31
Table of Contents for Statement of Additional Information 31
Appendix A--State Premium Taxes 31
Appendix B--Commercial Paper and Bond Ratings 32
Appendix C--Investment Techniques 35
Appendix D--Industry Sectors 46
Appendix E--Portfolio Composition Chart 49
</TABLE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATION ACCOUNT: An account established for the Contract to which net
Purchase Payments are credited in the form of Accumulation Units.
ACCUMULATION UNIT: A unit of measure used in the calculation of the value of
the Accumulation Account. There are two types of Accumulation Units: Variable
Accumulation Units and Fixed Accumulation Units.
ANNUITANT: The person or persons named in the Contract and on whose life the
first annuity payment is to be made.
ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment is to be
made.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of the
second and each subsequent Variable Annuity payment.
BENEFICIARY: The person who has the right to the death benefit set forth in the
Contract.
CONTRACT YEARS AND CONTRACT ANNIVERSARIES: The first Contract Year shall be the
period of 12 months plus a part of a month as measured from the date the
Contract is issued to the first day of the calendar month which follows the
calendar month of issue. All Contract Years and Anniversaries thereafter shall
be 12 month periods based upon such first day of the calendar month which
follows the calendar month of issue.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: The Fixed Account consists of all assets of the Company other
than those allocated to separate accounts of the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount.
2
<PAGE>
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403 or 408 of the Internal Revenue Code of 1986, as amended (the "Code").
Such Contract must be owned by a natural person or agent for a natural person
for the Contract to receive favorable income tax treatment as an annuity.
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.
PAYEE: The recipient of payments under the Contract. The term may include an
Annuitant, a Beneficiary who becomes entitled to benefits upon the death of the
Annuitant and any person who is designated as the beneficiary of distributions
made as a result of the death of the Owner.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company by the Owner or on
the Owner's behalf as consideration for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which
receives favorable federal income tax treatment under Sections 401, 403 or 408
of the Code.
SEVEN YEAR ANNIVERSARY: The seventh Contract Anniversary and each succeeding
Contract Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Contract Anniversaries.
VALUATION PERIOD: The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of these
values.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Variable Accounts.
SYNOPSIS
Purchase Payments are allocated to the Variable Accounts or the Fixed
Account or to both the Variable Accounts and the Fixed Account as selected by
the Owner. Purchase Payments must total at least $300 for the first Contract
Year and each Purchase Payment must be at least $25 (see "Purchase Payments" on
page 19). Subject to certain conditions, during the accumulation period the
Owner may, without charge, transfer amounts among the Variable Accounts and
between the Variable Accounts and the Fixed Account (see "Transfers/Conversions
of Accumulation Units" on page 21).
No sales charge is deducted from Purchase Payments; however, if any portion
of a Contract's Accumulation Account is surrendered, the Company will, with
certain exceptions, deduct a withdrawal charge (contingent deferred sales
charge) to cover certain expenses relating to the sale of the Contracts. A
portion of the Accumulation Account may be withdrawn each year without the
assessment of a withdrawal charge and after a Purchase Payment has been held by
the Company for seven years it may be withdrawn without charge. Also, no
withdrawal charge is assessed upon annuitization or upon the
transfers/conversions described above. Other amounts withdrawn will be subject
to a withdrawal charge ranging from 6% to 0% (see "Cash Withdrawals" and
"Withdrawal Charges" on pages 21 and 24, respectively).
Special restrictions on withdrawals apply to Contracts used with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Code (see
"Section 403(b) Annuities" on page 21).
In addition, under certain circumstances, withdrawals may result in tax
penalties (see "Federal Tax Status" on page 29).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable under the Contract except as may be provided under the annuity
option elected (see "Death Benefit" on page 22).
On each Contract Anniversary and on surrender of the Contract for full
value, the Company will deduct a contract maintenance charge of $30 from the
Accumulation Account to reimburse it for administrative expenses related to the
issuance and maintenance of the Contracts. After the Annuity Commencement Date
the charge will be deducted pro rata from each annuity payment made during the
year (see "Contract Maintenance Charge" on page 23).
3
<PAGE>
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Accounts attributable to the Contracts for mortality and expense
risks assumed by the Company. In addition, for the first seven Contract Years
the Company deducts a distribution expense risk charge at the end of each
Valuation Period equal to an annual rate of 0.15% of the daily net assets of the
Variable Accounts attributable to the Contracts. There is no deduction for the
distribution expense risk charge after the seventh Contract Anniversary (see
"Mortality and Expense Risk Charge" and "Distribution Expense Risk Charge" on
page 24).
The Company makes a deduction from the Variable Accounts at the end of each
Valuation Period for the investment management fees payable to the investment
adviser, Massachusetts Financial Services Company ("MFS"). These fees are based
upon average daily net assets of each Variable Account (see "Management of the
Variable Accounts" and "Investment Management Fees" on pages 18 and 24,
respectively).
Premium taxes payable to any governmental entity will be charged against the
Contracts (see "Premium Taxes" on page 25).
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 25).
If the Owner is not satisfied with the Contract it may be returned to the
Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Owner. When the Company receives the returned Contract it will
be cancelled and the value of the Contract's Accumulation Account at the end of
the Valuation Period during which the Contract was received by the Company will
be refunded. However, if applicable state law so requires, the full amount of
any Purchase Payment(s) received by the Company will be refunded, the "free
look" period may be greater than ten days and alternative methods of returning
the Contract may be acceptable.
EXPENSE SUMMARY
The purpose of the following table is to help Owners and prospective
purchasers of the Contracts to understand the costs and expenses that are borne,
directly and indirectly, by Contract Owners. The information set forth should be
considered together with the narrative provided under the heading "Contract
Charges" in this Prospectus. In addition to the expenses listed below, premium
taxes may be applicable.
<TABLE>
<CAPTION>
MONEY HIGH CAPITAL GOVERNMENT WORLD MANAGED TOTAL
MARKET YIELD APPRECIATION SECURITIES GOVERNMENTS SECTORS RETURN
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
CONTRACT OWNER TRANSACTION EXPENSES ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ----------------------------------------- -------- -------- ------------ ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases.......... 0 0 0 0 0 0 0
Deferred Sales Load (as a percentage of
Purchase Payments withdrawn)(1)
Number of Contract Years
0-1.................................. 6% 6% 6% 6% 6% 6% 6%
2-3.................................. 5% 5% 5% 5% 5% 5% 5%
4-5.................................. 4% 4% 4% 4% 4% 4% 4%
6.................................... 3% 3% 3% 3% 3% 3% 3%
7 or more............................ 0% 0% 0% 0% 0% 0% 0%
Exchange Fee............................. 0 0 0 0 0 0 0
<CAPTION>
ANNUAL CONTRACT FEE
- -----------------------------------------
ANNUAL EXPENSES $30 per contract
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of average net assets)
Management Fees.......................... 0.50% 0.75% 0.73% 0.55% 0.75% 0.75% 0.75%
Mortality and Expense Risk Fees.......... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Distribution Expense Risk Charge(2)...... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Other Expenses........................... 0.08% 0.16% 0.06% 0.06% 0.25% 0.15% 0.07%
Total Annual Expenses.................... 1.98% 2.31% 2.19% 2.01% 2.40% 2.30% 2.22%
<FN>
- ------------
(1) A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment
has been held by the Company for seven years it may be withdrawn free of
any withdrawal charge.
(2) The distribution expense risk charge is imposed ONLY during the first seven
Contract Years.
</TABLE>
4
<PAGE>
EXAMPLE
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Variable Account............................................. $ 74 $ 107 $ 143 $ 231
High Yield Variable Account............................................... 77 117 160 265
Capital Appreciation Variable Account..................................... 76 114 153 252
Government Securities Variable Account.................................... 74 108 144 234
World Governments Variable Account........................................ 78 120 164 274
Managed Sectors Variable Account.......................................... 77 117 159 264
Total Return Variable Account............................................. 77 114 155 255
</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>
Money Market Variable Account............................................. $ 20 $ 62 $ 107 $ 231
High Yield Variable Account............................................... 23 72 124 265
Capital Appreciation Variable Account..................................... 22 69 117 252
Government Securities Variable Account.................................... 20 63 108 234
World Governments Variable Account........................................ 24 75 128 274
Managed Sectors Variable Account.......................................... 23 72 123 264
Total Return Variable Account............................................. 23 69 119 255
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION--PER ACCUMULATION UNIT INCOME
AND CAPITAL CHANGES
The following information should be read in conjunction with the financial
statements included in the Variable Accounts' Annual Report to Contract Owners
which is incorporated by reference into the Statement of Additional Information,
all of which has been audited by Deloitte & Touche LLP, independent certified
public accountants.
PER UNIT AND OTHER DATA
<TABLE>
<CAPTION>
CAPITAL APPRECIATION VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 0.2870 $ 0.2617 $ 0.1919 $ 0.2748 $ 0.4690 $ 0.3098 $ 0.1699
Expenses.................................... 0.4421 0.4496 0.4131 0.3323 0.3026 0.2842 0.1330
--------- --------- --------- --------- --------- --------- ---------
Net investment income (expense)............. $ (0.1551) $ (0.1881) $ (0.2212) $ (0.0575) $ 0.1664 $ 0.0256 $ 0.0369
Net realized and unrealized gains (losses)
on investments............................. (3.1259) 2.5911 1.9595 4.5591 (1.4616) 4.1843 0.3396
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (3.2810) $ 2.4030 $ 1.7383 $ 4.5016 $ (1.2952) $ 4.2099 $ 0.3765
Unit value:
Beginning of year......................... 21.9341 19.5311 17.7928 13.2912 14.5864 10.3765 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 18.6531 $ 21.9341 $ 19.5311 $ 17.7928 $ 13.2912 $ 14.5864 $ 10.3765
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.79% 0.78% 0.80% 0.79% 0.79% 0.78% 0.81%+
Net investment income (expense)............. (0.69%) (0.83%) (1.08%) (0.23%) 1.58% 0.36% 0.46%+
PORTFOLIO TURNOVER............................ 95% 56% 34% 62% 36% 83% 73%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 4,686 4,899 4,401 3,742 2,639 1,646 506
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
5
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 1.1028 $ 1.1064 $ 1.0851 $ 1.0935 $ 1.0274 $ 0.9340 $ 0.5416
Expenses.................................... 0.3146 0.3154 0.2950 0.2604 0.2357 0.2109 0.1352
--------- --------- --------- --------- --------- --------- ---------
Net investment income....................... $ 0.7882 $ 0.7910 $ 0.7901 $ 0.8331 $ 0.7917 $ 0.7231 $ 0.4064
Net realized and unrealized gains (losses)
on investments............................. (1.3042) 0.3210 (0.0030) 0.9632 0.0699 0.4685 (0.1163)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (0.5160) $ 1.1120 $ 0.7871 $ 1.7963 $ 0.8616 $ 1.1916 $ 0.2901
Unit value:
Beginning of year......................... 16.0387 14.9267 14.1396 12.3433 11.4817 10.2901 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 15.5227 $ 16.0387 $ 14.9267 $ 14.1396 $ 12.3433 $ 11.4817 $ 10.2901
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.61% 0.61% 0.62% 0.60% 0.60% 0.55% 0.56%+
Net investment income....................... 5.09% 5.11% 5.51% 6.50% 6.81% 6.70% 6.24%+
PORTFOLIO TURNOVER............................ 41% 81% 175% 149% 107% 156% 498%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 2,922 2,697 2,722 2,327 1,757 1,271 558
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 1.5336 $ 1.5179 $ 1.5969 $ 1.5178 $ 1.4777 $ 1.2654 $ 0.8079
Expenses.................................... 0.3711 0.3671 0.3340 0.2582 0.2229 0.2411 0.1534
--------- --------- --------- --------- --------- --------- ---------
Net investment income....................... $ 1.1625 $ 1.1508 $ 1.2629 $ 1.2596 $ 1.2548 $ 1.0243 $ 0.6545
Net realized and unrealized gains (losses)
on investments............................. (1.6885) 1.5446 0.5037 2.8528 (2.7046) (1.3152) (0.1339)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (0.5260) $ 2.6954 $ 1.7666 $ 4.1124 $ (1.4498) $ (0.2909) $ 0.5206
Unit value:
Beginning of year......................... 17.3543 14.6589 12.8923 8.7799 10.2297 10.5206 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 16.8283 $ 17.3543 $ 14.6589 $ 12.8923 $ 8.7799 $ 10.2297 $ 10.5206
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.91% 0.86% 0.93% 0.87% 0.86% 0.80% 0.82%+
Net investment income....................... 7.41% 6.97% 9.03% 10.85% 13.14% 9.47% 9.43%+
PORTFOLIO TURNOVER............................ 77% 67% 61% 38% 14% 34% 37%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 2,506 2,577 2,345 1,823 788 806 624
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
6
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
MANAGED SECTORS VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 0.3031 $ 0.1817 $ 0.1156 $ 0.2307 $ 0.3473 $ 0.4110 $ 0.2035
Expenses.................................... 0.5452 0.5311 0.5325 0.4141 0.3639 0.3890 0.1664
--------- --------- --------- --------- --------- --------- ---------
Net investment income (expense)............. $ (0.2421) $ (0.3496) $ (0.4169) $ (0.1834) $ (0.0166) $ 0.0220 $ 0.0371
Net realized and unrealized gains (losses)
on investments............................. (0.6170) 1.2338 1.5249 8.8712 (2.3348) 5.3288 0.9684
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (0.8591) $ 0.8842 $ 1.1080 $ 8.6878 $ (2.3514) $ 5.3508 $ 1.0055
Unit value:
Beginning of year......................... 24.6849 23.8007 22.6927 14.0049 16.3563 11.0055 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 23.8258 $ 24.6849 $ 23.8007 $ 22.6927 $ 14.0049 $ 16.3563 $ 11.0055
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.90% 0.91% 0.92% 0.98% 1.08% 1.25% 1.25%+
Net investment income (expense)............. (0.97%) (1.49%) (1.75%) (0.97%) (0.05%) 0.25% 0.92%+
PORTFOLIO TURNOVER............................ 111% 122% 34% 52% 71% 66% 66%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 1,810 1,819 1,728 1,276 887 500 129
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 0.5688 $ 0.4065 $ 0.4888 $ 0.7619 $ 0.9503 $ 0.9975 $ 0.5403
Expenses.................................... 0.2756 0.2512 0.2497 0.2386 0.2294 0.2113 0.1292
--------- --------- --------- --------- --------- --------- ---------
Net investment income....................... $ 0.2932 $ 0.1553 $ 0.2391 $ 0.5233 $ 0.7209 $ 0.7862 $ 0.4111
--------- --------- --------- --------- --------- --------- ---------
Net increase in unit value.................. 0.2932 0.1553 0.2391 0.5233 0.7209 0.7862 0.4111
Unit value:
Beginning of year......................... 12.8359 12.6806 12.4415 11.9182 11.1973 10.4111 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 13.1291 $ 12.8359 $ 12.6806 $ 12.4415 $ 11.9182 $ 11.1973 $ 10.4111
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.58% 0.59% 0.59% 0.58% 0.57% 0.56% 0.58%+
Net investment income....................... 2.37% 1.30% 2.03% 4.46% 6.35% 7.44% 5.84%+
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 4,599 3,823 3,704 3,228 4,417 3,453 1,356
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
7
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
TOTAL RETURN VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 0.8371 $ 0.8304 $ 0.9284 $ 0.8989 $ 0.7763 $ 0.8508 $ 0.4733
Expenses.................................... 0.3904 0.3829 0.3607 0.3002 0.2716 0.2564 0.1568
--------- --------- --------- --------- --------- --------- ---------
Net investment income....................... $ 0.4467 $ 0.4475 $ 0.5677 $ 0.5987 $ 0.5047 $ 0.5944 $ 0.3165
Net realized and unrealized gains (losses)
on investments............................. (0.9992) 1.5264 0.7446 1.9505 (0.7025) 1.0696 0.2281
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (0.5525) $ 1.9739 $ 1.3123 $ 2.5492 $ (0.1978) $ 1.6640 $ 0.5446
Unit value:
Beginning of year......................... 17.8462 15.8723 14.5600 12.0108 12.2086 10.5446 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 17.2937 $ 17.8462 $ 15.8723 $ 14.5600 $ 12.0108 $ 12.2086 $ 10.5446
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 0.82% 0.76% 0.86% 0.84% 0.85% 0.81% 0.94%+
Net investment income....................... 2.60% 2.43% 3.63% 4.52% 4.26% 5.24% 4.65%+
PORTFOLIO TURNOVER............................ 63% 89% 94% 80% 53% 78% 13%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 7,349 7,013 5,721 4,752 3,624 2,624 793
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
<TABLE>
<CAPTION>
WORLD GOVERNMENTS VARIABLE ACCOUNT
---------------------------------------------------------------------------
COMPASS 3
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA**
Investment Income........................... $ 1.0666 $ 1.1293 $ 1.2979 $ 1.1961 $ 0.9588 $ 1.0001 $ 0.5779
Expenses.................................... 0.3760 0.3890 0.3876 0.3380 0.3103 0.2770 0.1599
--------- --------- --------- --------- --------- --------- ---------
Net investment income....................... $ 0.6906 $ 0.7403 $ 0.9103 $ 0.8581 $ 0.6485 $ 0.7231 $ 0.4180
Net realized and unrealized gains (losses)
on investments............................. (1.7764) 1.6795 (1.0699) 0.7089 0.9628 (0.0016) 0.1783
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in unit value....... $ (1.0858) $ 2.4198 $ (0.1596) $ 1.5670 $ 1.6113 $ 0.7215 $ 0.5963
Unit value:
Beginning of year......................... 16.7563 14.3365 14.4961 12.9291 11.3178 10.5963 10.0000++
--------- --------- --------- --------- --------- --------- ---------
End of year............................... $ 15.6705 $ 16.7563 $ 14.3365 $ 14.4961 $ 12.9291 $ 11.3178 $ 10.5963
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS (TO AVERAGE NET ASSETS):
Expenses (excluding mortality and expense
risk charges and distribution expense
charges)................................... 1.00% 0.94% 1.15% 1.18% 1.22% 1.22% 1.25%+
Net investment income....................... 4.45% 4.12% 6.03% 6.51% 5.55% 6.92% 9.55%+
PORTFOLIO TURNOVER............................ 256% 202% 133% 229% 120% 148% 87%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR
(000'S OMITTED).............................. 1,321 1,363 1,176 995 813 611 379
<FN>
+Annualized.
*From commencement date of sales of Compass 3 contracts, April 19, 1988, to
December 31, 1988.
**Per unit data has been computed based on the average number of units
outstanding during each year.
++Unit value on date of commencement of operations.
</TABLE>
8
<PAGE>
FINANCIAL STATEMENTS
Financial Statements of the Variable Accounts and the Company are included
in the Statement of Additional Information.
A WORD ABOUT THE COMPANY AND THE VARIABLE ACCOUNTS
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181. The Company is a wholly-owned subsidiary of Sun Life
Assurance Company of Canada, 150 King Street West, Toronto, Ontario, Canada M5H
IJ9, a mutual life insurance company incorporated in Canada in 1865.
THE VARIABLE ACCOUNTS
Money Market Variable Account ("MMVA"), High Yield Variable Account ("HYVA")
and Capital Appreciation Variable Account ("CAVA") were established as separate
accounts of the Company on July 22, 1982 pursuant to a resolution of its Board
of Directors. Government Securities Variable Account ("GSVA") was established on
April 20, 1984. World Governments Variable Account ("WGVA"), Total Return
Variable Account ("TRVA") and Managed Sectors Variable Account ("MSVA") were
established on January 4, 1988. Under Delaware insurance law and the Contracts,
the income, gains or losses of the Variable Accounts are credited to or charged
against the assets of the Variable Accounts without regard to the other income,
gains or losses of the Company. Although the assets maintained in the Variable
Accounts 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.
In addition to the Contracts offered by this Prospectus, the Company issues
other variable annuity contracts participating in the Variable Accounts.
MMVA, CAVA, GSVA and TRVA are registered with the Securities and Exchange
Commission as open-end, diversified, management investment companies under the
Investment Company Act of 1940. HYVA, WGVA and MSVA are registered as open-end,
non-diversified management investment companies. Each of the Variable Accounts
meets the definition of a separate account under federal securities laws.
INVESTMENT OBJECTIVES AND POLICIES
The following is a description of the Variable Accounts' investment
objectives and policies. The objectives may not be changed without approval of
owners of and payees under the Contracts and other contracts participating in
the investment experience of the Variable Accounts. The Statement of Additional
Information also includes a discussion of specific investment restrictions which
govern the Variable Accounts' investment policies. These specific investment
restrictions may not be changed without approval of owners of and payees under
the Contracts and other contracts participating in the investment experience of
the Variable Accounts (see "Voting Rights").
MONEY MARKET VARIABLE ACCOUNT
MMVA will seek maximum current income to the extent consistent with
stability of principal by investing exclusively in the following types of U.S.
dollar denominated money market instruments which mature in less than 13 months:
(a) Obligations of, or guaranteed by, the U.S. government, its agencies
or instrumentalities.
(b) Bank certificates of deposit issued by domestic or foreign branches
of any U.S. or Canadian chartered bank which has total assets in excess of
$1 billion (U.S.) ("Eurodollar CD's") and bankers' acceptances issued by
domestic branches of any such bank.
(c) Commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc. (see
Appendix B for a description of the ratings).
9
<PAGE>
(d) Repurchase agreements for the purchase of obligations which are
suitable for investment under paragraph (a) above.
Under regulations currently in effect, the average maturity of investments
in the Account may not exceed 90 days.
To the extent the investment adviser attempts to increase yield by trading
to take advantage of short-term market variations, a high turnover rate could
result, but this should not adversely affect the Account. Higher portfolio
turnover may result in additional transaction costs.
HIGH YIELD VARIABLE ACCOUNT
HYVA will seek high current income and capital appreciation by investing
primarily in fixed-income securities of U.S. and foreign issuers. These
securities may be denominated in U.S. dollars or foreign currencies. Securities
offering the high current income sought by HYVA are ordinarily in the lower
rated (that is, rated BBB or lower by Standard & Poor's Corporation ("S&P") or
Fitch's Investors Service, Inc. ("Fitch") or Baa or lower by Moody's Investors
Service, Inc. ("Moody's")) or non-rated categories and may include equity
features. Securities which are in the lower rated categories of recognized
rating agencies or are unrated may involve greater volatility of price and risk
of principal and income than securities in the higher rated categories (see
Appendix B for a description of the ratings). In particular, securities rated
BBB by S&P or Fitch or Baa by Moody's (and comparable unrated securities) are
considered to have speculative characteristics, while securities rated lower
than BBB by S&P or Fitch or Baa by Moody's (and comparable unrated securities)
(commonly known as "junk bonds") are considered speculative (see "Additional
Risk Factors Regarding Lower Rated Securities" below and Appendix B to this
Prospectus for a further description of the risks associated with investing in
these securities; see Appendix E for a chart indicating the composition of
HYVA's portfolio for the year ended December 31, 1994, with the debt securities
separated into rating categories and comparable unrated securities).
Fixed-income securities include preferred and preference stocks and all
types of debt obligations of both domestic and foreign corporate and government
issuers, such as bonds, debentures, notes, repurchase agreements, equipment
lease contracts, loan participations, corporate asset-backed securities,
commercial paper, and obligations issued or guaranteed by the U.S. government,
any foreign government or any of their respective political subdivisions,
agencies or instrumentalities (including obligations secured by such
instruments). HYVA may invest in restricted securities, subject to the
restriction against investing more than 10% of its net assets in securities that
are not readily marketable. HYVA may also enter into mortgage "dollar roll"
transactions on up to 10% of its total assets. See Appendix C for a description
of the risks associated with these investments and techniques.
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, no more
than 25% of the value of HYVA's total assets will be invested in equity
securities, including common stock, warrants and stock subscription rights, but
excluding convertible debt securities.
The fixed income securities in which HYVA may invest also include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ("PlK Bonds") (see Appendix C, "Investment Techniques--Zero Coupon
Bonds, Deferred Interest Bonds and PlK Bonds"). To the extent permitted by its
investment restrictions, HYVA may also invest a portion of its assets in
collateralized mortgage obligations, multi-class pass-through securities and
stripped mortgage-backed securities (see Appendix C, "Investment
Techniques--Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities" and "Stripped Mortgage-Backed Securities") and in interests in
trusts or other entities representing interests in fixed income securities or
holding fixed income securities in amounts sufficient to cover all payments due
from such entities. HYVA may purchase securities on a "when-issued" basis (see
Appendix C). HYVA may also invest in foreign securities without limitation,
which may include emerging market securities and Brady Bonds, and may invest in
American Depositary Receipts ("ADRs") (see Appendix C). Risks involved in
investing in foreign securities are described below.
10
<PAGE>
In seeking to achieve its objectives and lessen risks, HYVA will engage in
portfolio trading to take advantage of market developments and yield
disparities. HYVA's portfolio turnover rate cannot be accurately predicted.
However, it is anticipated that the annual turnover rate will not exceed 100%
(excluding short-term obligations). For example, a 100% annual portfolio
turnover rate would occur if all of the securities in HYVA's portfolio were
replaced once in a period of one year. Higher portfolio turnover may result in
increased brokerage commissions.
HYVA also will utilize credit analysis of the issues in which it invests and
evaluation of changes and trends in the world economies and international
financial markets. Investing in foreign securities involves considerations and
risks not typically associated with investing in U.S. markets. Such investments
may be favorably or unfavorably affected by changes in interest rates, currency
exchange rates and exchange control regulations. There may be less publicly
available information about a foreign company than about a domestic company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of U.S. companies.
Foreign securities markets, while growing in volume, have substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable domestic
companies. Fixed brokerage commissions and other transaction costs are generally
higher than in the United States. There is generally less government supervision
and regulation of exchanges, brokers and issuers in foreign countries than there
is in the United States. In addition, investments in foreign countries could be
affected by other factors generally not thought to be present in the United
States, including the possibility of heavy taxation, political or social
instability, limitations on the removal of funds or other assets of HYVA,
expropriation of assets, diplomatic developments adverse to U.S. investors and
difficulties in enforcing contractual obligations.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. For a discussion of these risks, see
Appendix C "Investment Techniques--Emerging Market Securities."
As a result of its investments in foreign securities, HYVA may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Account may promptly convert such currencies into dollars at
the current exchange rate. Under certain circumstances, however, such as where
the Adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Account may hold such
currencies for an indefinite period of time. The Account may also hold foreign
currency in anticipation of purchasing foreign securities.
While the holding of currencies will permit the Account to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Account
to risk of loss if such rates move in a direction adverse to the Account's
position. Such losses could reduce any profits or increase any losses sustained
by the Account from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. Costs may also be
incurred in connection with conversions between various currencies.
ADDITIONAL RISK FACTORS REGARDING LOWER RATED SECURITIES--Investments in
fixed income securities offering the high current income sought by HYVA, while
generally providing greater income and opportunity for gain than investments in
higher rated securities, usually entail greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities), and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than investments in higher rated
securities. In addition, since yields may vary over time, no specific level of
income or yield differential can ever be assured.
Securities rated lower than Baa by Moody's or BBB by S&P or Fitch (or
comparable unrated securities) (commonly known as "junk bonds") are considered
speculative. These high yielding fixed income securities generally tend to
reflect economic changes and short-term corporate and industry developments to a
greater extent than higher rated securities, which react primarily to
fluctuations in the general level of interest rates. These fixed income
securities also will be affected by the market's perception of their credit
quality (especially during times of adverse publicity) and the outlook for
economic growth. In the past, economic downturns or an increase in interest
rates have under certain circumstances caused a higher incidence of
11
<PAGE>
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods, the
higher yields on HYVA's lower rated high yielding fixed income securities are
paid primarily because of the increased risk of loss of principal and income,
arising from such factors as the heightened possibility of default or bankruptcy
of the issuers of such securities. Due to the fixed income payments of these
securities, HYVA may continue to earn the same level of interest income while
its Variable Accumulation and Annuity Unit values decline due to portfolio
losses, which could result in an increase in HYVA's yield despite the actual
loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. Change in the value of securities
subsequent to their acquisition will not affect cash income or yield to maturity
to HYVA but will be reflected in the value of its Variable Accumulation and
Annuity Units. The market for these lower rated fixed income securities may be
less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, credit judgment may
at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during certain adverse market conditions to sell these lower rated securities at
their fair value to meet redemption requests or to respond to changes in the
market.
Securities rated Baa by Moody's or BBB by S&P or Fitch (and comparable
unrated securities), while normally exhibiting adequate protection parameters,
may have speculative characteristics and changes in economic conditions and
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities.
While HYVA's investment adviser may refer to ratings issued by established
credit rating agencies, it is not the policy of HYVA to rely exclusively on
ratings issued by these credit rating agencies, but rather to supplement such
ratings with the adviser's own independent and ongoing review of credit quality.
HYVA's achievement of its investment objectives may be more dependent on the
adviser's own credit analysis than it would be in the case of a fund or series
investing primarily in higher quality bonds.
The value of HYVA's Variable Accumulation and Annuity Units changes as the
general levels of interest rates fluctuate; when interest rates decline, the
value of a portfolio invested at higher yields can be expected to rise, and
conversely when interest rates rise, the value of a portfolio invested at lower
yields can be expected to decline. HYVA is aggressively managed and, thus, is
subject to greater fluctuations in the value of its Variable Accumulation Units
and Annuity Units and involves the assumption of a higher degree of risk as
compared to a conservative income fund. HYVA is registered as a
"non-diversified" investment company so that it will be able to invest more than
5% of its assets in the securities of a particular issuer. Accordingly, an
investment in HYVA should not constitute a complete investment program and may
not be appropriate for prospective purchasers who cannot bear the greater risk
of capital depreciation inherent in seeking higher yields.
PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND CONSIDER THE
INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS TO HYVA.
CAPITAL APPRECIATION VARIABLE ACCOUNT
CAVA will seek to maximize capital appreciation by investing in securities
of all types. In seeking to achieve its objectives, a flexible approach toward
the type of securities and the relative attractiveness of the various securities
markets is maintained. Securities are selected based upon their potential for
capital appreciation. Income is not a significant factor in portfolio selection.
While CAVA usually will invest primarily in common stocks, CAVA will seek
capital appreciation in other types of securities, including fixed-income
securities, convertible bonds and preferred stocks and warrants when they appear
attractive for capital appreciation. CAVA may hold part or all of its assets in
cash or short-term commercial paper or other forms of debt securities for
temporary defensive purposes or as a buying reserve, may enter into Futures
Contracts and Options on Futures Contracts for hedging purposes, and may write
covered call and put options and purchase call and put options on securities and
stock indexes in an
12
<PAGE>
effort to increase current income and for hedging purposes (see Appendix C
"Investment Techniques" and Appendix D to the Statement of Additional
Information). CAVA's use of options, Futures Contracts and Options on Futures
Contracts may result in the loss of principal under certain market conditions.
CAVA may invest up to 50% (and generally expects to invest between 10% and
50%) of its total assets in foreign securities, which may include emerging
market securities, and may invest in American Depositary Receipts ("ADRs"), and
may enter into forward foreign currency exchange contracts ("Forward Contracts")
for the purchase or sale of foreign currency for hedging purposes (see Appendix
C "Investment Techniques--Forward Foreign Currency Exchange Contracts",
"American Depositary Receipts" and "Emerging Market Securities" and Appendix D
to the Statement of Additional Information). For a description of the risks
involved in investing in foreign securities see the discussion under "High Yield
Variable Account" above.
CAVA may invest in restricted securities, subject to the restriction against
investing more than 10% of its net assets in securities that are not readily
marketable (see Appendix C "Investment Techniques -- Restricted Securities").
CAVA is focused on growth companies and may be subject to fluctuations in
the value of its Variable Accumulation Units and Annuity Units during periods of
stock market volatility. CAVA involves the assumption of a higher degree of risk
as compared to a conservative equity fund. While it is not CAVA's policy
generally to invest or trade for short-term profits, portfolio securities may be
disposed of without regard to the length of time held whenever the investment
adviser is of the opinion that a security no longer has an appropriate
appreciation potential or has reached its anticipated level of performance, or
when another security appears to offer relatively greater appreciation potential
or a relatively greater anticipated level of performance. The rate of portfolio
turnover is not a limiting factor when changes are appropriate. High levels of
portfolio activity result in higher brokerage commissions.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
GSVA will seek current income and preservation of capital by investing in
debt obligations that are issued or guaranteed as to principal and interest by
the U.S. government, its agencies, authorities or instrumentalities ("Government
Securities") and obligations that are fully collateralized or otherwise fully
backed by government securities ("Government-related Securities"). GSVA may also
engage in transactions involving options, Futures Contracts and Options on
Futures Contracts as a hedge against anticipated future changes in interest
rates that otherwise might adversely affect the value of GSVA's portfolio of
securities and may enter into mortgage "dollar roll" transactions on up to 30%
of its total assets. GSVA's use of options, Futures Contracts and Options on
Futures Contracts may result in the loss of principal under certain market
conditions (see Appendix C "Investment Techniques" and Appendix D to the
Statement of Additional Information). GSVA may also hold cash or invest in
short-term U.S. government debt securities and related repurchase agreements for
temporary defensive purposes or as a buying reserve.
Government Securities include: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturity of one year or less), U.S. Treasury notes (maturities of one to
10 years), and U.S. Treasury bonds (generally maturities of greater than 10
years), all of which are backed by the full faith and credit of the United
States; and (2) obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association; some of which are supported by the right of the issuer to
borrow from the U.S. government, e.g., obligations of Federal Home Loan Banks;
and some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association.
Government-related Securities include collateralized mortgage obligations
("CMOs") and government backed trust certificates ("GBTs"). CMOs are debt
obligations issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by mortgage pass-through securities
such as Government National Mortgage Association ("Ginnie Mae"), Federal
National Mortgage Association ("Fannie Mae"), and Federal Home Loan Mortgage
Corporation ("Freddie Mac") certificates. Payments of principal and interest on
the underlying collateral and any reinvestment income thereon provide the funds
to pay debt service obligations on the CMOs. CMOs are issued in a number of
classes or series, each with
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its own maturity and interest rate. While the classes or series are often
retired in sequence as the underlying mortgages are repaid, payments of
principal and interest on the underlying mortgages may be allocated among the
different series or classes in innumerable ways. As with any mortgage-related
security, principal prepayment on the collateral may cause the CMOs to be
retired substantially earlier than the stated maturities or final distribution
dates. Prepayment may thus shorten the stated maturity of the obligation and can
result in the loss of premium if any has been paid. Certain of these securities
may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security). GSVA intends to invest in privately issued CMOs only if
they are rated at the time of purchase in the two highest ratings by nationally
recognized rating agencies (see Appendix B for a description of the ratings).
GBTs are obligations of certain private trusts formed for the purpose of
refinancing certain foreign government loans. The assets of the trust typically
include (a) a foreign government loan (the "Note"), 90% of principal and
interest payments on which are backed by a full faith and credit guaranty of the
United States government and (b) a beneficial interest in a trust holding direct
obligations of the United States Government, calculated to provide amounts equal
to at least 10% of all principal and interest payments on the Note. Funds
scheduled to be received from these assets are calculated to cover all scheduled
distributions on the GBTs.
GBTs and certain CMOs and other Government-related Securities are issued by
private entities, are not Government Securities and are not directly guaranteed
by any government agency. They are secured by the underlying collateral held by
the private issuer.
Government Securities and Government-related Securities do not generally
involve the credit risks associated with other types of interest bearing
securities, although, as a result, yields available from these securities are
generally lower than the yields available from corporate interest bearing
securities. Like other interest bearing securities, however, the values of
Government Securities and Government-related Securities change as interest rates
fluctuate. Therefore, when interest rates decline the market value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise the market value of a portfolio invested at lower yields can
be expected to decline. Therefore, GSVA will engage in portfolio trading to take
advantage of market developments and yield disparities, e.g. shortening the
average maturity of the portfolio in anticipation of a rise in interest rates so
as to minimize depreciation of principal or lengthening the average maturity of
the portfolio in anticipation of a decline in interest rates so as to maximize
the appreciation of principal.
TOTAL RETURN VARIABLE ACCOUNT
TRVA's primary investment objective is to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
the prudent employment of capital. While current income is the primary
objective, TRVA also will seek a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. Assets will be allocated and reallocated from time to
time between money market, fixed income and equity securities. Generally at
least 40% of TRVA's assets are invested in equity securities, including
preferred stocks.
TRVA's policy is to invest in a broad portfolio of securities, including
short-term obligations. The portfolio may be diversified not only by companies
and industries, but also by type of securities, for example, equity securities,
fixed income securities, and securities representing cash equivalents. Thus
fixed income securities, such as bonds, may be held as well as common stocks. In
addition, some fixed income securities held by TRVA may include a right to
purchase common stock by means of a conversion privilege or attached warrants.
TRVA may vary the percentage of assets invested in any one type of security in
accordance with its interpretation of economic and money market conditions,
fiscal and monetary policy, and underlying security values. Most of TRVA's
long-term debt investments will consist of "investment grade" securities (rated
Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch")
(see Appendix B for a description of these ratings; for a description of risks
associated with securities rated Baa or lower by Moody's or BBB or lower by S&P
or Fitch, see the discussion under "High Yield Variable Account" above.) TRVA
may enter into
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repurchase agreements only with member banks of the Federal Reserve System,
member firms (and subsidiaries thereof) of the New York Stock Exchange,
recognized primary U.S. Government securities dealers, or institutions which
TRVA's investment adviser has determined to be of comparable creditworthiness,
and only for U.S. Government securities and may seek to increase its income by
lending its portfolio securities to the extent consistent with present
regulatory policies. TRVA may invest in restricted securities, subject to the
restriction against investing more than 15% of its net assets in securities that
are not readily marketable. TRVA may enter into mortgage "dollar roll"
transactions and invest in corporate asset-backed securities (see Appendix C for
a discussion of repurchase agreements, corporate asset-backed securities,
lending of portfolio securities, restricted securities and mortgage "dollar
roll" transactions).
Securities offering above-average yield may at times involve greater than
average risk. For this reason, and because the value of securities and the
income earned on them may fluctuate according to the earnings of the issuers and
changes in economic and money market conditions, there can be no assurance that
TRVA's investment objectives will be achieved.
TRVA may invest up to 20% (and generally expects to invest between 10% and
20%) of its total assets in foreign securities, which may include emerging
market securities and Brady Bonds, and may invest in American Depositary
Receipts ("ADRs") (see Appendix C). Such investments may represent a greater
degree of risk than an investment in domestic securities due to possible
exchange rate fluctuations, less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions, war or
expropriation. For a description of the risks involved in investing in foreign
securities see the discussion under "High Yield Variable Account" above and
Appendix C "Investment Techniques--Emerging Market Securities" and "Brady
Bonds".
TRVA does not intend to trade in securities for short-term profits and
anticipates that portfolio securities will ordinarily be held for one year or
longer. However, TRVA will trade whenever it believes that changes in the
portfolio are appropriate.
WORLD GOVERNMENTS VARIABLE ACCOUNT
WGVA will seek to provide moderate current income and preservation and
growth of capital by investing in a portfolio of "U.S. Government Securities"
and "Foreign Government Securities" (to the extent WGVA's investment adviser
believes that the higher yields available from such Foreign Government
Securities are sufficient to justify the risks of investing in such securities).
WGVA may also hold its assets in cash or short-term obligations. In pursuing its
objectives, WGVA will consider the preservation and growth of capital by
balancing the yields of various fixed income securities against their attendant
risks.
WGVA will seek to provide purchasers with an opportunity to enhance the
value and increase the protection of their investment against inflation and
otherwise by taking advantage of investment opportunities in the United States
as well as in other countries where opportunities may be more rewarding. It is
believed that diversification of assets on an international basis decreases the
degree to which events in any one country, including the United States, can
affect the entire portfolio. Although the percentage of the Account's assets
invested in securities issued abroad and denominated in foreign currencies
("non-dollar securities") will vary depending on the state of the economies of
the principal countries of the world, their financial markets and the
relationships of their currencies to the U.S. dollar, under normal conditions
the Account's portfolio will be internationally diversified. However, for
defensive reasons or during times of international, political or economic
uncertainty or turmoil, most or all of the Account's investments may be in the
United States.
The Account will purchase non-dollar securities denominated in the currency
of countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Account's return. Investments in non-dollar securities are
evaluated primarily on the strength of a particular currency against the dollar
and on the interest rate climate of that country. Currency is judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate
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forecasts, balance of payments status, and economic policies) as well as
technical and political data. In addition to the foregoing, interest rates are
evaluated on the basis of differentials or anomalies that may exist between
different countries.
The phrase "preservation of capital" is generally understood to imply the
portfolio is invested in very low risk securities and that the major risk is
loss of purchasing power through the effects of inflation or major changes in
interest rates. However, while the Account will invest in securities which are
believed by its investment adviser to have minimal credit risk, an error of
judgment in selecting a currency or an interest rate environment could result in
a loss of capital.
WGVA intends to invest in the following securities: (1) U.S. GOVERNMENT
SECURITIES--U.S. Government Securities include (i) direct obligations of the
U.S. Treasury (i.e., Treasury bills, notes and bonds) with a wide range of
maturities, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury (e.g., direct pass through certificates of the Government National
Mortgage Association); some of which are supported by the right of the issuer to
borrow from the U.S. Government (e.g., obligations of the Federal Home Loan
Banks); and some of which are backed only by the credit of the issuer itself
(e.g., obligations of the Student Loan Marketing Association). Some U.S.
Government Securities do not generally involve the credit risks associated with
other types of interest bearing securities, although, as a result, the yields
available from such securities are generally lower than the yields available
from other interest bearing securities. Like other interest bearing securities,
however, the values of U.S. Government Securities change as interest rates
fluctuate; (2) FOREIGN GOVERNMENT SECURITIES--WGVA may invest in Foreign
Government Securities of issuers considered stable by WGVA's investment adviser.
The investment adviser does not believe that the credit risk inherent in the
obligations of such stable foreign governments is significantly greater than
that of U.S. Government Securities. The risk considerations involved in
investing in Foreign Government Securities are described below. The percentage
of WGVA's assets invested in Foreign Government Securities will vary depending
on the relative yields of such securities, the economies of the countries in
which the investments are made and such countries' financial markets, the
interest rate climate of such countries and the relationship of such countries'
currencies to the U.S. dollar. To the extent that WGVA invests in Foreign
Government Securities, its portfolio, under normal conditions, will include
securities of a number of foreign countries. As a "non-diversified" investment
company, WGVA will be able to invest more than 5% of its assets in obligations
of one or more foreign governments, to the extent consistent with federal income
tax diversification requirements; WGVA may also hold foreign currency for
hedging purposes; and (3) OTHER INVESTMENTS--When the investment adviser
believes that investing for temporary defensive purposes is appropriate, such as
during periods of unusual market conditions, or when relative yields are deemed
attractive, part or all of WGVA's assets may be invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, notes, U.S. Government
Securities, Foreign Government Securities and repurchase agreements.
In order to achieve its investment objectives, WGVA may employ the following
investment practices: (1) writing covered put and call options and purchasing
put and call options on U.S. and Foreign Government Securities that are traded
on United States and foreign securities exchanges and over the counter in an
effort to increase current income and to reduce fluctuations in Variable
Accumulation Unit and Annuity Unit values; (2) entering into contracts for the
purchase or sale for future delivery of fixed income securities or foreign
currencies, or contracts based on financial indexes, including any index of U.S.
or Foreign Government Securities ("Futures Contracts") and purchasing and
writing options to buy or sell Futures Contracts ("Options on Futures
Contracts") but only as a hedge against anticipated further changes in interest
or exchange rates; (3) purchasing and writing put and call options on foreign
currencies traded on U.S. and foreign exchanges or over the counter for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increase in the dollar cost of foreign securities to be
acquired; (4) entering into forward foreign currency exchange contracts
("Forward Contracts") to attempt to minimize the risk to WGVA from adverse
changes in the relationship between the U.S. dollar and foreign currencies; (5)
lending portfolio securities to the extent consistent with present regulatory
policies for the purpose of increasing WGVA's income; (6) purchasing securities
on a "when-issued" or on a "forward delivery" basis;
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(7) entering into repurchase agreements for U.S. Government Securities with
member banks of the Federal Reserve System, member firms (and subsidiaries
thereof) of the New York Stock Exchange, recognized primary U.S. Government
securities dealers, or institutions which WGVA's investment adviser has
determined to be of comparable creditworthiness; (8) entering into mortgage
"dollar roll" transactions; (9) entering into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors; (10) entering into indexed securities whose value is linked to foreign
currencies, interest rates, commodities, indexes or other financial indicators;
and (11) investing in restricted securities, subject to the restriction against
investing more than 15% of its net assets in securities that are not readily
marketable. These investment practices, the instruments involved and their use,
risks and costs are more fully described in Appendix C "Investment Techniques"
and in Appendix D in the Statement of Additional Information. WGVA's use of
options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
options on foreign currencies may result in the loss of principal under certain
market conditions.
WGVA will engage in portfolio trading if it believes that a transaction, net
of costs, will help in achieving its investment objective. WGVA cannot
accurately predict its portfolio turnover rate, but it is anticipated that the
annual turnover rate generally will not exceed 400% (excluding turnover of
securities having a maturity of one year or less). A 400% annual turnover rate
would occur, for example, if all the securities in the portfolio were replaced
four times in a period of one year. WGVA's anticipated portfolio turnover rate
would be substantially higher than that experienced by most investment
companies. A high turnover rate necessarily involves greater expenses to WGVA.
Investment in Foreign Government Securities involves considerations and
possible risks not typically associated with investing in U.S. Government
Securities. The value of Foreign Government Securities investments will be
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the U.S. or
abroad) or changed circumstances between nations. Costs may be incurred in
connection with conversions between various currencies. Foreign brokerage
commissions are generally higher than U.S. commissions, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods. For
a description of the risks involved in investing in foreign securities, see the
discussion under "High Yield Variable Account" above.
PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND CONSIDER THE
INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS TO WGVA.
MANAGED SECTORS VARIABLE ACCOUNT
MSVA will seek capital appreciation by varying the weighting of its
portfolio among fifteen industry sectors. Dividend income, if any, is incidental
to MSVA's objective of capital appreciation.
The fifteen sectors from among which MSVA chooses its investments are: autos
and housing; consumer goods and services; defense and aerospace; energy;
financial services; health care; heavy industry; leisure; machinery and
equipment; precious metals; retailing; technology; transportation; utilities;
and foreign securities. (See Appendix D for a description of the scope of and
potential risks associated with each of these industry sectors.) Certain sectors
may overlap; for example, the defense and aerospace sector and the technology
sector both include companies involved in the development of computer-related
products. Therefore, securities of certain companies or industries may
simultaneously be held in more than one industry sector.
In response to changes or anticipated changes in the general economy or
within one or more particular industry sectors, MSVA may increase, decrease or
eliminate entirely a particular sector's representation in its portfolio;
similarly, it may acquire securities of a sector not then represented in its
portfolio. A sector or stock of a particular company will be added to or
eliminated from the portfolio based upon such factors as such sector's or
company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
MSVA expects to remove such stocks from its
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portfolio. Any one sector may comprise up to 50% of the portfolio, as may cash
held as a temporary defensive measure or to meet anticipated redemption
requests. MSVA has registered as a "non-diversified" investment company so that
more than 5% of the Account's assets may be invested in the securities of each
of one or more issuers. As a result of such non-diversified status, MSVA may be
more susceptible to adverse changes in the value of securities of a particular
company than would be a diversified investment company. Similarly, due to the
Account's ability to concentrate in as few as two industry sectors, MSVA's
assets may be more susceptible to any single economic, political or regulatory
occurrence than would be those of an investment company without a policy of
concentration in particular industry sectors.
While MSVA's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities such as non-convertible and
convertible bonds, convertible preferred stocks, and in warrants to purchase
common stock, when relative values make such investments appear attractive
either as individual issues or as types of securities in certain economic
environments. The non-convertible bonds invested in by MSVA will include (i)
obligations issued or guaranteed by the U.S. Treasury or U.S. government
agencies or instrumentalities, and (ii) obligations of the U.S. Treasury that
have been issued without interest coupons or stripped of their unmatured
interest coupons, interest coupons that have been stripped from such debt
obligations, and receipts and certificates for such stripped debt obligations
and stripped coupons. MSVA may invest in restricted securities, subject to the
restriction against investing more than 15% of its net assets in securities that
are not readily marketable (see Appendix C "Investment Techniques--Restricted
Securities"). MSVA may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities, which may include
emerging market securities, and may invest in American Depositary Receipts
("ADRs") (for a description of the risks involved in investing in foreign
securities see the discussion under "High Yield Variable Account" above and
Appendix C "Investment Techniques--Emerging Market Securities") and may enter
into forward foreign currency exchange contracts ("Forward Contracts") for the
purchase or sale of foreign currency for hedging purposes. MSVA may write
covered put and call options and purchase put and call options on securities and
stock indexes in an effort to increase current income and for hedging purposes.
MSVA may also purchase and sell stock index futures contracts and may write and
purchase options thereon for hedging purposes. MSVA's use of options, Futures
Contracts, Options on Futures Contracts and Forward Contracts may result in loss
of principal under certain market conditions. See Appendix C "American
Depository Receipts" and "Investment Techniques" and Appendix D to the Statement
of Additional Information for a description of ADR's, options, Futures
Contracts, Options on Futures Contracts and Forward Contracts and the risks and
costs associated therewith.
MSVA's portfolio is aggressively managed and the Account assumes above
average risk of loss. Therefore an investment in MSVA should not constitute a
complete investment program. Portfolio changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of portfolio turnover is not a limiting
factor when changes are believed by the Account's investment adviser to be
appropriate, and the annual portfolio turnover rate may exceed 100%. A
relatively high level of portfolio activity may result in relatively substantial
brokerage commissions.
PORTFOLIO TRANSACTIONS
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. and such other
policies as the Boards of Managers may determine, MFS may consider the sale of
the Contracts and other contracts participating in the Variable Accounts as a
factor in the selection of broker-dealers to execute the Variable Accounts'
portfolio transactions. For a further discussion of portfolio transactions see
the Statement of Additional Information.
MANAGEMENT OF THE VARIABLE ACCOUNTS
The Boards of Managers of the Variable Accounts provide broad supervision
over the affairs of the Variable Accounts and the officers of the Variable
Accounts are responsible for their operation. Massachusetts Financial Services
Company ("MFS"), 500 Boylston Street, Boston, Massachusetts 02116 is the
investment adviser for each of the Variable Accounts. MFS is a wholly-owned
subsidiary of the Company.
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MFS and its predecessor organizations have a history of money management dating
from 1924. MFS serves as investment adviser to each of the funds in the MFS
Family of Funds and to certain other investment companies established by MFS
and/or the Company. MFS Asset Management, Inc., a subsidiary of MFS, provides
investment advice to substantial private clients.
MFS provides the Variable Accounts with overall investment advisory services
and furnishes some general office facilities and equipment. Administrative
functions relating to the Contracts and the Variable Accounts are performed by
the Company. For a description of expenses paid by each Variable Account see
"Management of the Variable Accounts" in the Statement of Additional
Information.
PURCHASE PAYMENTS AND CONTRACT VALUES
DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. Purchase Payments may be made annually, semi-annually,
quarterly, monthly or on any other frequency acceptable to the Company. Unless
the Contract has been surrendered, Purchase Payments may be made at any time
during the life of the Annuitant and before the Annuity Commencement Date (the
"Accumulation Period"). The amount of Purchase Payments may vary; however,
Purchase Payments must total at least $300 for the first Contract Year, and each
Purchase Payment must be at least $25. In addition, the prior approval of the
Company is required before it will accept a Purchase Payment which would cause
the value of a Contract's Accumulation Account to exceed $1,000,000. If the
value of a Contract's Accumulation Account exceeds $1,000,000, no additional
Purchase Payments will be accepted without prior approval.
Completed application forms, together with the initial Purchase Payment, are
forwarded to the Company. Upon acceptance, the Contract is issued to the Owner
and the initial Purchase Payment is credited to the Contract in the form of
Accumulation Units. The initial Purchase Payment must be applied within two
business days of receipt of a completed application. The Company may retain the
Purchase Payment for up to five business days while attempting to complete an
incomplete application. If the application cannot be made complete within five
business days, the applicant will be informed of the reasons for the delay and
the Purchase Payment will be returned immediately unless the applicant
specifically consents to the Company's retaining the Purchase Payment until the
application is made complete. Thereafter, the Purchase Payment must be applied
within two business days. All subsequent Purchase Payments will be applied using
the Accumulation Unit values for the Valuation Period during which the Purchase
Payment is received by the Company.
The Company will establish an Accumulation Account for each Contract. The
Contract's Accumulation Account value for any Valuation Period is equal to the
variable accumulation value, if any, plus the fixed accumulation value, if any,
for that Valuation Period. The variable accumulation value is equal to the sum
of the value of all Variable Accumulation Units credited to the Contract's
Accumulation Account.
Each net Purchase Payment will be allocated to either the Variable Accounts
or the Fixed Account (see Appendix A to the Statement of Additional Information
for a description of the Fixed Account) or to both the Variable Accounts and the
Fixed Account in accordance with the allocation factors specified by the Owner
in the application or as subsequently changed. Upon receipt of a Purchase
Payment, all or that portion, if any, of the net Purchase Payment to be
allocated to the Variable Accounts will be credited to the Accumulation Account
in the form of Variable Accumulation Units. The number of particular Variable
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Variable Account by the Variable Accumulation Unit
value for the particular Variable Account for the Valuation Period during which
the Purchase Payment is received.
The Variable Accumulation Unit value for each Variable Account was
established at $10.00 for the first Valuation Period of the particular Variable
Account. The Variable Accumulation Unit value for any subsequent Valuation
Period is determined by methodology which is the mathematical equivalent of
multiplying the Variable Accumulation Unit value for the immediately preceding
Valuation Period by the appropriate Net Investment Factor for such subsequent
Valuation Period.
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NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Variable 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 Valuation Period is determined by adding
(a) and (b), subtracting the sum of (c) and (d), and dividing the result of the
subtraction by (a). For the purposes of this calculation:
(a) is the value of the Variable Account's net assets attributable to
the Contracts at the end of the preceding Valuation Period;
(b) is the investment income and capital gains, realized or unrealized,
that are credited to such assets of the Variable Account during the
Valuation Period;
(c) is the capital losses, realized or unrealized, charged against such
assets of the Variable Account in the Valuation Period plus, with respect to
such assets, any amount charged against the Variable Account or set aside as
a reserve to maintain or operate the Variable Account for the Valuation
Period;
(d) is the expenses of the Variable Account attributable to the
Contracts incurred during the Valuation Period including the mortality and
expense risk charge, the distribution expense risk charge and the investment
management fee and the other expenses of the Variable Account, subject to
any applicable expense limitation.
The assets of the Variable Accounts will normally be composed chiefly of
investment securities. The assets of each Variable Account are valued as of the
close of trading on the New York Stock Exchange on each day the Exchange is open
for trading, and on such other days on which there was a sufficient degree of
trading in the Variable Account's portfolio securities so that the values of the
Variable Account's Accumulation Units and Annuity Units might be materially
affected. The assets of MMVA are valued at amortized cost in accordance with
Rule 2a-7 under the Investment Company Act of 1940. The assets of the other
Variable Accounts are valued as follows:
(a) Equity securities are normally valued at the last sale price on the
exchange on which they are primarily traded or on the NASDAQ system for
unlisted national market issues or at the last quoted bid price for unlisted
securities not reported on the NASDAQ system or listed securities in which
there were no sales during the day.
(b) Debt securities (other than short-term obligations, but including
listed issues) and forward foreign currency exchange contracts are normally
valued on the basis of valuations provided by a pricing service since such
valuations are believed to reflect the fair value of such securities. Use of
the pricing service has been approved by the Boards of Managers. (Valuations
provided by the pricing service may be determined without exclusive reliance
on quoted prices and may take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other
market data.)
(c) Short-term debt securities (i.e. those maturing in not more than
sixty days) owned by a Variable Account are valued on the basis of amortized
cost, which the Board of Managers has determined approximates market value.
(d) Options, Futures Contracts and Options on Futures Contracts are
normally valued at the settlement price on the exchange on which they are
primarily traded.
(e) The Board of Managers of each Variable Account is required to
determine in good faith the fair value of securities and other assets that
do not have a readily available market price. The Board of Managers may
delegate the making of such determinations to others, e.g., the Variable
Account's investment adviser.
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TRANSFERS/CONVERSIONS OF ACCUMULATION UNITS
During the accumulation period the Owner may convert the value of a
designated number of Fixed Accumulation Units then credited to a Contract's
Accumulation Account into Variable Accumulation Units of particular Variable
Accounts having an equal aggregate value, or convert the value of a designated
number of Variable Accumulation Units into other Variable Accumulation Units
and/or Fixed Accumulation Units having an equal aggregate value. These
transfers/conversions are subject to the following conditions: (1) conversions
involving Fixed Accumulation Units may be made only during the 45 day period
before and the 45 day period after each Contract Anniversary; (2) not more than
12 conversions may be made in any Contract Year; and (3) the value of
Accumulation Units converted may not be less than $1,000 unless all of the Fixed
Accumulation Units or all of the Variable Accumulation Units of a particular
Variable Account credited to the Accumulation Account are being converted. The
conversion will be made using the Accumulation Unit values for the Valuation
Period during which the request for conversion is received by the Company. Under
current tax law a conversion will not result in any tax liability to the Owner.
Conversions may be made pursuant to telephoned instructions.
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Owner may elect to receive a cash withdrawal payment from the
Company. Any such election shall specify the amount of the withdrawal and will
be effective on the date that it is received by the Company. For withdrawals in
excess of $5,000 the Company may require a signature guarantee. The withdrawal
will result in the cancellation of Accumulation Units with an aggregate value
equal to the dollar amount of the cash withdrawal payment plus, if applicable,
the contract maintenance charge and any withdrawal charge. Unless instructed to
the contrary, the Company will cancel Fixed Accumulation Units and Variable
Accumulation Units on a pro rata basis reflecting the existing composition of
the Contract's Accumulation Account. If a partial withdrawal is requested which
would leave an Accumulation Account value of less than the contract maintenance
charge, then such partial withdrawal will be treated as a full surrender.
Under certain conditions, the Company will assess a withdrawal charge if a
cash withdrawal payment is made. The amount of any withdrawal charge and the
conditions under which the charge will apply are discussed under "Withdrawal
Charges".
Any cash withdrawal payment will be paid within seven days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940. Deferment is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings, or
(b) during which trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (2) for any period during
which an emergency exists as a result of which (a) disposal of securities held
by the Accounts is not reasonably practicable, or (b) it is not reasonably
practicable to determine the value of the net assets of the Accounts, or (3) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of security holders.
Special restrictions on withdrawals apply to certain Qualified Contracts
including Contracts used with Tax Sheltered Annuities established pursuant to
Section 403(b) of the Code ("Section 403(b) Annuities") and under the Texas
Optional Retirement Program, discussed below. Reference should be made to the
terms of the particular retirement plan for which Qualified Contracts are issued
for any limitations or restrictions on cash withdrawals. A cash withdrawal under
either a Qualified or Non-Qualified Contract also may result in the imposition
of a tax penalty (see "Federal Tax Status").
SECTION 403(B) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for these Contracts to
receive tax deferred treatment, the Contract must provide that cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of Accumulation Account value as of December 31, 1988 ("Pre-1989
Account Value")) may be made only when the Contract Owner attains age 59 1/2,
separates from service with the employer, dies or becomes
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<PAGE>
disabled (within the meaning of Section 72(m)(7) of the Code). These
restrictions apply to any growth or interest on or after January 1, 1989 on
Pre-1989 Account Value, salary reduction contributions made on or after January
1, 1989, and any growth or interest on such contributions ("Restricted Account
Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Owner must have an
immediate and heavy bona fide financial need and lack other resources reasonably
available to satisfy the need. Hardship withdrawals (as well as certain other
premature withdrawals) will be subject to a 10% tax penalty, in addition to any
withdrawal charge applicable under the Contract (see "Federal Tax Status").
Under the terms of a particular Section 403(b) plan, the Owner may be
entitled to transfer all or a portion of the Accumulation Account value to one
or more alternative funding options. Contract Owners should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
In imposing these restrictions on withdrawals, the Company is relying upon a
no-action letter dated November 28, 1988 from the staff of the Securities and
Exchange Commission to the American Council of Life Insurance, the requirements
for which have been complied with by the Company.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status."
TEXAS OPTIONAL RETIREMENT PROGRAM
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution, the State of Texas will contribute a specified amount
to the participant's retirement account. If a participant does not commence the
second year of participation in the plan as a "faculty member" as defined in
Title 110B of the State of Texas Statutes, the Company will return the State's
contribution. If a participant does begin a second year of participation, the
employer's first year contributions will then be applied as a Purchase Payment
under the Qualified Contract, as will the employer's subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise the
right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
DEATH BENEFIT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable under the Contract except as may be provided under the annuity
option elected.
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Accumulation Account applied
under one or more annuity options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death of
the Annuitant. If no election of a method of settlement of the death benefit by
the Owner is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a cash payment; or (b)
to have the value of the Accumulation Account applied under one or more of the
annuity options (on the Annuity Commencement Date described under "Payment of
Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination
of both for the Beneficiary as Payee. If an election by the
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Beneficiary is not received by the Company within 60 days following the date Due
Proof of Death of the Annuitant and any required release or consent is received,
the Beneficiary will be deemed to have elected a cash payment as of the last day
of the 60 day period.
In all cases, no Owner or Beneficiary shall be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code (see "Other Contractual Provisions --
Death of Owner").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 under the
circumstances described under "Cash Withdrawals". If the death benefit is to be
paid in one sum to the Owner, or to the estate of the deceased Owner/Annuitant,
payment will be made within seven days of the date Due Proof of Death of the
Annuitant, the Owner, and/or the Beneficiary, as applicable, is received. If
settlement under one or more of the annuity options is elected by the Owner, the
Annuity Commencement Date will be the first day of the second calendar month
following receipt of Due Proof of Death of the Annuitant and the Beneficiary, if
any. In the case of an election by the Beneficiary, the Annuity Commencement
Date will be the first day of the second calendar month following the effective
date of the election. An Annuity Commencement Date later than that described
above may be elected by an Owner or Beneficiary provided that such date is (a)
the first day of a calendar month, and (b) not later than the first day of the
first month following the 85th birthday of the Owner or Beneficiary, as the case
may be, unless otherwise restricted, in the case of a Qualified Contract, by the
applicable 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 (unless prohibited by applicable state
law) (3) the value of the Contract's Accumulation Account on the Seven Year
Anniversary immediately preceding the date of death of the Annuitant, adjusted
for any Purchase Payments or cash withdrawal payments made and contract charges
assessed subsequent to such Seven Year Anniversary. The Accumulation Unit values
used in determining the amount of the death benefit under (1) above will be the
values for the Valuation Period during which Due Proof of Death of the Annuitant
is received by the Company if settlement is elected by the Owner under one or
more of the annuity options or, if no election by the Owner is in effect, either
the values for the Valuation Period during which an election by the Beneficiary
is effective or the values for the Valuation Period during which Due Proof of
Death of both the Annuitant and the designated Beneficiary is received by the
Company if the amount of the death benefit is to be paid in one sum to the
deceased Owner/Annuitant's estate.
CONTRACT CHARGES
Contract charges may be assessed under the Contracts as follows:
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary and on surrender of the Contract for full value
on other than the Contract Anniversary the Company deducts from the Accumulation
Account a contract maintenance charge of $30 to reimburse it for administrative
expenses relating to the issuance and maintenance of the Contract. The contract
maintenance charge will be deducted in equal amounts from the Fixed Account and
each Variable Account in which the Owner has Accumulation Units at the time of
such deduction. On the Annuity Commencement Date the value of the Contract's
Accumulation Account will be reduced by a proportionate amount of the contract
maintenance charge to reflect the time elapsed between the last Contract
Anniversary and the day before the Annuity Commencement Date. After the Annuity
Commencement Date, the contract maintenance charge will be deducted pro rata
from each annuity payment made during the year.
The amount of the contract maintenance charge may not be increased by the
Company. The Company reserves the right to reduce the amount of the contract
maintenance charge for groups of participants with
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individual Contracts under an employer's retirement program in situations in
which the size of the group and established administrative efficiencies
contribute to a reduction in administrative expenses. The Company does not
expect to make a profit from the contract maintenance charge.
MORTALITY AND EXPENSE RISK CHARGE
The mortality and expense risks assumed by the Company are the risks that
Annuitants may live for a longer period of time than estimated by the Company in
establishing the guaranteed annuity rates incorporated into the Contract, and
the risk that administrative charges assessed under the Contracts may be
insufficient to cover actual administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Accounts with respect to the Contracts at the end of each Valuation Period
during both the accumulation period and after annuity payments begin at an
effective annual rate of 1.25%. The rate of this deduction may be changed
annually but in no event may it exceed 1.25% on an annual basis. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including, among other things,
payment of distribution expenses. If the distribution expense risk charge and
withdrawal charges described below prove insufficient to cover expenses
associated with the distribution of the Contracts, the deficiency will be met
from the Company's general corporate funds, which may include amounts derived
from the mortality and expense risk charges.
DISTRIBUTION EXPENSE RISK CHARGE
The distribution expense risk assumed by the Company is the risk that
withdrawal charges assessed under the Contracts may be insufficient to
compensate the Company for the costs of distributing the Contracts. For assuming
such risk the Company makes a deduction from the Variable Accounts with respect
to the Contracts at the end of each Valuation Period for the first seven
Contract Years (during both the accumulation period and, if applicable, after
annuity payments begin) at an effective annual rate of 0.15% of the assets of
the Variable Accounts attributable to the Contracts. No deduction is made after
the seventh Contract Anniversary. If the distribution expense risk charge is
insufficient to cover the actual risk assumed, the Company will bear the loss;
however, if the charge is more than sufficient, any excess will be profit to the
Company and would be available for any proper corporate purpose. In no event
will the distribution expense risk charges and any withdrawal charges assessed
under a Contract exceed 9% of the Purchase Payments made under the Contract.
INVESTMENT MANAGEMENT FEES
The Company makes a deduction from the Variable Accounts at the end of each
Valuation Period for the investment management fees payable to MFS. For the year
ended December 31, 1994 the investment management fees paid to MFS by the
Variable Accounts were equal to the following percentages of the average daily
net assets of the respective Accounts: MMVA, 0.50%; HYVA, 0.75%; CAVA, 0.73%;
GSVA, 0.55%; WGVA, 0.75%; TRVA, 0.75%; and MSVA, 0.75%.
WITHDRAWAL CHARGES
No sales charges are deducted from Purchase Payments. However, a withdrawal
charge (contingent deferred sales charge), when applicable, will be assessed to
reimburse the Company for certain expenses relating to the distribution of the
Contracts, including commissions, costs of preparation of sales literature and
other promotional costs and acquisition expenses.
A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment has
been held by the Company for seven years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization or upon the transfer of Accumulation Account values among the
Variable Accounts or between the Variable Accounts and the Fixed Account.
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All other full or partial withdrawals are subject to a withdrawal charge
which will be applied as follows:
(1) Old Payments, new Payments and accumulated value: With respect to a
particular Contract Year, "new Payments" are those Payments made in that
Contract Year or in the six immediately preceding Contract Years; "old
Payments" are those Payments not defined as new Payments; and "accumulated
value" is the value of the Accumulation Account less the sum of old and new
Payments.
(2) Order of liquidation: To effect a full surrender or partial
withdrawal, the oldest previously unliquidated Payment will be deemed to
have been liquidated first, then the next oldest, and so forth. Once all old
and new Payments have been withdrawn, additional amounts withdrawn will be
attributed to accumulated value.
(3) Maximum free withdrawal amount: The maximum amount that can be
withdrawn without a withdrawal charge in a Contract Year is equal to the sum
of (a) any old Payments not already liquidated; and (b) 10% of any new
Payments, irrespective of whether these new Payments have been liquidated.
(4) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge will be the excess, if any, of (a) amounts liquidated from
old and new Payments over (b) the remaining maximum free withdrawal amount
at the time of the withdrawal.
The amount of the withdrawal charge varies according to the number of
complete Contract Years between the Contract Year in which a Purchase Payment
was credited to a Contract's Accumulation Account and the Contract Year in which
it was withdrawn, in accordance with the following table:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACT YEARS WITHDRAWAL CHARGE
- --------------- -------------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
The withdrawal charge is not assessed with respect to a Contract established
for the personal account of an employee of the Company or of any of its
affiliates, or of a licensed insurance agent engaged in distributing the
Contracts.
In no event shall the aggregate withdrawal charges (including the
distribution expense risk charge described above) assessed against a Contract
exceed 9% of the aggregate Purchase Payments made under the Contract (see
Appendix C in the Statement of Additional Information for examples of
withdrawals and withdrawal charges).
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes ranging from 0% to 3.5% (see Appendix A). It is currently the Company's
policy to deduct the tax from the amount applied to provide an annuity at the
time annuity payments commence; however, the Company reserves the right to
deduct such taxes when incurred.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments under a Contract will begin on the Annuity Commencement
Date which is selected by the Owner at the time the Contract is applied for.
This date may be changed by the Owner as provided in the Contract; however the
new Annuity Commencement Date must be the first day of a month and not later
than the first day of the first month following the Annuitant's 85th birthday,
unless otherwise limited or restricted, in the case of a Qualified Contract, by
the particular retirement plan or by applicable law. In most situations, current
law requires that the Annuity Commencement Date under a Qualified Contract be no
later than April 1 following the year the Annuitant reaches age 70 1/2, and the
terms of 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."
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On the Annuity Commencement Date the Contract's Accumulation Account will be
cancelled and its adjusted value will be applied to provide an annuity. The
adjusted value will be equal to the value of the Accumulation Account for the
Valuation Period which ends immediately preceding the Annuity Commencement Date,
reduced by any applicable premium or similar taxes and a proportionate amount of
the contract maintenance charge (see "Contract Maintenance Charge"). NO CASH
WITHDRAWALS WILL BE PERMITTED AFTER THE ANNUITY COMMENCEMENT DATE EXCEPT AS MAY
BE AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403, or 408 of
the Internal Revenue Code, as well as certain non-qualified plans, reference
should be made to the terms of the particular plan for any limitations or
restrictions on the Annuity Commencement Date.
ANNUITY OPTIONS
Unless restricted by the particular retirement plan or any applicable
legislation, during the lifetime of the Annuitant and prior to the Annuity
Commencement Date the Owner may elect one or more of the annuity options
described below or such other settlement option as may be agreed to by the
Company for the Annuitant as Payee. Annuity options may also be elected by the
Owner or the Beneficiary as provided under "Death Benefit." The Owner may not
change any election after 30 days prior to the Annuity Commencement Date, and NO
CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT DATE. If no
election is in effect on the 30th day prior to the Annuity Commencement Date,
Annuity Option B, for a Life Annuity with 120 monthly payments certain, will be
deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Contract's Accumulation Account to be applied to the Fixed Account and the
Variable Accounts. In the event the election does not so specify, then the
portion of the adjusted value of the Accumulation Account to be applied to the
Fixed Account and the Variable Accounts will be determined on a pro rata basis
from the composition of the Accumulation Account on the Annuity Commencement
Date.
Annuity options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity options D and E are available only to provide a
Fixed Annuity.
ANNUITY OPTION A. LIFE ANNUITY: Monthly payments during the lifetime of the
Payee. This option offers a higher level of monthly payments than options B or C
because no further payments are payable after the death of the Payee and there
is no provision for a death benefit payable to a Beneficiary.
ANNUITY OPTION B. LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected.
ANNUITY OPTION C. JOINT AND SURVIVOR ANNUITY: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of the election of this option of the number of each type of Annuity Unit
credited to the Contract and each fixed monthly payment, if any, will be equal
to the same percentage of the fixed monthly payment payable during the joint
lifetime of the Payee and the designated second person.
*ANNUITY OPTION D. FIXED PAYMENTS FOR A SPECIFIED PERIOD CERTAIN: Fixed
monthly payments for a specified period of time (at least five years, but not
exceeding 30 years), as elected.
*ANNUITY OPTION E. FIXED PAYMENTS: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times (at least over a
period of five years) as may be agreed upon with the Company and will continue
until the amount held by the Company with interest is exhausted. Interest will
be credited yearly on the amount remaining unpaid at a rate which shall be
determined by the Company from time to time but which
- ---------
* The election of this annuity option may result in the imposition of a penalty
tax.
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<PAGE>
shall not be less than 4% per year compounded annually. The rate so determined
may be changed by the Company at any time; however, the rate may not be reduced
more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Variable Account is determined by dividing that portion of the first variable
annuity payment attributable to that Variable Account by the Annuity Unit value
of that Variable Account for the Valuation Period which ends immediately
preceding the Annuity Commencement Date. The number of Annuity Units of each
particular Variable 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 Variable Accounts.
The Statement of Additional Information contains detailed disclosure
regarding the method of determining the amount of each variable annuity payment
and calculating the value of a Variable Annuity Unit, as well as hypothetical
examples of these calculations.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may exchange the value of a
designated number of Variable Annuity Units of particular Variable Accounts then
credited to the Contract for other Variable Annuity Units, the value of which
would be such that the dollar amount of an annuity payment made on the date of
the exchange would be unaffected by the fact of the exchange. Exchanges may be
made only between the Variable Accounts. Twelve such exchanges may be made
within each Contract Year.
ANNUITY PAYMENT RATES
The Contract contains annuity payment rates for each annuity option
described above. The rates show, for each $1,000 applied, the dollar amount of
(a) the first monthly variable annuity payment based on the assumed interest
rate of 4%; and (b) the monthly fixed annuity payment, when this payment is
based on the minimum guaranteed interest rate of 4% per year. The annuity
payment rates may vary according to the annuity option elected and the adjusted
age of the Payee. Over a period of time, if the Variable Accounts achieved a net
investment return exactly equal to the assumed interest rate of 4%, the amount
of each variable annuity payment would remain constant. However if the Variable
Accounts achieved a net investment result greater than 4%, the amount of each
variable annuity payment would increase; conversely, a net investment result
smaller than 4% would decrease the amount of each variable annuity payment.
OTHER CONTRACTUAL 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
Owner of a Non-Qualified Contract may change the ownership of the Contract,
subject to the provisions of the Contract, although such change may result in
the imposition of tax (see "Federal Tax Status--Taxation of Annuities In
General"). Transfer of ownership of a Qualified Contract is governed by the laws
and regulations applicable to the retirement or deferred compensation plan for
which the Contract was issued. Subject to the foregoing, a Qualified Contract
may not be sold, assigned, transferred, discounted or pledged as collateral for
a loan or as security for the performance of an obligation or for any other
purpose to any person other than the Company.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
may change or revoke the designation of a Beneficiary at any time while the
Annuitant is living.
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<PAGE>
DEATH OF OWNER
If the Owner of a Non-Qualified Contract dies before the Annuity
Commencement Date, the entire value of the Contract's Accumulation Account must
be either (1) distributed within five years after the date of death of the
Owner, or (2) distributed over some period not greater than the life or expected
life of the "designated beneficiary" as defined below, with annuity payments
beginning within one year after the date of death of the Owner. The person named
as "successor Owner" shall be considered the "designated beneficiary" for the
purposes of Section 72(s) of the Internal Revenue Code and if no person then
living has been so named, then the Annuitant shall automatically be the
"designated beneficiary" for this purpose. These distribution requirements will
not apply where the Beneficiary is the spouse of the Owner; rather, in such a
case the Contract may be continued in the name of the spouse as Owner. Where the
deceased Owner is also the Annuitant (other than where a Beneficiary spouse
elects to continue the Contract), the Death Benefit provision of the Contract
will control. If the Owner/Annuitant dies on or after the Annuity Commencement
Date and before the entire accumulation under the Contract has been distributed,
the remaining portion of such accumulation, if any, must be distributed at least
as rapidly as the method of distribution then in effect.
In all cases, no Owner or Beneficiary shall be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code.
Any distributions upon the death of the Owner of a Qualified Contract will
be subject to the laws and regulations governing the particular retirement or
deferred compensation plan in connection with which the Qualified Contract was
issued.
VOTING RIGHTS
Owners of and payees under the Contracts and other contracts participating
in the investment experience of each Variable Account have the right to vote at
meetings of owners/payees of the particular Variable Account, upon such matters
as the election of Members of the Board of Managers, the ratification of the
selection of the independent certified public accountants, proposed changes in
the Variable Accounts' investment objectives and/or restrictions and such other
matters as the Investment Company Act of 1940 may require.
Prior to the Annuity Commencement Date the Owner may cast one vote for each
Variable Accumulation Unit in the particular Variable Account credited to the
Contract's Accumulation Account on the record date. On or after the Annuity
Commencement Date, the number of votes that a Payee may cast is determined by
dividing the reserve held in the particular Variable Account for the Contract by
the Variable Accumulation Unit value of the Variable Account on the record date.
Employees who contribute to retirement plans which are funded by Qualified
Contracts are entitled to instruct the Owners as to how to vote at meetings of
Owners/ Payees of Contracts participating in the investment experience of the
Variable Account.
MODIFICATION
Upon notice to the Owner, or to the Payee during the annuity period, the
Contract may be modified by the Company, but only if such modification (i) is
necessary to make the Contract or the Variable Account comply with any law or
regulation issued by a governmental agency to which the Company is subject or
(ii) is necessary to assure continued qualification of the Contract under the
Internal Revenue Code or other federal or state laws relating to retirement
annuities or variable annuity contracts or (iii) is necessary to reflect a
change in the operation of the Variable Accounts or (iv) provides additional
Variable Account and/or fixed accumulation options. In the event of any such
modification, the Company may make appropriate endorsement to the Contract to
reflect such modification.
CHANGE IN OPERATION OF VARIABLE ACCOUNTS
At the Company's election and subject to any necessary vote by persons
having the right to vote, the Variable Accounts may be operated as unit
investment trusts under the Investment Company Act of 1940 or they may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Accounts requires an order
by the Securities and Exchange Commission. In the event of any change in the
operation of the Variable Accounts pursuant to this provision, the Company may
make appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
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<PAGE>
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change of unit values, strict equity will be preserved and no
change will have a material effect on the benefits or other provisions of the
Contract.
FEDERAL TAX STATUS
INTRODUCTION
The 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 Accounts,
to the extent that it is applied to increase reserves under the Contracts, is
not taxable to the Company.
TAXATION OF ANNUITIES IN GENERAL
Generally no tax is imposed on the increase in the value of a Contract held
by an individual Owner until a distribution occurs, either as an annuity payment
or in the form of a cash withdrawal, a lump sum payment or a loan from (or
pledge of) the Contract prior to the Annuity Commencement Date. Corporate Owners
and other Owners that are not natural persons are subject to current taxation on
the annual increase in the value of a Non-Qualified Contract's Accumulation
Account. This rule does not apply where a non-natural person holds the Contract
as agent for a natural person (such as where a bank holds a Contract as trustee
under a trust agreement).
Taxable cash withdrawals from either Qualified or Non-Qualified Contracts
are subject to a 10% penalty, except in certain circumstances (such as where the
distribution is made after the Owner has reached age 59 1/2 or upon the death of
the Owner). In the case of a Qualified Contract, certain distributions, known as
"eligible rollover distributions," if rolled over to certain other qualified
retirement plans (either directly or after being distributed to the Owner or
Payee), are not taxable until distributed from the plan to which they are rolled
over. In general, an eligible rollover distribution is any taxable distribution
other than a distribution that is part of a series of payments made for life or
for a specified period of ten years or more. Owners, Annuitants, Payees and
Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans in
connection with which the Contracts are purchased.
If the Owner dies before the Annuity Commencement Date, the Contract's
Accumulation Account must be distributed within a specified period. In the case
of a Non-Qualified Contract, this distribution requirement does not apply where
the spouse of the Owner is the successor Owner.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis.
The Company will withhold and remit to the U.S. government part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use 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) that he or she
chooses not to have amounts withheld.
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In the case of distributions from a Qualified Contract (other than
distributions from 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 Qualified Contract is
not an eligible rollover distribution, then the Owner or Payee can choose not to
have amounts withheld as described above for Non-Qualified Contracts and
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 Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for segregated asset accounts underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for income tax purposes. The Company
believes that the Variable Accounts comply with the regulations.
The preamble to the regulations states that the Service may promulgate
guidelines under which a variable contract will not be treated as an annuity for
tax purposes if the owner has excessive control over the investments underlying
the contract. It is not known whether such guidelines, if in fact promulgated,
would have retroactive effect. If guidelines are promulgated, the Company will
take any action (including modification of the Contract or the Variable
Accounts) necessary to comply with the guidelines.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with the following types of qualified retirement plans:
(1) Individual Retirement Annuities permitted by Sections 219 and 408 of
the Code, including Simplified Employee Pensions established by employers
pursuant to Section 408(k);
(2) Tax Sheltered Annuities established pursuant to the provisions of
Section 403(b) of the Code for public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code; and
(3) Various Pension and Profit-Sharing Plans established by business
employers and certain associations, as permitted by Sections 401(a), 401(k)
and 403(a) of the Code, including those purchasers who would have been
covered under the rules governing old H.R. 10 (Keogh) Plans.
The tax rules applicable to participants in such 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 Qualified Contracts.
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 Qualified Contracts. The Company
will provide purchasers of Qualified Contracts for use in connection with
Individual Retirement Annuities with such supplemental information as may be
required by the Internal Revenue Service or other appropriate agency. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by Clarendon Insurance Agency, Inc., 500
Boylston Street, Boston, Massachusetts 02116, a wholly-owned subsidiary of MFS.
Commissions and other distribution compensation will be paid by the Company and
will not be more than 6.11% of Purchase Payments. In addition, after the first
Contract Year, broker-dealers who have entered into distribution agreements with
the Company may receive an annual renewal commission of no more than 0.20% of
the Contract's Accumulation Account value. In addition to commissions, the
Company may, from time to time, pay or allow additional promotional
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incentives, in the form of cash or other compensation. In some instances, such
other incentives may be offered only to certain broker-dealers that sell or are
expected to sell during specified time periods certain minimum amounts of the
Contracts or other contracts offered by the Company. Commissions will not be
paid with respect to Contracts established for the personal account of employees
of the Company or any of its affiliates or of persons engaged in the
distribution of the Contracts.
LEGAL PROCEEDINGS
The Variable Accounts, the Company and MFS are engaged in various kinds of
routine litigation which, in management's opinion, is not material with respect
to the Variable Accounts.
CONTRACT OWNER INQUIRIES
All Contract Owner inquiries should be directed to the Company at its
Annuity Service Mailing Address.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
General Information
The Variable Accounts' Investment Objectives, Policies and Restrictions
Management of the Variable Accounts
Annuity Provisions
Other Contractual Provisions
Federal Tax Status
Administration of the Contracts
Distribution of the Contracts
Legal Matters
Accountants and Financial Statements
APPENDIX A
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of April 30, 1995 premium
taxes will be imposed on Contracts offered by this Prospectus only by the
jurisdictions listed below at the rates indicated. For information subsequent to
April 30, 1995 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
---------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ---------------------------------------- ----------- -------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kansas -- 2.00%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Mississippi -- 1.00%*
Nevada -- 3.50%
Pennsylvania -- 2.00%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
<FN>
* No tax on purchase payments received on or after July 1, 1995.
</TABLE>
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APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION ("S&P"): A-1
The rating "A" is the highest commercial paper rating assigned by S&P and issues
so rated are regarded as having the greatest capacity for timely payment. Issues
in the "A" category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. The A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those A-1
issues determined to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"): P-1
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have the
same yield.
STANDARD & POOR'S CORPORATION:
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB -
rating.
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CCC: Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B - rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC - debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus(+) or Minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH'S INVESTORS SERVICE, INC.:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
very strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
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C: Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term and should be resolved
within 12 months.
MOODY'S INVESTORS SERVICE, INC.:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
APPENDIX C
INVESTMENT TECHNIQUES
As part of their strategies for attaining their investment objectives, the
Variable Accounts may employ the following investment techniques. Each of CAVA,
GSVA, WGVA and MSVA may engage in transactions involving options, Futures
Contracts, and Options on Futures Contracts. CAVA, WGVA and MSVA may also
participate in Forward Contracts. In addition, all the Accounts may engage in
repurchase agreement transactions; WGVA and TRVA may engage in securities
lending; GSVA, HYVA, TRVA and WGVA may enter into mortgage "dollar roll"
transactions; HYVA and TRVA may invest in corporate asset-backed securities;
HYVA may purchase loan participations; and WGVA may trade options on foreign
currencies, purchase indexed securities and enter into swap agreements. All the
Accounts except MMVA, GSVA and WGVA may purchase emerging market securities, and
HYVA and TRVA may invest in Brady Bonds. All the Accounts except MMVA may invest
in restricted securities, subject to applicable restrictions on purchasing
securities that are not readily marketable. An Account's use of options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies may result in loss of principal under certain market
conditions. These various techniques are described below.
OPTIONS ON SECURITIES
An option on a security provides the purchaser, or "holder", with the right,
but not the obligation, to purchase, in the case of a "call" option, or sell, in
the case of a "put" option, the security or securities underlying the option,
for a fixed exercise price up to a stated expiration date or, in the case of
certain options, on such date. The holder pays a non-refundable purchase price
for the option, known as the "premium". If the price of the underlying security
moves adversely to the holder's position, the maximum amount of risk the holder
assumes is equal to the premium plus related transaction costs, although this
entire amount may be lost. The risk to the seller, or "writer", in the case of
an adverse market movement, is that the option may be exercised and the writer
will be required to purchase or sell the underlying security at a
disadvantageous price, which may be only partially offset by the amount of
premium received. The writer's risk is potentially unlimited, unless the option
is "covered", which is generally accomplished through the writer's ownership of
the underlying security, in the case of a call option, or the writer's
segregation of an amount of cash or securities equal to the exercise price in
the case of a put option. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
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Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security in the case of a call
option, or to purchase the security in the case of a put option. Options on
securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities discussed below
are traded on national securities exchanges such as the Chicago Board Options
Exchange and the New York Stock Exchange, which are regulated by the Securities
and Exchange Commission. The Options Clearing Corporation guarantees the
performance of each party to an exchange-traded option, by in effect taking the
opposite side of each such option. A holder or writer may engage in transactions
in exchange-traded options on securities and options on indexes of securities
only through a registered broker-dealer which is a member of the exchange on
which the option is traded.
In addition, options on securities and options on indexes of securities may
be traded on exchanges located outside the United States and over-the-counter
through financial institutions dealing in such options as well as the underlying
instruments. The particular risks of over-the-counter transactions are set forth
more fully in the Statement of Additional Information.
OPTIONS ON INDEXES
In contrast to an option on a security, an option on an index (which may be
a stock index, fixed income security index or other financial index, as
appropriate) provides the holder with the right, but not the obligation, to make
or receive a cash settlement upon exercise of the option, rather than the right
to purchase or sell a security. The amount of this settlement is equal to (i)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier". The purchaser of the option receives this cash settlement amount if
the closing level of the index on the day of exercise is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount if the option is exercised. As in the
case of options on securities, the writer or holder may liquidate positions in
index options prior to exercise or expiration by entering into closing
transactions on the exchange on which such positions were established, subject
to the availability of a liquid secondary market. Trading of options on indexes
is described above under "Options on Securities."
The index underlying a stock index option may be a "broad-based" index, such
as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indexes, such as the Standard & Poor's 100 Index, or on indexes of
securities of particular industry groups, such as those of oil and gas or
technology companies. An index assigns relative values to the securities
included in the index and the index fluctuates with changes in the market values
of the securities so included. The composition of the index is changed
periodically.
FUTURES CONTRACTS
A Futures Contract is a bilateral agreement providing for the making and
acceptance of a cash settlement at a stated time in the future for a fixed
price. By its terms, a Futures Contract provides for a specified settlement date
on which, in the case of the majority of interest rate and foreign currency
futures contracts, the fixed income securities or currency underlying the
contract are delivered by the seller and paid for by the purchaser, or on which,
in the case of stock index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at which
the contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures Contracts differ from options
in that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. In addition, Futures Contracts
call for settlement only on the expiration date, and cannot be "exercised" at
any other time during their term.
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This investment technique is designed only to hedge against anticipated
future changes in interest or exchange rates which otherwise might either
adversely affect the value of the Account's portfolio securities or adversely
affect the price of securities which the Account intends to purchase at a later
date. Should interest or exchange rates move in an unexpected manner, an Account
may not achieve the anticipated benefits of this technique, or may realize a
loss.
The purchase or sale of a Futures Contract also differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which
generally varies between 5% and 15% of the value of the contract, must be
deposited with the broker as "initial margin". Subsequent payments to and from
the broker, referred to as "variation margin", are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable, a process known
as "marking to the market".
U.S. Futures Contracts may be purchased or sold only on an exchange, known
as a "contract market", designated by the Commodity Futures Trading Commission
("CFTC") for the trading of such contracts, and only through a registered
futures commission merchant which is a member of such contract market. A
commission must be paid on each completed purchase and sale transaction. The
contract market clearing house guarantees the performance of each party to a
Futures Contract, by in effect taking the opposite side of such Contract. At any
time prior to the expiration of a Futures Contract, a trader may elect to close
out its position by taking an opposite position on the contract market on which
the position was entered into, subject to the availability of a secondary
market, which will operate to terminate the initial position. At that time, a
final determination of variation margin is made and any loss experienced by the
trader is required to be paid to the contract market clearing house while any
profit due to the trader must be delivered to it. Futures Contracts may also be
traded on foreign exchanges.
Interest rate Futures Contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, U.S. Treasury Bills and Eurodollar deposits. Foreign currency
Futures Contracts currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc and West German mark.
A stock index futures contract provides for the making and acceptance of a
cash settlement in much the same manner as the settlement of an option on a
stock index. The types of indexes underlying stock index futures contracts are
essentially the same as those underlying stock index options, as described
above. The index assigns weighted values to the securities included in the index
and its composition is changed periodically.
The Accounts' Boards of Managers (the "Boards") have adopted the requirement
that Futures Contracts and Options on Futures Contracts discussed below only be
used as a hedge and not for speculation. In addition to this requirement, the
Boards have also adopted two percentage restrictions on the use of Futures
Contracts. The first restriction is that an Account will not enter into any
Futures Contracts and Options on Futures Contracts if immediately thereafter the
amount of initial margin deposits on all the Futures Contracts of the Account
and premiums paid on Options on Futures Contracts would exceed 5% of the market
value of the Account's total assets. The second restriction is that the
aggregate market value of the Futures Contracts held by an Account may not
exceed 50% of the market value of the Account's total assets. Neither of these
restrictions will be changed by the Boards without considering the policies and
concerns of various federal and state regulatory agencies.
OPTIONS ON FUTURES CONTRACTS
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date, or in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearing house establishes a corresponding short
position for the writer of the option in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties
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will be subject to all the risks associated with the trading of Futures
Contracts, such as payment of margin deposits. In addition, the writer of an
Option on a Futures Contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
This investment technique is designed only to hedge against anticipated
future changes in interest or exchange rates which otherwise might either
adversely affect the value of the Account's portfolio securities or adversely
affect the price of securities which the Account intends to purchase at a later
date. Should interest or exchange rates move in an unexpected manner, the
Account may not achieve the anticipated benefits of this technique, or may
realize a loss. For restrictions on the use of Options on Futures Contracts see
the discussion under "Futures Contracts" above.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (I.E.,the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Variable
Account on United States exchanges are traded on the same contract market as the
underlying Futures Contract and, like Futures Contracts, are subject to
regulation by the CFTC and the performance guarantee of the exchange clearing
house. In addition, Options on Futures Contracts may be traded on foreign
exchanges.
An option, whether based on a Futures Contract, an index or a security,
becomes worthless to the holder when it expires. Upon exercise of an option, the
exchange or contract market clearing house assigns exercise notices on a random
basis to those of its members which have written options of the same series and
with the same expiration date. A brokerage firm receiving such notices then
assigns them on a random basis to those of its customers which have written
options of the same series and expiration date. A writer therefore has no
control over whether an option will be exercised against it, nor over the timing
of such exercise.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Forward Contract is a contractual obligation to purchase or sell a
specific quantity of a given foreign currency for a fixed exchange rate at a
future date. Forward Contracts are individually negotiated and are traded
through the "interbank currency market", an informal network of banks and
brokerage firms which operates around the clock and throughout the world.
Transactions in the interbank market may be executed only through financial
institutions acting as market-makers in the interbank market, or through brokers
executing purchases and sales through such institutions. Market-makers in the
interbank market generally act as principals in taking the opposite side of
their customers' positions in Forward Contracts, and ordinarily charge a mark-up
or commission which may be included in the cost of the Forward Contract. In
addition, market-makers may require their customers to deposit collateral upon
entering into a Forward Contract as security for the customer's obligation to
make or receive delivery of currency, and to deposit additional collateral if
exchange rates move adversely to the customer's position. Such deposits may
function in a manner similar to the margining of Futures Contracts, described
above.
Prior to the stated maturity date of a Forward Contract, it may be possible
to liquidate the transaction by entering into an offsetting contract. In order
to do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
An Account may enter into Forward Contracts to attempt to minimize the risk
to the Account from adverse changes in the relationship between the U.S. dollar
and foreign currencies. An Account may enter into a Forward Contract, for
example, at the same time as it enters into a contract for the purchase or sale
of a security denominated in a foreign currency, in order to "lock in" the U.S.
dollar price of the security. Additionally, for example, when an Account
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a Forward Contract to sell an amount of that
foreign currency approximating the value of some or all of the Account's
portfolio securities denominated in such foreign currency, or when an Account
believes that the U.S. dollar may suffer a substantial decline against a foreign
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currency, it may enter into a Forward Contract to buy that foreign currency for
a fixed dollar amount. An Account may also enter into Forward Contracts for
"cross hedging" purposes; e.g. the purchase or sale of a Forward Contract on one
type of currency as a hedge against adverse fluctuations in the value of a
second type of currency. CAVA, WGVA and MSVA have established procedures
consistent with the statements of the Securities and Exchange Commission
concerning such purchases. Since that policy currently requires the use of
"cover" or that an amount of the Account's assets equal to the amount of the
purchase be held aside or segregated in a separate account to be used to pay for
the commitment, the Account always will use "cover" or have cash, cash
equivalents or high quality debt securities available sufficient to cover any
commitments under these contracts or to limit any potential risk. The segregated
account will be marked to market on a daily basis.
An Account may be required to receive delivery of the foreign currency
underlying forward foreign currency exchange contracts that it has entered into.
This could occur, for example, if the Account were unable to close out a Forward
Contract. An Account may also elect to take delivery of the currencies
underlying Forward Contracts, if, in the judgment of the Adviser, it is the best
interests of the Account to do so. In such instances, the Account may promptly
convert the foreign currencies to dollars at the then current exchange rate, or
may hold such currencies for an indefinite period of time.
While the holding of currencies will permit an Account to take advantage of
favorable movement in the applicable exchange rates, it also exposes the Account
to risk of loss if such rates move in a direction adverse to an Account's
position. Such losses could reduce any profits or increase any losses sustained
by an Account from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. In addition, the holding
of currencies could adversely affect an Account's profit or loss on Forward
Contracts, as well as in its hedging strategies.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for an
Account than if it had not engaged in such contracts. Furthermore, while these
contracts are not presently regulated by the CFTC, the CFTC may in the future
assert authority to regulate Forward Contracts. In such event, the ability of an
Account to utilize Forward Contracts in the manner set forth above may be
restricted.
OPTIONS ON FOREIGN CURRENCIES
WGVA may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As in the case of other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. Furthermore, as a result of
writing such options, WGVA could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. While
the purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates, in the event of rate movement adverse to
WGVA's position, WGVA may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by
WGVA will be traded on U.S. and foreign exchanges or over the counter.
Options on foreign currencies are traded in a manner substantially similar
to options on securities. In particular, an option on foreign currency provides
the holder with the right to purchase, in the case of a call option, or to sell,
in the case of a put option, a stated quantity of a particular currency for a
fixed price up to a stated expiration date or, in the case of certain options,
on such date. The writer of the option undertakes the obligation to deliver, in
the case of a call option, or to purchase in the case of a put option, the
quantity of the currency called for in the option, upon exercise of the option
by the holder.
As in the case of other types of options, the holder of an option on foreign
currency is required to pay a one-time, non-refundable premium, which represents
the cost of purchasing the option. The holder can lose the entire amount of this
premium, as well as related transaction costs, but not more than this amount.
The writer of the option, in contrast, generally is required to make initial and
variation margin payments, similar to
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margin deposits required in the trading of Futures Contracts and the writing of
other types of options. The writer is therefore subject to risk of loss beyond
the amount originally invested and above the value of the option at the time it
is entered into.
Options on foreign currencies may result in an Account's holding foreign
currency, and expose the Account to risks similar to those described above under
"Forward Foreign Currency Exchange Contracts".
Certain options on foreign currencies, like Forward Contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments, which are discussed
in the Statement of Additional Information. Options on foreign currencies may
also be traded on national securities exchanges regulated by the SEC and on
exchanges located in foreign countries.
LENDING OF PORTFOLIO SECURITIES
WGVA and TRVA may seek to increase their income by lending portfolio
securities to the extent consistent with present regulatory policies, including
those of the Board of Governors of the Federal Reserve System and the Securities
and Exchange Commission ("SEC"). Such loans may be made to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange (and
subsidiaries thereof), and would be required to be secured continuously by
collateral, including cash, cash equivalents or U.S. Government Securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. An Account would have the right to call a loan and obtain
the securities loaned at any time on five days' notice. For the duration of a
loan, the Account would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation from the investment of the collateral. An Account would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the investment adviser
to be of good standing, and when, in the judgment of the investment adviser, the
consideration which could be earned currently from securities loans of this type
justified the attendant risk. If the investment adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 30% of the value of an Account's total assets.
"WHEN-ISSUED SECURITIES"
Securities may be purchased on a "when-issued" or on a "forward delivery"
basis, which means that the obligations will be delivered at a future date
beyond customary settlement time. The commitment to purchase a security for
which payment will be made on a future date may be deemed a separate security.
Although an Account is not limited to the amount of securities for which it may
have commitments to purchase on such basis, it is expected that under normal
circumstances, an Account will not commit more than 30% of its assets to such
purchases. An Account does not pay for the securities until received or start
earning interest on them until the settlement date. In order to invest its
assets immediately, while awaiting delivery of securities purchased on such
basis, an Account will normally invest in short-term securities that offer
same-day settlement and earnings, but that may bear interest at a lower rate
than longer term securities.
When an Account commits to purchase a security on a "when issued" or
"forward delivery" basis it will set up a segregated account consistent with the
General Statement of Policy of the SEC referred to above under "Forward Foreign
Currency Exchange Contracts." While WGVA does not intend to make such purchases
for speculative purposes and intends to adhere to the provisions of the SEC
policy, purchases of securities on such bases may involve more risk than other
types of purchases. For example, if an Account determines it is necessary to
sell the "when-issued" or "forward delivery" securities before delivery, it may
incur a gain or a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
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REPURCHASE AGREEMENTS
An Account may enter into repurchase agreements (a purchase of and a
simultaneous commitment to resell a security at an agreed upon price on an
agreed upon date) only with member banks of the Federal Reserve System, member
firms (and subsidiaries thereof) of the New York Stock Exchange, recognized
primary U.S. Government Securities dealers, or institutions which the Account's
investment adviser has determined to be of comparable creditworthiness, and only
for U.S. Government Securities. When participating in repurchase agreements the
Account buys securities with the agreement that the seller will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Account to earn a return on available cash, although the
Account may be subject to various delays and risks of loss (including risk of
decline in market value of the underlying securities) if the seller is unable to
meet its obligation to repurchase. In evaluating whether to enter into a
repurchase agreement the investment adviser will carefully consider the
creditworthiness of the seller and will follow guidelines regarding the
determination of creditworthiness established by the Board of Managers of the
Account. If the member bank or securities dealer that is the party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
the U.S. Bankruptcy Code, the law regarding the rights of the Account is
unsettled. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the underlying securities,
including accrued interest, is at least equal to the repurchase price.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS
Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and/or credit quality than debt obligations which make regular
payments of interest. An Account will accrue income on such investments for
accounting purposes.
EMERGING MARKET SECURITIES
Emerging market securities include investments in countries or regions with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid economic
growth (emerging markets). Emerging markets will include any country: (i) having
an "emerging stock market" as defined by the International Finance Corporation;
(ii) with low- to middle-income economies according to the International Bank
for Reconstruction and Development (the World Bank); (iii) listed in World Bank
publications as developing; or (iv) determined by the Adviser to be an emerging
market as defined above. Investments may be in securities of: (i) companies the
principal securities trading market for which is an emerging market country;
(ii) companies organized under the laws of, and with a principal office in, an
emerging market country; (iii) companies whose principal activities are located
in emerging market countries; or (iv) companies traded in any market that derive
50% or more of their total revenue from either goods or services in an emerging
market or sold in an emerging market.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be
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unable to respond effectively to increases in trading volume, potentially making
prompt liquidation of substantial holdings difficult or impossible at times.
Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
Variable Account is uninvested and no return is earned thereon. The inability of
a Variable Account to make intended security purchases due to settlement
problems could cause the Variable Account to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to the Variable Account due to subsequent
declines in values of the portfolio securities or, if the Variable Account has
entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Variable Account
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to a Variable Account of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of a Variable Account.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Mexico, Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, Brazil, Bulgaria,
Ecuador, Poland and the Philippines. Brady Bonds have been issued only recently,
and for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three of four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS
American Depositary Receipts ("ADRs") are certificates issued by a U.S.
depository (usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository which
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Each Variable
Account that invests in foreign securities may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Variable Accounts may purchase securities in local
markets and direct delivery of these ordinary shares to the local depository of
an ADR agent bank in the foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Variable
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Account's custodian in five days. Each such Variable Account may also execute
trades on the U.S. markets using existing ADRs. Because ADRs trade on United
States securities exchanges, the Accounts' adviser does not treat them as
foreign securities. However, they are subject to many of the risks of foreign
securities. For example, a foreign issuer of the security underlying an ADR is
generally not subject to the same reporting requirements in the United States as
a domestic issuer. Accordingly the information available to a U.S. investor will
be limited to the information the foreign issuer is required to disclose in its
own country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may also be
subject to exchange rate risks if the underlying foreign securities are traded
in foreign currency.
RESTRICTED SECURITIES
Restricted securities are securities that are subject to legal or
contractual restrictions on resale, including securities which cannot be sold to
the public without registration under the Securities Act of 1933 (the
"Securities Act"). Unless registered for sale, such securities can only be sold
in privately negotiated transactions or pursuant to an exemption from
registration, such as pursuant to Rule 144A under the Securities Act for offers
and sales to "qualified institutional buyers." Consequently, there may be a more
limited trading market for these securities and market quotations may be less
readily available. However, as to certain restricted securities, a substantial
market of qualified institutional buyers may develop pursuant to Rule 144A
("Rule 144A Securities"). A Variable Account's Board of Managers may determine
based upon a continuing review of the trading markets for the specific Rule 144A
Security that such securities are readily marketable. The Board has adopted
guidelines and delegated to the Adviser the daily function of determining and
monitoring liquidity of Rule 144A Securities. The Board, however, will retain
sufficient oversight and is ultimately responsible for the determinations. The
Board will carefully monitor the Variable Account's investments in Rule 144A
Securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Variable Account to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A Securities held in the Variable Account's portfolio. As a
result, the Variable Account might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities. A Variable Account may invest in restricted securities
as to which the Board has made such a determination of ready marketability, to
the extent consistent with its investment objectives. Where the Board has not
made such a determination, investments in restricted securities are subject to
the Variable Account's investment restrictions on investments in securities that
are not readily marketable.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Collateralized mortgage obligations or "CMOs' are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by certificates issued by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through securities. Payments of principal of and interest on
the Mortgage Assets and any reinvestment income thereon provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayment on a Mortgage Asset may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated under
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several classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayment, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier. Planned
amortization class CMOs ("PAC Bonds") generally require payments of the
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment of such securities having
the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities ("SMBS") are derivative multi-class
mortgage securities issued by agencies or instrumentalities of the United States
Government or by private originators of, or investors in, mortgage loans
including savings and loan associations, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of Mortgage
Assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest while the other class
will receive all of the principal. If the underlying Mortgage Assets experience
more than anticipated prepayments of principal, the Account may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were only
recently introduced, established trading markets for these securities have not
yet developed, although these securities are traded among institutional
investors and investment banking firms.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
GSVA, HYVA, TRVA and WGVA may enter into mortgage "dollar roll" transactions
with selected banks and broker-dealers pursuant to which the Account sells
mortgage-backed securities for delivery in the future (generally within 30 days)
and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. The Accounts will
only enter into covered rolls. A "covered roll" is a specific type of dollar
roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. During the roll period, the Account foregoes principal
and interest paid on the mortgage-backed securities. The Account is compensated
for the lost interest by the difference between the current sales price and the
lower price for the futures purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. The Account
may also be compensated by receipt of a commitment fee.
In the event that the party with whom the Account contracts to repurchase
substantially similar securities on a future date fails to deliver such
securities, the Account may not be able to obtain such securities at the price
specified in such contract and thus may not benefit from the price differential
between the current sales price and the repurchase price. The market value of
securities purchased by the Account may decline below the price of securities
that the Account has sold but is obligated to repurchase under the agreement.
Under the terms of these transactions, the securities purchased may have
different prepayment characteristics and both the Account and the dealer may be
permitted to over or underdeliver the aggregate principal amount of the
securities by 2%.
CORPORATE ASSET-BACKED SECURITIES
HYVA and TRVA may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
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Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g. loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
As noted above, corporate asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
series will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
HYVA may invest a portion of its assets in "loan participations". By
purchasing a loan participation, the Account acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Account may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default. Certain of the loan participations acquired by the Account may involve
revolving credit facilities or other standby financing commitments which
obligate the Account to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Account may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan participations and the
risks related to transactions therein, see Appendix D in the Statement of
Additional Information.
SWAPS AND RELATED TRANSACTIONS
As one way of managing its exposure to different types of investments, WGVA
may enter into interest rate swaps, currency swaps and other types of available
swap agreements, such as caps, collars and floors. Swaps involve the exchange by
the Account with another party of cash payments based upon different interest
rate indexes, currencies, and other prices or rates, such as the value of
mortgage prepayment rates. For example, in the typical interest rate swap, the
Account might exchange a sequence of cash payments based on a floating rate
index for cash payments based on a fixed rate. Payments made by both parties to
a swap transaction are based on a principal amount determined by the parties.
45
<PAGE>
The Account may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Account's Fund investment exposure
from one type of investment to another. For example, if the Account agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the Account's
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Account's investments and its share price
and yield.
Swap agreements are sophisticated hedging instruments that typically involve
a small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Account's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Account may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the Statement of Additional Information on the risks
involved in these activities.
INDEXED SECURITIES
The value of indexed securities is linked to foreign currencies, interest
rates, commodities, indices, or other financial indicators. Most indexed
securities are short to intermediate term fixed-income securities whose values
at maturity or interest rates rise or fall according to the change in one or
more specified underlying instruments. Indexed securities may include securities
that have embedded swap agreements (see "Swaps and Related Transactions").
Indexed securities may be positively or negatively indexed (i.e., their value
may increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
The performance of indexed securities depends to a great extent on the
performance of the securities, currencies, or other instruments to which they
are indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
APPENDIX D
INDUSTRY SECTORS
MSVA seeks to achieve its investment objective by varying the weighting of
its portfolio among the following fifteen industry sectors (i.e., industry
groupings):
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design,
production and sale of automobiles, automobile parts, mobile homes and
related products, and in the design, construction, renovation and
refurbishing of residential dwellings. The value of automobile industry
securities is affected by foreign competition, consumer confidence, consumer
debt and installment loan rates. The housing construction industry is
affected by the level of consumer confidence, consumer debt, mortgage rates
and the inflation outlook.
(2) CONSUMER GOODS AND SERVICES SECTOR: companies engaged in providing
consumer goods and services such as: the design, processing, production and
storage of packaged, canned, bottled and frozen foods and beverages; and the
design, production and sale of home furnishings,
46
<PAGE>
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the permissibility
of using various food additives and production methods, which regulations
could affect company profitability. Also, the success of food- and fashion-
related products may be strongly affected by fads, marketing campaigns and
other factors affecting supply and demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research,
manufacture, or sale of products or services related to the defense and
aerospace industries, such as: air transport; data processing or
computer-related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch vehicles
and spacecraft; units for guidance, propulsion and control of flight
vehicles; and airborne and ground-based equipment essential to the test,
operation and maintenance of flight vehicles. Since such companies rely
largely on U.S. (and other) governmental demand for their products and
services, their financial conditions are heavily influenced by federal (and
other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geothermal, oil shale and solar
sources of energy. The business activities of companies comprising this
sector may include: production, generation, transmission, marketing, control
or measurement of energy or energy fuels; provision of component parts or
services to companies engaged in such activities; energy research or
experimentation; environmental activities related to the solution of energy
problems; and activities resulting from technological advances or research
discoveries in the energy field. The value of such companies' securities
varies based on the price and supply of energy fuels and may be affected by
events relating to international politics, energy conservation, the success
of exploration projects, and the tax and other regulatory policies of
various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services
to consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities
brokerage companies; leasing companies; and firms in all segments of the
insurance field (such as multiline, property and casualty, and life
insurance). These kinds of companies are subject to extensive governmental
regulations, some of which regulations are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as a
result of volatile interest rates and general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture or
sale of products or services used in connection with health care or
medicine, such as: pharmaceutical companies; firms that design, manufacture,
sell or supply medical, dental and optical products, hardware or services;
companies involved in biotechnology, medical diagnostic and biochemical
research and development; and companies involved in the operation of health
care facilities. Many of these companies are subject to government
regulation, which could affect the price and availability of their products
and services. Also, products and services in this sector could quickly
become obsolete.
(7) HEAVY INDUSTRY SECTOR: companies engaged in the research,
development, manufacture or marketing of products, processes or services
related to the agriculture, chemicals, containers, forest products,
non-ferrous metals, steel and pollution control industries, such as:
synthetic and natural materials, for example, chemicals, plastics,
fertilizers, gases, fibers, flavorings and fragrances; paper; wood products;
steel and cement. Certain companies in this sector are subject to regulation
by state and federal authorities, which could require alteration or
cessation of production of a product, payment of fines or cleaning of a
disposal site. In addition, since some of the materials and processes used
by these companies involve hazardous components, there are risks associated
with their production, handling and disposal. The risk of product
obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or
distribution of goods or services in the leisure industry, such as:
television and radio broadcast or manufacture; motion pictures and
photography; recordings and musical instruments; publishing; sporting goods,
camping and recreational equipment; sports arenas; toys and games; amusement
and theme parks; travel-related
47
<PAGE>
services and airlines; hotels and motels; fast food and other restaurants;
and gaming casinos. Many products produced by companies in this sector--for
example, video and electronic games--may quickly become obsolete.
(9) MACHINERY AND EQUIPMENT SECTOR: companies engaged in the research,
development or manufacture of products, processes or services relating to
electrical equipment, machinery, pollution control and construction
services, such as: transformers, motors, turbines, hand tools, earth-moving
equipment and waste disposal services. The profitability of most companies
in this group may fluctuate significantly in response to capital spending
and general economic conditions. Since some of the materials and processes
used by these companies involve hazardous components, there are risks
associated with their production, handling and disposal. The risk of product
obsolescence is also present.
(10) PRECIOUS METALS SECTOR: companies engaged in exploration, mining,
processing or dealing in gold, silver, platinum, diamonds or other precious
metals or companies which, in turn, invest in companies engaged in these
activities. A significant portion of this sector may be represented by
securities of foreign companies, and investors should understand the special
risks related to such an investment emphasis. Also, such securities depend
heavily on prices in metals, some of which may experience extreme price
volatility based on international economic and political developments.
(11) RETAILING SECTOR: companies engaged in the retail distribution of
home furnishings, food products, clothing, pharmaceuticals, leisure products
and other consumer goods, such as: department stores; supermarkets; and
retail chains specializing in particular items such as shoes, toys or
pharmaceuticals. The value of securities in this sector will fluctuate based
on consumer spending patterns, which depend on inflation and interest rates,
level of consumer debt and seasonal shopping habits. The success or failure
of a particular company in this highly competitive sector will depend on
such company's ability to predict rapidly changing consumer tastes.
(12) TECHNOLOGY SECTOR: companies which are expected to have or develop
products, processes or services which will provide or will benefit
significantly from technological advances and improvements or future
automation trends in the office and factory, such as: semiconductors;
computers and peripheral equipment; scientific instruments; computer
software; telecommunications; and electronic components, instruments and
systems. Such companies are sensitive to foreign competition and import
tariffs. Also, many products produced by companies in this sector may
quickly become obsolete.
(13) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and
trucking firms. Revenues of companies in this sector will be affected by
fluctuations in fuel prices resulting from domestic and international
events, and government regulation of fares.
(14) UTILITIES SECTOR: companies in the public utilities industry and
companies deriving a substantial majority of their revenues through
supplying public utilities such as: companies engaged in the manufacture,
production, generation, transmission and sale of gas and electric energy;
and companies engaged in the communications field, including telephone,
telegraph, satellite, microwave and the provision of other communication
facilities to the public. The gas and electric public utilities industries
are subject to various uncertainties, including the outcome of political
issues concerning the environment, prices of fuel for electric generation,
availability of natural gas, and risks associated with the construction and
operation of nuclear power facilities.
(15) FOREIGN SECTOR: companies whose primary business activity takes
place outside of the United States. The securities of foreign companies
would be heavily influenced by the strength of national economies, inflation
levels and the value of the U.S. dollar versus foreign currencies. Foreign
investments will be subject to certain risks not generally associated with
domestic investments. Such investments may be favorably or unfavorably
affected by changes in interest rates, currency exchange rates and exchange
control regulations, and costs may be incurred in connection with
conversions between currencies. In addition, investments in foreign
countries could be affected by less favorable tax
48
<PAGE>
provisions, less publicly available information, less securities regulation,
political or social instability, limitations on the removal of funds or
other assets of the Account, expropriation of assets, diplomatic
developments adverse to U.S. investments and difficulties in enforcing
contractual obligations.
APPENDIX E
PORTFOLIO COMPOSITION CHART
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
HIGH YIELD VARIABLE ACCOUNT
The table below shows the percentages of HYVA's assets at December 31, 1994
invested in securities assigned to the various rating categories by S&P, Moody's
(provided only for securities not rated by S&P), Fitch (provided only for
securities not rated by S&P or Moody's) and Dominion (provided only for
securities not rated by S&P, Moody's or Fitch) and in unrated securities
determined by MFS to be of comparable quality:
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPARABLE
RATING S&P MOODY'S FITCH QUALITY TOTAL
- ----------- ----------- --------------- ----------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
AAA/Aaa -- -- -- -- --
AA/Aa -- -- -- -- --
A/A -- -- -- -- --
BBB/Baa -- -- -- -- --
BB/Ba 19.0% -- -- 0.4% 19.4%
B/B 55.3% 1.0% -- 3.2% 59.5%
CCC/Caa 6.4% -- -- 1.4% 7.8%
CC/Ca 0.7% -- -- -- 0.7%
C/C -- -- -- -- --
Default 0.1% -- -- 1.2% 1.3%
Other -- -- -- -- 11.3%
</TABLE>
The chart does not necessarily indicate what the composition of HYVA's
portfolio will be in subsequent years. Rather, the Account's investment
objective, policies and restrictions indicate the extent to which it may
purchase securities in the various categories.
49
<PAGE>
This Prospectus sets forth information about the Contracts and the Variable
Accounts that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Accounts has been filed with
the Securities and Exchange Commission in a Statement of Additional Information
dated May 1, 1995 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 Sun Life Annuity Service Center
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for Compass 3--Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, Total Return Variable
Account, World Governments Variable Account and Managed Sectors Variable
Account.
Name -------------------------------------------
Address
-------------------------------------------
-------------------------------------------
City State Zip
-------------------------- ------------ --------------
Telephone
-------------------------------------------
50
<PAGE>
PROSPECTUS
MAY 1, 1995
COMBINATION FIXED/VARIABLE
ANNUITY FOR PERSONAL AND
QUALIFIED RETIREMENT PLANS
ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Annuity Service Mailing Address:
c/o Sun Life Annuity Service Center
P.O. Box 1024
Boston, Massachusetts 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
500 Boylston Street
Boston, Massachusetts 02116
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
ISSUED IN CONNECTION WITH
- MONEY MARKET VARIABLE ACCOUNT
- HIGH YIELD VARIABLE ACCOUNT
- CAPITAL APPRECIATION VARIABLE ACCOUNT
- GOVERNMENT SECURITIES VARIABLE ACCOUNT
- WORLD GOVERNMENTS VARIABLE ACCOUNT
- TOTAL RETURN VARIABLE ACCOUNT
- MANAGED SECTORS VARIABLE ACCOUNT
CO3US-1 5/95
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
Attached hereto and made a part hereof is the Statement of Additional
Information dated May 1, 1995.
<PAGE>
MAY 1, 1995
COMPASS 2 AND 3
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information................................................................ 2
The Variable Accounts' Investment Objectives, Policies and Restrictions............ 2
Management of the Variable Accounts................................................ 16
Annuity Provisions................................................................. 18
Other Contractual Provisions....................................................... 19
Federal Tax Status................................................................. 20
Administration of the Contracts.................................................... 23
Distribution of the Contracts...................................................... 23
Legal Matters...................................................................... 24
Accountants and Financial Statements............................................... 24
</TABLE>
This Statement of Additional Information sets forth information which may be
of interest to prospective purchasers of Compass 2 and 3 Combination
Fixed/Variable Annuity Contracts for personal and qualified retirement plans
(the "Contracts") issued by Sun Life Assurance Company of Canada (U.S.) (the
"Company") in connection with Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, Total Return Variable Account, World Governments Variable Account and
Managed Sectors Variable Account (the "Variable Accounts") which is not
necessarily included in the Compass 2 and 3 Prospectuses dated May 1, 1995. This
Statement of Additional Information should be read in conjunction with the
Prospectuses, copies of which may be obtained without charge from the Company at
its Annuity Service Mailing Address: Sun Life Annuity Service Center, P.O. Box
1024, Boston, Massachusetts 02103, or by telephoning (800) 752-7215.
The terms used in this Statement of Additional Information have the same
meanings as in the Prospectus.
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE>
GENERAL INFORMATION
THE COMPANY
Sun Life Assurance Company of Canada (U.S.) (the "Company") is a stock life
insurance company incorporated under the laws of Delaware on January 12, 1970.
Its Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181. The Company is 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 Company's
wholly-owned subsidiaries are Massachusetts Financial Services Company,
Massachusetts Casualty Insurance Company, Sun Life Insurance and Annuity Company
of New York, New London Trust, F.S.B., Sun Investment Services Company, Sun
Benefit Services Company, Inc. and Sun Capital Advisers, Inc.
THE VARIABLE ACCOUNTS
Money Market Variable Account ("MMVA"), High Yield Variable Account
("HYVA"), Capital Appreciation Variable Account ("CAVA"), Government Securities
Variable Account ("GSVA"), Total Return Variable Account ("TRVA"), World
Governments Variable Account ("WGVA") and Managed Sectors Variable Account
("MSVA") are separate accounts of the Company, each of which meets the
definition of a separate account under the federal securities laws and is
registered with the Securities and Exchange Commission as an open-end management
investment company 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 "Fixed Account" in
Appendix A).
THE VARIABLE ACCOUNTS' INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions applicable to the
Variable Accounts are discussed below.
MONEY MARKET VARIABLE ACCOUNT
MMVA will seek maximum current income to the extent consistent with
stability of principal by investing exclusively in the following types of United
States dollar denominated money market instruments which mature in less than 13
months:
(a) Obligations of, or guaranteed by, the United States government, its
agencies or instrumentalities. There are two broad categories of such
instruments: (1) direct obligations of the United States Treasury (e.g.
Treasury Bills), and (2) securities issued or guaranteed by United States
government agencies. Some obligations issued or guaranteed by agencies of
the United States government are backed by the full faith and credit of the
United States government (e.g., Government National Mortgage Association
direct pass through certificates) and others are backed only by the rights
of the issuer to borrow from the United States Treasury (e.g., Federal Home
Loan Bank obligations). Still others are supported only by the credit of the
instrumentality (e.g., Federal National Mortgage Association obligations).
2
<PAGE>
(b) Bank certificates of deposit or bankers' acceptances issued by any
domestic or Canadian chartered bank which has total assets in excess of $1
billion (U.S.). To the extent MMVA purchases Eurodollar certificates of
deposit issued by foreign branches of domestic United States banks,
consideration will be given to their marketability and possible restrictions
on international currency transactions. Since MMVA's portfolio may contain
Eurodollar certificates of deposit issued by London branches of domestic or
Canadian chartered banks, MMVA may be subject to additional investment risks
that are different in some respects from those incurred by a separate
account which invests only in debt obligations issued in the United States.
Such risks include future political and economic developments, the possible
imposition of United Kingdom withholding taxes on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits,
the possible establishment of exchange controls or the adoption of other
foreign governmental restrictions which might adversely affect the payment
of principal and interest on the Eurodollar certificates of deposit.
(c) Commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc. (see
Appendix B to the Prospectus for a description of the ratings).
(d) Repurchase agreements with respect to obligations which are suitable
for investment under the categories set forth in (a) above. Under such
repurchase agreements, the custodian holds U.S. Government securities, the
value of which is equal to or greater than the repurchase price agreed to be
paid by the seller. A repurchase agreement is an instrument under which the
purchaser acquires ownership of the obligation (debt security), and the
seller agrees, at the time of the sale, to repurchase the obligation at a
mutually agreed upon time and price, thereby determining the yield during
the purchaser's holding period. That yield is determined by current
short-term rates and may be more or less than the interest rate on the
underlying security. If the seller defaults, MMVA may incur a loss if the
value of the U.S. Government securities held by the custodian declines and
may incur disposition costs in connection with the liquidation of such
security. If the seller becomes bankrupt, MMVA may be delayed or otherwise
restricted from obtaining such security for its own purposes.
Under regulations currently in effect, the average maturity of the
investments in MMVA may not exceed 90 days.
To the extent MFS attempts to increase yield by trading to take advantage of
short-term market variations, a high turnover rate could result but this should
not adversely affect MMVA. Higher portfolio turnover may result in additional
transaction costs.
HIGH YIELD VARIABLE ACCOUNT
HYVA will seek high current income and capital appreciation by investing
primarily in fixed-income securities of United States and foreign issuers. These
securities may be denominated in United States dollars or foreign currencies.
Securities offering the high current income sought by HYVA are ordinarily in the
lower rated (that is, rated BBB or lower by Standard & Poor's Corporation
("S&P") or Fitch's Investors Service, Inc. ("Fitch") or Baa or lower by Moody's
Investors Service, Inc. ("Moody's")) or non-rated categories and may include
equity features (see Appendix B to the Prospectus for a detailed description of
the ratings). Securities rated BBB by S&P or Fitch or Baa by Moody's (and
comparable unrated securities) are considered to have speculative
characteristics, while securities rated lower than BBB by S&P or Fitch or Baa by
Moody's (and comparable unrated securities) (commonly known as "junk bonds") are
considered speculative. Securities which are in the lower rated categories of
recognized rating agencies or are unrated generally involve greater volatility
of price and risk of principal and income than securities in the higher rated
categories. Such risks include greater fluctuation of value than higher rated
low income securities and a greater possibility of default or bankruptcy of the
issuer of such securities. There can be no assurance that HYVA's investment
objective will be achieved. (see the discussion under "High Yield Variable
Account--Additional Risk Factors Regarding Lower Rated Securities" in the
Prospectus and Appendix B to the Prospectus for a further description of the
risks associated
3
<PAGE>
with investing in these securities; see Appendix E to the Prospectus for a chart
indicating the composition of HYVA's portfolio for the year ended December 31,
1994, with the debt securities separated into rating categories and comparable
unrated securities).
Fixed-income securities include preferred and preference stocks and all
types of debt obligations of both domestic and foreign corporate and government
issuers, such as bonds, debentures, notes, repurchase agreements, equipment
lease contracts, loan participations, corporate asset-backed securities,
commercial paper, and obligations issued or guaranteed by the United States
government, any foreign government or any of their respective political
subdivisions, agencies or instrumentalities (including obligations secured by
such instruments). To the extent that HYVA invests in repurchase agreements, the
same restrictions would apply and HYVA would bear the same risks as described in
(d) under "Money Market Variable Account" above. HYVA may also enter into
mortgage "dollar roll" transactions and purchase restricted securities (see
Appendix C to the Prospectus and Appendix D hereto).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, no more
than 25% of the value of HYVA's total assets will be invested in equity
securities, including common stock, warrants and stock subscription rights, but
excluding convertible debt securities.
The fixed income securities in which HYVA may invest also include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ("PIK Bonds") (see Appendix C to the Prospectus, "Investment
Techniques--Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds"). To the
extent permitted by its investment restrictions (see "Investment Restrictions
That Apply To All Variable Accounts," paragraph 10), HYVA may also invest a
portion of its assets in collateralized mortgage obligations, multi-class
pass-through securities and stripped mortgage-backed securities (see Appendix C
to the Prospectus, "Investment Techniques--Collateralized Mortgage Obligations
and Multi-Class Pass-Through Securities" and "Stripped Mortgage-Backed
Securities") and in interests in trusts or other entities representing interests
in fixed income securities or holding fixed income securities in amounts
sufficient to cover all payments due from such entities. HYVA may purchase
securities on a "when-issued" basis (see Appendix C to the Prospectus). HYVA may
also invest in foreign securities without limitation, which may include emerging
market securities and Brady Bonds, and may invest in American Depositary
Receipts ("ADRs") (see Appendix C to the Prospectus). Risks involved in
investing in foreign securities are described below.
In seeking to achieve its objectives and lessen risks, HYVA will engage in
portfolio trading to take advantage of market developments and yield
disparities. HYVA will utilize credit analysis of the issues in which it invests
and evaluation of changes and trends in the world economies and international
financial markets. Investing in foreign securities involves considerations and
risks not typically associated with investing in United States markets. Such
investments may be favorably or unfavorably affected by changes in interest
rates, currency exchange rates and exchange control regulations. There may be
less publicly available information about a foreign company than about a
domestic company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of United States companies. Foreign securities markets, while growing in volume,
have substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Fixed brokerage commissions and
other transaction costs are generally higher than in the United States. There is
generally less government supervision and regulation of exchanges, brokers and
issuers in foreign countries than there is in the United States. In addition,
investments in foreign countries could be affected by other factors generally
not thought to be present in the United States, including the possibility of
heavy taxation, political or social instability, limitations on the removal of
funds or other assets of HYVA, expropriation of assets, diplomatic developments
adverse to United States investors and difficulties in enforcing contractual
obligations. Owners and Payees participating in HYVA should be prepared to
accept the risk entailed in foreign investments.
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As a result of its investments in foreign securities, HYVA may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Account may promptly convert such currencies into dollars at
the current exchange rate. Under certain circumstances, however, such as where
the Adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Account may hold such
currencies for an indefinite period of time. The Account may also hold foreign
currency in anticipation of purchasing foreign securities. The risks of
investing in foreign securities may be intensified in the case of investments in
emerging markets. For a discussion of these risks, see Appendix C to the
Prospectus ("Investment Techniques--Emerging Market Securities").
While the holding of currencies will permit the Account to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Account
to risk of loss if such rates move in a direction adverse to the Account's
position. Such losses could reduce any profits or increase any losses sustained
by the Account from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. Costs may also be
incurred in connection with conversions between various currencies.
The value of HYVA's Variable Accumulation Units and Annuity Units changes as
the general levels of interest rates fluctuate; when interest rates decline, the
value of a portfolio invested at higher yields can be expected to rise, and
conversely when interest rates rise, the value of a portfolio invested at lower
yields can be expected to decline. HYVA is aggressively managed and, thus, is
subject to greater fluctuations in the value of its Variable Accumulation Units
and Annuity Units and involves the assumption of a higher degree of risk as
compared to a conservative income fund. PROSPECTIVE PURCHASERS SHOULD REVIEW
THIS SECTION CAREFULLY AND CONSIDER THE INVESTMENT RISKS INVOLVED BEFORE
ALLOCATING PURCHASE PAYMENTS TO HYVA.
CAPITAL APPRECIATION VARIABLE ACCOUNT
CAVA will seek to maximize capital appreciation by investing in securities
of all types. In seeking to achieve its objectives, a flexible approach toward
the type of securities and the relative attractiveness of the various securities
markets is maintained. Securities are selected based upon their potential for
capital appreciation. Income is not a significant factor in portfolio selection.
While CAVA usually will invest primarily in common stocks, CAVA will seek
capital appreciation in other types of securities, including fixed-income
securities, convertible bonds and preferred stocks and warrants when they appear
attractive for capital appreciation. CAVA may hold cash or invest in short-term
commercial paper or other forms of debt securities for defensive purposes or as
a buying reserve, may enter into Futures Contracts and Options on Futures
Contracts for hedging purposes, and may write covered call and put options and
purchase call and put options on securities and stock indexes in an effort to
increase current income and for hedging purposes (see Appendix C to the
Prospectus "Investment Techniques" and Appendix D hereto).
CAVA may invest up to 50% (and generally expects to invest between 10% and
50%) of its total assets in foreign securities, which may include emerging
market securities, and may invest in American Depositary Receipts ("ADRs"), and
may enter into forward foreign currency exchange contracts ("Forward Contracts")
for the purchase or sale of foreign currency for hedging purposes (see Appendix
C to the Prospectus "Investment Techniques--American Depositary Receipts" and
"Emerging Market Securities" and Appendix D hereto). For a description of the
risks involved in investing in foreign securities see the discussion under "High
Yield Variable Account" above. CAVA may invest in restricted securities, subject
to the restriction against investing more than 10% of its net assets in
securities that are not readily marketable (see Appendix C to the Prospectus,
"Investment Techniques--Restricted Securities").
CAVA is focused on growth companies and may be subject to fluctuations in
the value of its Variable Accumulation Units and Annuity Units during periods of
stock market volatility. CAVA involves the assumption of a higher degree of risk
as compared to a conservative equity fund. While it is not CAVA's policy
generally to invest or trade for short-term profits, portfolio securities may be
disposed of without
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regard to the length of time held whenever the investment adviser is of the
opinion that a security no longer has an appropriate appreciation potential or
has reached its anticipated level of performance, or when another security
appears to offer relatively greater appreciation potential or a relatively
greater anticipated level of performance. The rate of portfolio turnover is not
a limiting factor when changes are appropriate. High levels of portfolio
activity result in higher brokerage commissions.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
GSVA will seek current income and preservation of capital by investing in
debt obligations that are issued or guaranteed as to principal and interest by
the U.S. government, its agencies, authorities or instrumentalities ("Government
Securities") and obligations that are fully collateralized or otherwise fully
backed by government securities ("Government-related Securities"). GSVA may also
engage in transactions involving options, Futures Contracts and Options on
Futures Contracts as a hedge against anticipated future changes in interest
rates that otherwise might adversely affect the value of GSVA's portfolio of
securities and may enter into mortgage "dollar roll" transactions. The Account's
use of options, Futures Contracts and Options on Futures Contracts may result in
the loss of principal under certain market conditions (See Appendix C to the
Prospectus "Investment Techniques" and Appendix D hereto). GSVA may also hold
cash or invest in short-term U.S. government debt securities and related
repurchase agreements for temporary defensive purposes or as a buying reserve.
Government Securities include: (1) U.S. Treasury obligations, which differ
only in their interest rates, maturities and time of issuance: U.S. Treasury
bills (maturity of one year or less), U.S. Treasury notes (maturities of one to
10 years), and U.S. Treasury bonds (generally maturities of greater than 10
years), all of which are backed by the full faith and credit of the United
States; and (2) obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association; some of which are supported by the right of the issuer to
borrow from the U.S. government, e.g., obligations of Federal Home Loan Banks;
and some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association.
Government-related Securities include collateralized mortgage obligations
("CMOs") and government backed trust certificates ("GBTs"). CMOs are debt
obligations issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by mortgage pass-through securities
such as Government National Mortgage Association ("Ginnie Mae"), Federal
National Mortgage Association ("Fannie Mae"), and Federal Home Loan Mortgage
Corporation ("Freddie Mac") certificates. Payments of principal and interest on
the underlying collateral and any reinvestment income thereon provide the funds
to pay debt service obligations on the CMOs. CMOs are issued in a number of
classes or series, each with its own maturity and interest rate. While the
classes or series are often retired in sequence as the underlying mortgages are
repaid, payments of principal and interest on the underlying mortgages may be
allocated among the different series or classes in innumerable ways. As with any
mortgage-related security, principal prepayment on the collateral may cause the
CMOs to be retired substantially earlier than the stated maturities or final
distribution dates. Prepayment may thus shorten the stated maturity of the
obligation and can result in the loss of premium if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security). GSVA intends to invest in privately issued CMOs only
if they are rated at the time of purchase in the two highest ratings of
nationally recognized rating agencies (see Appendix A to the Prospectus for a
description of the ratings).
GBTs are obligations of certain private trusts formed for the purpose of
refinancing certain foreign government loans. The assets of the trust typically
include (a) a foreign government loan (the "Note"), 90% of principal and
interest payments on which are backed by a full faith and credit guaranty of the
United States Government and (b) a beneficial interest in a trust holding direct
obligations of the United States government, calculated to provide amounts equal
to at least 10% of all principal and interest payments on the Note. Funds
scheduled to be received from these assets are calculated to cover all scheduled
distributions on the GBTs.
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GBTs and certain CMOs and other Government-related Securities are issued by
private entities, are not Government Securities and are not directly guaranteed
by any government agency. They are secured by the underlying collateral held by
the private issuer.
Government Securities and Government-related Securities do not generally
involve the credit risks associated with other types of interest bearing
securities, although, as a result, yields available from these securities are
generally lower than the yields available from corporate interest bearing
securities. Like other interest bearing securities, however, the values of
Government Securities and Government-related Securities change as interest rates
fluctuate. Therefore, when interest rates decline the market value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise the market value of a portfolio invested at lower yields can
be expected to decline. Therefore, GSVA will engage in portfolio trading to take
advantage of market developments and yield disparities, e.g., shortening the
average maturity of the portfolio in anticipation of a rise in interest rates so
as to minimize depreciation of principal or lengthening the average maturity of
the portfolio in anticipation of a decline in interest rates so as to maximize
the appreciation of principal.
TOTAL RETURN VARIABLE ACCOUNT
TRVA's primary investment objective is to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
the prudent employment of capital. While current income is the primary
objective, TRVA also will seek a reasonable opportunity for growth of capital
and income, since many securities offering a better than average yield may also
possess growth potential. MFS considers each of these objectives in selecting
securities for TRVA's portfolio. Assets will be allocated and reallocated from
time to time between money market, fixed income and equity securities. Generally
at least 40% of TRVA's assets are invested in equity securities, including
preferred stocks.
TRVA's policy is to invest in a broad portfolio of securities, including
short-term obligations. The portfolio may be diversified not only by companies
and industries, but also by type of securities, for example, equity securities,
fixed income securities, and securities representing cash equivalents. Thus
fixed income securities, such as bonds, may be held as well as common stocks. In
addition, some fixed income securities held by TRVA may include a right to
purchase common stock by means of a conversion privilege or attached warrants.
TRVA may vary the percentage of assets invested in any one type of security in
accordance with its interpretation of economic and money market conditions,
fiscal and monetary policy, and underlying security values. Normally, most of
TRVA's long-term debt investments will consist of "investment grade" securities
(rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or
better by Standard & Poor's Corporation ("S&P") or Fitch's Investors Service,
Inc. ("Fitch")) (see Appendix B to the Prospectus for a description of these
ratings; for a description of risks associated with securities rated Baa or
lower by Moody's or BBB or lower by S&P or Fitch, see the discussion under "High
Yield Variable Account--Additional Risk Factors Regarding Lower Rated
Securities" in the Prospectus.).
TRVA may enter into repurchase agreements only with member banks of the
Federal Reserve System, member firms (and subsidiaries thereof) of the New York
Stock Exchange, recognized primary U.S. Government securities dealers or
institutions which TRVA's investment adviser has determined to be of comparable
creditworthiness, and only for U.S. government securities. If the seller fails
to pay the sum agreed to on the delivery date, TRVA would have the right to sell
the U.S. government securities, but might incur a loss in doing so and in
certain cases may be otherwise restricted in liquidating the U.S. government
securities. TRVA may seek to increase its income by lending portfolio securities
to the extent consistent with present regulatory policies. TRVA may invest in
restricted securities, subject to the restriction against investing more than
15% of its net assets in securities that are not readily marketable. TRVA may
enter into mortgage "dollar roll" transactions and invest in corporate
asset-backed securities (see Appendix C to the Prospectus for a discussion of
repurchase agreements, corporate asset-backed securities, mortgage "dollar roll"
transactions, restricted securities and the lending of portfolio securities).
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Securities offering above-average yield may at times involve greater than
average risk. For this reason, and because the value of securities and the
income earned on them may fluctuate according to the earnings of the issuers and
changes in economic and money market conditions, there can be no assurance that
TRVA's investment objectives will be achieved.
TRVA may invest up to 20% (and generally expects to invest between 10% and
20%) of its total assets in foreign securities, which may include emerging
market securities and Brady Bonds, and may invest in American Depositary
Receipts ("ADRs") (see Appendix C to the Prospectus). The value of foreign
securities investments may be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in this country or abroad) or changed circumstances in dealings
between nations. Costs may be incurred in connection with conversions between
various currencies. Moreover, there may be less publicly available information
about foreign issuers than about domestic issuers, and foreign issuers may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of domestic issuers. Securities of some foreign
issuers are less liquid and more volatile than securities of comparable domestic
issuers and foreign brokerage commissions are generally higher than in the
United States. Foreign securities markets may also be less liquid, more volatile
and less subject to government supervision than in the United States.
Investments in foreign countries could be affected by other factors not present
in the United States, including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations. See also Appendix C
to the Prospectus "Investment Techniques-- Emerging Market Securities" and
"Brady Bonds".
TRVA does not intend to trade in securities for short-term profits and
anticipates that portfolio securities will ordinarily be held for one year or
longer. However, TRVA will trade whenever it believes that changes in the
portfolio are appropriate.
WORLD GOVERNMENTS VARIABLE ACCOUNT
WGVA will seek to provide moderate current income and preservation and
growth of capital by investing in a portfolio of "U.S. Government Securities"
and "Foreign Government Securities" (to the extent WGVA's investment adviser
believes that the higher yields available from such Foreign Government
Securities are sufficient to justify the risks of investing in such securities).
WGVA may also hold its assets in cash or short-term obligations. In pursuing its
objectives, WGVA will consider the preservation and growth of capital by
balancing the yields of various fixed income securities against their attendant
risks.
WGVA will seek to provide purchasers with an opportunity to enhance the
value and increase the protection of their investment against inflation and
otherwise by taking advantage of investment opportunities in the United States
as well as in other countries where opportunities may be more rewarding. It is
believed that diversification of assets on an international basis decreases the
degree to which events in any one country, including the United States, can
affect the entire portfolio. Although the percentage of the Account's assets
invested in securities issued abroad and denominated in foreign currencies
("non-dollar securities") will vary depending on the state of the economies of
the principal countries of the world, their financial markets and the
relationships of their currencies to the U.S. dollar, under normal conditions
the Account's portfolio will be internationally diversified. However, for
defensive reasons or during times of international, political or economic
uncertainty or turmoil, most or all of the Account's investments may be in the
United States.
The Account will purchase non-dollar securities denominated in the currency
of countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Account's return. Investments in non-dollar securities are
evaluated primarily on the strength of a particular currency against the dollar
and on the interest rate climate of that country. Currency is judged on the
basis of fundamental economic criteria (e.g., relative inflation levels
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and trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data. In addition to the foregoing,
interest rates are evaluated on the basis of differentials or anomalies that may
exist between different countries.
The phrase "preservation of capital" is generally understood to imply that
the portfolio is invested in very low risk securities and that the major risk is
loss of purchasing power through the effects of inflation or major changes in
interest rates. However, while the Account will invest in securities which are
believed by its investment adviser to have minimal credit risk, an error of
judgment in selecting a currency or an interest rate environment could result in
a loss of capital.
WGVA intends to invest in the following Securities: U.S. GOVERNMENT
SECURITIES--U.S. Government Securities include: (i) U.S. Treasury obligations,
which differ only in their interest rates, maturities and times of issuance,
U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturities of one to ten years), and U.S. Treasury bonds (generally maturities
of greater than ten years), all of which are backed by the full faith and credit
of the United States; and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, some of which are backed by the full
faith and credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association (commonly referred to as "Ginnie
Maes"); some of which are supported by the right of the issuer to borrow from
the U.S. Government, e.g., obligations of Federal Home Loan Banks; and some of
which are backed only by the credit of the issuer itself, e.g., obligations of
the Student Loan Marketing Association. Some U.S. Government Securities do not
generally involve the credit risks associated with other types of interest
bearing securities, although, as a result, the yields available from U.S.
Government Securities are generally lower than the yields available from other
interest bearing securities. Like other interest bearing securities, however,
the values of U.S. Government Securities change as interest rates fluctuate.
FOREIGN GOVERNMENT SECURITIES--WGVA may invest in Foreign Government
Securities of issuers considered stable by MFS. The percentage of WGVA's assets
invested in Foreign Government Securities will vary depending on the relative
yields of such securities, the economies of the countries in which the
investments are made and such countries' financial markets, the interest rate
climate of such countries and the relationship of such countries' currencies to
the U.S. dollar. To the extent that WGVA invests in Foreign Government
Securities WGVA's portfolio, under normal conditions, will include securities of
a number of foreign countries. As a "non-diversified" investment company, WGVA
will be able to invest more than 5% of its assets in obligations of one or more
foreign governments, to the extent consistent with federal income tax
diversification requirements described under "Federal Tax Status-- Taxation of
Annuities in General."
Investing in Foreign Government Securities involves considerations and
possible risks not typically associated with investing in U.S. Government
Securities. The value of Foreign Government Securities investments will be
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in this country or
abroad) or changed circumstances in dealing between nations. Costs may be
incurred in connection with conversions between various currencies. Foreign
brokerage commissions are generally higher than in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods (see also the discussion of risks involved in investing in foreign
securities under "High Yield Variable Account" above).
OTHER INVESTMENTS--When MFS believes that investing for defensive purposes
is appropriate, such as during periods of unusual market conditions, or when
relative yields are deemed attractive, part or all of WGVA's assets may be
invested in cash (including foreign currency) or cash equivalent short-term
obligations including, but not limited to, certificates of deposit, commercial
paper, notes, U.S. Government Securities, Foreign Government Securities and
repurchase agreements (see Appendix C to the Prospectus for a discussion of
repurchase agreements).
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INVESTMENT PRACTICES--In order to achieve its investment objectives, WGVA
may employ the following investment practices: (1) writing covered put and call
options and purchasing put and call options on U.S. and Foreign Government
Securities that are traded on U.S. and foreign securities exchanges and over the
counter in an effort to increase current income and to reduce fluctuations in
Variable Accumulation Unit and Annuity Unit values; (2) entering into contracts
for the purchase or sale for future delivery of fixed income securities or
foreign currencies, or contracts based on financial indexes, including any index
of U.S. or Foreign Government Securities ("Futures Contracts") and purchasing
and writing options to buy or sell Futures Contracts ("Options on Futures
Contracts") but only as a hedge against anticipated further changes in interest
or exchange rates; (3) purchasing and writing put and call options on foreign
currencies traded on U.S. and foreign exchanges or over the counter for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increase in the dollar cost of foreign securities to be
acquired; (4) entering into forward foreign currency exchange contracts
("Forward Contracts") to attempt to minimize the risk to WGVA from adverse
changes in the relationship between the U.S. dollar and foreign currencies; (5)
lending portfolio securities to the extent consistent with present regulatory
policies for the purpose of increasing WGVA's income; (6) purchasing securities
on a "when-issued" or on a "forward delivery" basis; (7) entering into
repurchase agreements for U.S. Government Securities with member banks of the
Federal Reserve System, member firms (and subsidiaries thereof) of the New York
Stock Exchange, recognized primary U.S. Government securities dealers or
institutions which WGVA's investment adviser has determined to be of comparable
creditworthiness; (8) entering into mortgage "dollar roll" transactions; (9)
entering into interest rate swaps, currency swaps and other types of available
swap agreements, such as caps, collars and floors; (10) entering into indexed
securities whose value is linked to foreign currencies, interest rates,
commodities, indexes or other financial indicators; and (11) investing in
restricted securities, subject to the restriction against investing more than
15% of its net assets in securities that are not readily marketable. These
investment practices, the instruments involved and their uses, risks and costs
are more fully described in Appendix D hereto and in Appendix C to the
Prospectus.
When interest rates decline, the value of a portfolio invested at higher
yields can be expected to rise. Conversely, when interest rates rise, the value
of a portfolio invested at lower yields can be expected to decline. If WGVA's
expectations of changes in interest rates or its evaluation of the normal yield
relationship between two securities proves to be incorrect, WGVA's income and
the value of its Accumulation and Annuity Units decrease.
WGVA's use of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies may result in the loss of
principal under certain market conditions. Also, since WGVA may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, WGVA may be more susceptible to any single economic, political or
regulatory occurrence. For these reasons, WGVA should not constitute a complete
investment program and may not be appropriate for prospective purchasers who
cannot assume the greater risk of capital depreciation inherent in seeking
higher income. PROSPECTIVE PURCHASERS SHOULD REVIEW THIS SECTION CAREFULLY AND
CONSIDER THE INVESTMENT RISKS INVOLVED BEFORE ALLOCATING PURCHASE PAYMENTS TO
WGVA.
MANAGED SECTORS VARIABLE ACCOUNT
MSVA will seek capital appreciation by varying the weighting of its
portfolio among fifteen industry sectors. Dividend income, if any, is incidental
to MSVA's objective of capital appreciation.
The fifteen sectors from among which MSVA chooses its investments are: autos
and housing; consumer goods and services; defense and aerospace; energy;
financial services; health care; heavy industry; leisure; machinery and
equipment; precious metals; retailing; technology; transportation; utilities;
and foreign securities. (See Appendix D to the Prospectus for a description of
the scope of and potential risks associated with each of these industry
sectors). Certain sectors may overlap; for example, the defense and aerospace
sector and the technology sector both include companies involved in the
development of computer-related products. Therefore, securities of certain
companies or industries may simultaneously be held in more than one industry
sector.
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In response to changes or anticipated changes in the general economy or
within one or more particular industry sectors, MSVA may increase, decrease or
eliminate entirely a particular sector's representation in its portfolio;
similarly, it may acquire securities of a sector not then represented in its
portfolio. A sector or stock of a particular company will be added to or
eliminated from the portfolio based upon such factors as such sector's or
company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
MSVA expects to remove such stocks from its portfolio. Any one sector may
comprise up to 50% of the portfolio, as may cash held as a defensive measure or
to meet anticipated redemption requests. MSVA has registered as a
"non-diversified" investment company so that more than 5% of the Account's
assets may be invested in the securities of each of one or more issuers. As a
result of such non-diversified status, MSVA may be more susceptible to adverse
changes in the value of securities of a particular company than would be a
diversified investment company. Similarly, due to the Account's ability to
concentrate in as few as two industry sectors, MSVA's assets may be more
susceptible to any single economic, political or regulatory occurrence than
would be those of an investment company without a policy of concentration in
particular industry sectors.
While MSVA's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities, such as non-convertible and
convertible bonds, convertible preferred stocks, and in warrants to purchase
common stock, when relative values make such investments appear attractive
either as individual issues or as types of securities in certain economic
environments. The non-convertible bonds invested in by MSVA will include (i)
obligations issued or guaranteed by the U.S. Treasury or U.S. government
agencies or instrumentalities, and (ii) obligations of the U.S. Treasury that
have been issued without interest coupons or stripped of their unmatured
interest coupons, interest coupons that have been stripped from such debt
obligations, and receipts and certificates for such stripped debt obligations
and stripped coupons. MSVA may invest in restricted securities, subject to the
restriction against investing more than 15% of its net assets in securities that
are not readily marketable (see Appendix C to the Prospectus "Investment
Techniques--Restricted Securities"). There is no formula as to the percentage of
MSVA's assets that may be invested in any one type of security except as
provided below. MSVA's purchase of warrants will not exceed 5% of its assets.
Included within that amount, but not exceeding 2% of assets, may be warrants for
which there is no public market. Any such warrants will be valued at their
market value, except that warrants which are attached to securities at the time
such securities are acquired by MSVA will be deemed to be without value for the
purpose of this restriction.
MSVA may invest up to 20% (and generally expects to invest between 10% and
20%) of its total assets in foreign securities, which may include emerging
market securities, and may invest in American Depositary Receipts ("ADRs") (see
discussion of the risks involved in investing in foreign securities under "High
Yield Variable Account" above and Appendix C to the Prospectus "Investment
Techniques--Emerging Market Securities") and may enter into forward currency
exchange contracts ("Forward Contracts") for the purchase or sale of foreign
currency for hedging purposes. MSVA may write covered put and call options and
purchase put and call options on securities and stock indexes in an effort to
increase current income and for hedging purposes. MSVA may also purchase and
sell stock index futures contracts and may write and purchase options thereon
for hedging purposes. These practices, the instruments involved and their uses,
risks and costs are described in Appendix D hereto and in Appendix C to the
Prospectus.
INVESTMENT RESTRICTIONS THAT APPLY TO ALL VARIABLE ACCOUNTS:
The Variable Accounts may not:
(1) Enter into repurchase agreements if, as a result of such agreement,
more than 10% of the Variable Account's total assets valued at the time of
the transaction would be subject to repurchase agreements maturing in more
than seven days.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term
obligations in accordance with its objectives and policies are not
prohibited; and provided that this shall not prohibit WGVA and TRVA from
lending securities in
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accordance with their objectives and policies; and provided that this shall
not prevent MSVA from purchasing convertible debt instruments consistent
with its investment objectives. As regards HYVA, TRVA, WGVA and MSVA, the
purchase of a portion or all of an issue of debt securities shall not be
considered the making of a loan.
(3) Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to one-third of the value
of its total assets, in order to meet redemption requests without
immediately selling any portfolio securities (any such borrowings under this
section will not be collateralized). If, for any reason, the current value
of any Variable Account's total assets falls below an amount equal to three
times the amount of its indebtedness from money borrowed, the Variable
Account will, within three business days, reduce its indebtedness to the
extent necessary. The Variable Accounts will not borrow for leverage
purposes. The Variable Accounts will not purchase any investments while
borrowings are outstanding.
(4) Make short sales of securities or purchase any securities on margin
except to obtain such short term credits as may be necessary for the
clearance of transactions; provided that this shall not prevent CAVA, GSVA,
WGVA, or MSVA from making margin deposits in connection with options,
Futures Contracts, Options on Futures Contracts, Forward Contracts or
options on foreign currencies; and provided that this shall not prevent TRVA
or MSVA from selling a security which it does not own if, by virtue of its
ownership of other securities, the Account has, at the time of sale, a right
to obtain securities without payment of further consideration equivalent in
kind and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions.
(5) Write, purchase or sell puts, calls or combinations thereof;
provided that this shall not prevent CAVA, GSVA, WGVA or MSVA from writing,
purchasing and selling puts, calls or combinations thereof in accordance
with their objectives and policies; and further provided that this shall not
prevent CAVA, GSVA, WGVA and MSVA from purchasing, owning, holding or
selling contracts for the future delivery of securities or currencies.
Warrants and convertible securities may be purchased and sold by the
Variable Account; however, except as to TRVA where the grantor of warrants
is the issuer of the underlying securities, no more than 5% of the Variable
Account's total assets may consist of warrants and no more than 5% of the
Variable Account's total assets may consist of convertible securities. A
warrant is a certificate entitling the Variable Account to purchase a
specified amount of securities at a specified time at a specified price. A
convertible security is a bond, debenture or preferred security which may be
exchanged by the Variable Account for common stock or another security. With
respect to warrants, the risk exists that the market value of the underlying
security will not exceed or equal the exercise price at some time during the
exercise period.
(6) Purchase or retain the securities of any issuer if any of the
members of the Board of Managers of the Variable Account or the directors
and officers of the Company or MFS own beneficially more than one-half of
one percent (.50%) of the securities of such issuer and together own more
than 5% of the securities of such issuer.
(7) Invest for the purpose of exercising control or management of
another issuer.
(8) Invest in commodities or commodity futures contracts or in real
estate; except that this shall not prevent CAVA, GSVA, WGVA or MSVA from
writing, selling or purchasing Futures Contracts, Options on Futures
Contracts, Forward Contracts or options on foreign currencies, or from
holding or selling real estate or mineral leases, commodities or commodity
contracts acquired as a result of the ownership of securities in accordance
with their investment objectives and policies.
(9) Invest in oil, gas or other mineral exploration or development
programs.
(10) Purchase securities of other investment companies; except that GSVA
may purchase Government-related Securities in accordance with its investment
objectives and policies; and except, as regards TRVA, WGVA and MSVA, by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
12
<PAGE>
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that MSVA shall not purchase the securities of any investment company if
such purchase at the time thereof would cause more than 10% of the Account's
total assets (taken at market value) to be invested in the securities of
such issuers; and provided, further, that the Accounts shall not purchase
securities issued by any open-end investment company.
(11) Underwrite securities issued by others except to the extent the
Variable Account may be deemed to be an underwriter, under the Federal
securities laws, in connection with the disposition of portfolio securities.
(12) Issue senior securities as defined in the Investment Company Act of
1940 except as permitted in restriction (3) above. For the purpose of this
restriction as it applies to CAVA, GSVA, WGVA and MSVA, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies, and
collateral arrangements with respect to initial and variation margins are
not deemed to be the issuance of a senior security.
With the exception of repurchase agreements, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in percentage
beyond the specified limit resulting from a change in values or net assets will
not be considered a violation.
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO MMVA:
MMVA will operate under the general investment restrictions described above.
In addition, MMVA will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States government, its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the
value of its assets would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class).
(3) Concentrate more than 25% of the value of its assets in any one
industry, provided that the restriction shall not apply to obligations
issued or guaranteed by the United States government, its agencies or
instrumentalities, or certificates of deposit or securities issued or
guaranteed by domestic banks (See "Money Market Variable Account" for a
description of such securities).
(4) Purchase equity securities, voting securities or local or state
government securities.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements).
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO HYVA:
HYVA will operate under the general investment restrictions described above.
In addition, HYVA will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as a result of such purchase, more than 10% of the
value of its assets would be invested in securities of that issuer.
(2) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric and gas utilities shall each be
considered a separate industry.
(3) Invest more than 10% of its total assets in securities of issuers
which are not readily marketable.
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<PAGE>
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO CAVA:
CAVA will operate under the general investment restrictions described above.
In addition, CAVA will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the
value of its assets would be invested in the securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one class.
(3) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric and gas utilities shall each be
considered a separate industry.
(4) Invest more than 10% of its total assets in securities of issuers
which are not readily marketable.
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO GSVA:
GSVA will operate under the general investment restrictions described above.
In addition, GSVA will not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the
value of its assets would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class).
(3) Purchase equity securities or voting securities.
(4) Purchase interests in pools of mortgages evidenced by direct pass
through mortgage certificates if, as a result of such purchase, more than
90% of the value of its assets would be evidenced by direct pass through
mortgage certificates.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements maturing in more than seven days).
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO TRVA:
TRVA will operate under the general investment restrictions described above.
In addition, TRVA will not:
(1) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objectives, up to
25% of its assets, taken at market value at the time of each investment, may
be invested in any one industry.
(2) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if such purchase, at the time thereof, would cause more
than 5% of its total assets, taken at market value, to be invested in the
securities of such issuer.
(3) Purchase voting securities of any issuer if such purchase, at the
time thereof, would cause more than 10% of the outstanding voting securities
of such issuer to be held by the Account, or purchase securities of any
issuer if such purchase, at the time thereof, would cause the Account to
hold more than 10% of any class of securities of such issuer. For this
purpose, all indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class.
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<PAGE>
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO WGVA:
WGVA will operate under the general investment restrictions described above.
In addition, WGVA will not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if such purchase, at the time thereof, would cause more
than 10% of the voting securities of such issuer to be held by the Account.
INVESTMENT RESTRICTIONS THAT APPLY ONLY TO MSVA:
MSVA will operate under the general investment restrictions described above.
In addition, MSVA will not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as to 50% of the Account's total assets, such
purchase, at the time thereof, would cause more than 5% of its total assets,
taken at market value, to be invested in the securities of such issuer.
(2) Purchase voting securities of any issuer if, as to 50% of the value
of the Account's assets, such purchase, at the time thereof, would cause
more than 10% of the outstanding voting securities of such issuer to be held
by the Account.
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<PAGE>
MANAGEMENT OF THE VARIABLE ACCOUNTS
BOARDS OF MANAGERS
Each Variable Account is under the general supervision of a Board of
Managers. The members of each Board of Managers were initially selected by the
Company, but in the future will be elected by Owners and other persons entitled
to vote (See "Voting Rights" in the Prospectus). Members of all seven Boards of
Managers and officers of each of the Variable Accounts are the same. Their
positions with the Accounts, business addresses and principal occupations during
the last five years are listed below.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BUSINESS
AFFILIATIONS AND PRINCIPAL OCCUPATIONS
MEMBERS AND OFFICERS DURING PAST FIVE YEARS
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
Samuel Adams, Member He is an attorney and a partner in the law firm of Warner &
75 State Street Stackpole; a Director of Sun Growth Variable Annuity Fund,
Boston, Massachusetts 02106 Inc.; and a Trustee of MFS/Sun Life Series Trust.
Geoffrey Crofts, Member He is Professor Emeritus, the University of Hartford; a
74 Scott Drive Director of Sun Growth Variable Annuity Fund, Inc.; and a
Bloomfield, Connecticut 06002 Trustee of MFS/Sun Life Series Trust.
David D. Horn*, Member He is Senior Vice President and General Manager for the
One Sun Life Executive Park United States of Sun Life Assurance Company of Canada;
Wellesley Hills, Massachusetts 02181 Senior Vice President and General Manager and a Director of
Sun Life Assurance Company of Canada (U.S.); Chairman and
President and a Director of Sun Investment Services Company;
Vice President and a Director of Sun Growth Variable Annuity
Fund, Inc.; President and a Director of Sun Benefit Services
Company, Inc.; a Director of Sun Capital Advisers, Inc.;
Chairman and a Director of Massachusetts Casualty Insurance
Company; Senior Vice President and a Director of Sun Life
Insurance and Annuity Company of New York; and a Trustee of
MFS/Sun Life Series Trust.
Derwyn F. Phillips, Member He is Vice Chairman--Retired of The Gillette Company; a
One Cliff Street Director of Sun Growth Variable Annuity Fund, Inc.; and a
Marblehead, Massachusetts 01945 Trustee of MFS/Sun Life Series Trust.
Garth Marston, Member He is Former Chairman and Chief Executive Officer of the
90 Beacon Street Provident Institution for Savings; a Director of Sun Growth
Boston, Massachusetts 02108 Variable Annuity Fund, Inc.; and a Trustee of MFS/Sun Life
Series Trust.
John D. McNeil*, Chairman and Member He is Chairman and a Director of Sun Life Assurance Company
150 King Street West of Canada, Sun Life Assurance Company of Canada (U.S.) and
Toronto, Ontario, Canada M5H 1J9 Sun Life Insurance and Annuity Company of New York;
President and a Director of Sun Growth Variable Annuity
Fund, Inc.; a Director of MFS; Chairman and a Trustee of
MFS/Sun Life Series Trust; and a Director of Shell (Canada)
Limited and Canadian Pacific, Ltd.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BUSINESS
AFFILIATIONS AND PRINCIPAL OCCUPATIONS
MEMBERS AND OFFICERS DURING PAST FIVE YEARS
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
Bonnie S. Angus*, Secretary She is Assistant Secretary for the United States of Sun Life
One Sun Life Executive Park Assurance Company of Canada; and Secretary of Sun Investment
Wellesley Hills, Massachusetts 02181 Services Company, Sun Life Assurance Company of Canada
(U.S.), Sun Life Insurance and Annuity Company of New York,
Sun Benefit Services Company, Inc., MFS/Sun Life Series
Trust, Sun Growth Variable Annuity Fund, Inc., Sun Capital
Advisers, Inc. and New London Trust, F.S.B.
<FN>
- -------------------
*Interested persons as defined in the Investment Company Act of 1940.
</TABLE>
All Members of the Boards of Managers and officers of the Variable Accounts
who are associated with Sun Life Assurance Company of Canada and its
subsidiaries will continue in their present positions with these companies. The
Variable Accounts pay no remuneration to Members of the Boards of Managers who
also serve as officers of Sun Life Assurance Company of Canada or its
affiliates. The Members who are not affiliated with Sun Life Assurance Company
of Canada, taken as a group, received fees during 1994 in the aggregate amount
of $74,200 from the Variable Accounts.
INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS") is the investment manager
for each of the Variable Accounts. MFS also serves as investment adviser to each
of the funds in the MFS Family of Funds, Sun Growth Variable Annuity Fund, Inc.,
MFS/Sun Life Series Trust and certain other investment companies established or
distributed by MFS and/or its affiliates. MFS Asset Management, Inc., a
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924 and founded the first mutual fund in the United States.
MFS is a wholly-owned subsidiary of the Company, which, in turn, is a
wholly-owned subsidiary of Sun Life Assurance Company of Canada. MFS operates as
an autonomous organization and the obligation of performance with respect to the
investment management agreements is solely that of MFS. The Company undertakes
no obligation in this respect.
John D. McNeil, Chairman and a Member of the Boards of Managers of the
Variable Accounts, is Chairman and a Director of the Company and a Director of
MFS. John R. Gardner, President and a Director of the Company, is also a
Director of MFS.
(1) INVESTMENT MANAGEMENT AGREEMENTS
MFS manages each Variable Account pursuant to an Investment Management
Agreement ("Agreement"). Each Agreement provides that MFS shall act as the
Variable Account's investment adviser, manage its investments, administer its
business affairs, furnish office facilities and equipment, provide clerical,
bookkeeping and administrative services and permit any of its officers or
employees to serve without compensation as members of the Board of Managers or
officers of the Variable Accounts if elected to such positions.
MFS is paid maximum investment management fees of 0.50% of the average daily
net assets of MMVA; 0.75% of the first $300 million of average daily net assets
of HYVA, CAVA, WGVA, TRVA and MSVA and 0.675% of the average daily net assets of
HYVA, CAVA, WGVA, TRVA and MSVA in excess of $300 million; and 0.55% of the
first $300 million of average daily net assets of GSVA and 0.495% of the average
daily net assets of GSVA in excess of $300 million. Each Variable Account pays
its respective fees and expenses of the Board of Managers, independent certified
public accountants, counsel, and custodian, the cost of reports and notices to
owners of contracts, brokerage commissions and transaction costs, foreign and
domestic taxes and registration fees. MFS has undertaken to reimburse each
Variable Account whose operating expenses, excluding taxes, extraordinary
expenses and brokerage and transaction costs, and excluding the mortality and
expense risk charges and contract maintenance
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<PAGE>
charges payable to the Company exceed 1.25% of the average daily net assets of
the Variable Account for the calendar year. The investment management fees paid
by the Variable Accounts during 1992, 1993 and 1994, respectively (in $
thousands), were as follows: MMVA, $964, $782 and $885; HYVA, $1,470, $1,605 and
$1,409; CAVA, $3,509, $3,976 and $3,468; GSVA, $2,015, $1,893 and $1,779; WGVA,
$217, $267 and $292; TRVA, $1,237, $1,588 and $1,743; and MSVA, $667, $479 and
$465.
(2) PORTFOLIO TRANSACTIONS
MFS, in placing orders for any purchases and sales of portfolio securities
for the Variable Accounts, will select broker-dealer firms by giving primary
consideration to the quality, quantity and nature of the firms' professional
services, which include execution, clearance procedures and market, statistical
and other research information provided to the Variable Accounts, MFS and its
advisory affiliate. Any research benefits provided by broker-dealers may be
available for all clients of MFS or its advisory affiliate, which may include
the Company, Sun Life Assurance Company of Canada and Sun Life Insurance and
Annuity Company of New York. Consistent with the foregoing primary consideration
and the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. MFS may consider sales of the Contracts and other contracts
participating in the Variable Accounts as a factor in the selection of such
broker-dealer firms. While MFS will be primarily responsible for the allocation
of the brokerage business of each of the Variable Accounts, the policies and
practices of MFS in this regard must be consistent with the foregoing and will
at all times be subject to review by the Boards of Managers of the Variable
Accounts. Brokerage commissions paid by CAVA, HYVA, TRVA and MSVA during 1992,
1993 and 1994, respectively (in $ thousands), were $407, $974 and $ ; $9, $8
and $ ; $70, $55 and $ ; and $25, $195 and $ . No commissions were paid by
MMVA, GSVA or WGVA in 1992, 1993 and 1994. See Appendix E for transactions in
securities of regular broker-dealers and affiliates of regular broker-dealers
for the Accounts.
At times investment decisions may be made to purchase or sell the same
security for one or more Variable Accounts and for one or more of the other
client portfolios managed by MFS or its advisory affiliate. When two or more of
such clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed by the
investment adviser to be equitable to each. At other times one such client may
be purchasing the same security that another client is selling. In this event
MFS has discretion to place both such orders with broker-dealers or to arrange
for the completion of the transaction between the clients without the use of
broker-dealers. The Boards of Managers of the Variable Accounts have authorized
MFS to arrange for the Variable Accounts to purchase securities from or to sell
securities to another investment company for which MFS or its advisory affiliate
serves as investment adviser.
In addition to using broker-dealers to execute portfolio securities
transactions for the Variable Accounts, MFS and/or Clarendon Insurance Agency,
Inc., the distributor of the Contracts and a wholly-owned subsidiary of MFS, may
enter into other types of business transactions with broker-dealers relating to
the distribution of the Contracts. These other transactions will be unrelated to
the allocation of the Variable Accounts' portfolio securities transactions.
ANNUITY PROVISIONS
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Contract's Accumulation Account will be
cancelled and its adjusted value will be applied to provide a Variable Annuity
or a Fixed Annuity or a combination of both. The adjusted value will be equal to
the value of the Accumulation Account for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by any applicable
premium or similar taxes and a proportionate amount of the contract maintenance
charge to reflect the time elapsed between the last Contract Anniversary and the
day before the Annuity Commencement Date.
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Variable Account is
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<PAGE>
determined by dividing that portion of the first variable annuity payment
attributable to that Variable Account by the Annuity Unit value of that Variable
Account for the Valuation Period which ends immediately preceding the Annuity
Commencement Date. The number of Annuity Units of each particular Variable
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, and
is equal to the sum of the amounts determined by multiplying the number of
Annuity Units of a particular Variable Account credited to the Contract by the
Annuity Unit value for the particular Variable 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.
For a hypothetical example of the calculation of a variable annuity payment,
see Appendix B.
ANNUITY UNIT VALUE
The Annuity Unit value for each Variable Account was established at $10.00
for the first Valuation Period of the particular Variable Account. The Annuity
Unit value for any subsequent Valuation Period is determined by multiplying the
Annuity Unit value for the immediately preceding Valuation Period by the
appropriate Net Investment Factor (See "Net Investment Factor" in the
Prospectus) 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. This 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 CONTRACTUAL PROVISIONS
OWNER AND CHANGE OF OWNERSHIP
The Contract shall belong to the Owner. All Contract rights and privileges
may be exercised by 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.
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 a Qualified 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
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Owner; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement or
deferred compensation plans for which a Qualified Contract may be issued.
Subject to the foregoing, a Qualified 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.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, although such change may result in the imposition of tax (see
"Federal Tax Status--Taxation of Annuities in General"). A change of ownership
will not be binding upon the Company until written notification is received by
the Company. Once received by the Company the change will be effective as of the
date on which the request for change was signed by the Owner but the change will
be without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change. The Company may require that
the signature of the Owner be guaranteed by a member firm of the New York,
American, Boston, Midwest, Philadelphia or Pacific Stock Exchange, or by a
commercial bank (not a savings bank)
19
<PAGE>
which is a member of the Federal Deposit Insurance Corporation or, in certain
cases, by a member firm of the National Association of Securities Dealers, Inc.
which has entered into an appropriate agreement with the Company.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in the application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
may change or revoke the designation of a Beneficiary at any time while the
Annuitant is living by filing with the Company a written beneficiary designation
or revocation in such form as the Company may require. The change or revocation
will not be binding upon the Company until it is received by the Company. When
it is so received the change or revocation will be effective as of the date on
which the Beneficiary designation or revocation was signed by the Owner.
CUSTODIAN
The Custodian of the assets of the Variable Accounts is State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
The Custodian's responsibilities include safekeeping and controlling the
Variable Accounts' cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Variable Accounts' investments, maintaining books of original entry for
portfolio and fund accounting and other required books and accounts, and
calculating Accumulation Unit and Annuity Unit values. The Custodian does not
determine the investment policies of the Variable Accounts or decide which
securities the Variable Accounts will buy or sell. The Variable Accounts may,
however, invest in securities of the Custodian and may deal with the Custodian
as principal in securities transactions. Portfolio securities may be deposited
into the Federal Reserve--Treasury Department Book Entry System or the
Depository Trust Company.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in the Prospectuses are designed for use in
connection with retirement plans that may or may not be qualified plans under
Sections 401, 403 or 408 or, in the case of Compass 2 Contracts, Section 457 of
the Internal Revenue Code (the "Code"). The ultimate effect of federal income
taxes on the Contract's Accumulation Account, on annuity payments and on the
economic benefit to the Owner, the Annuitant, the Payee or the Beneficiary
depends on the Company's tax status, 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 current federal income tax laws
(including recently enacted amendments), 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 ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNTS
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Accounts are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Accounts are not separately taxable as regulated investment companies or
otherwise as taxable entities separate from the Company. Under existing federal
income tax laws, the income (consisting primarily of interest, dividends, and
net capital gains) of the Variable Accounts, to the extent that it is applied to
increase reserves under the Contracts, is not taxable to the Company.
20
<PAGE>
TAXATION OF ANNUITIES IN GENERAL
Generally, no tax is imposed on the increase in the value of a Contract held
by an individual Owner until distribution occurs, either as annuity payments
under the annuity option elected or in the form of cash withdrawals or lump-sum
payments prior to the Annuity Commencement Date.
Corporate Owners and other Owners that are not natural persons (other than
the estate of a decedent Owner) are subject to current taxation on the annual
increase in the value of a Non-Qualified Contract's Accumulation Account. This
rule does not apply where a non-natural person holds the Contract as agent for a
natural person (such as where a bank holds a Contract as trustee under a trust
agreement). This provision does not apply to earnings accumulated under an
immediate annuity (as defined below). This provision applies to earnings on
Purchase Payments made after February 28, 1986.
The following discussion of annuity taxation applies only to contributions
(and attributable earnings) made to Non-Qualified Contracts after August 13,
1982. If an Owner has made contributions before August 14, 1982 to another
annuity contract and exchanges that contract for this Contract, then different
tax treatment will apply to the contributions (and attributable earnings) made
before August 14, 1982. For example, non-taxable principal may be withdrawn
before taxable earnings and the 10% penalty tax for early withdrawal is not
applicable.
In the case of a Non-Qualified Contract (other than a Contract issued in
exchange for a contract issued prior to August 14, 1982, as discussed above), a
partial cash withdrawal (that is, a withdrawal of less than the entire value of
the Contract's Accumulation Account), must be treated first as a withdrawal from
the excess of the Accumulation Account's value over the Contract's cost basis.
The amount of the withdrawal so allocable will be includible in the Owner's
income. Similarly, if an individual receives a loan under a Contract or if the
Contract is assigned or pledged as collateral for a loan, the amount of the loan
or the amount assigned or pledged must be treated as if withdrawn from the
Contract. (For Non-Qualified Contracts entered into after October 21, 1988 (or
any annuity contract entered into on or before such date that is exchanged for a
Non-Qualified Contract issued after such date), any withdrawal or loan amount
that is includible in the Owner's income will increase the Contract's cost
basis. Repayment of a loan or payment of interest on a loan will not affect the
Contract's cost basis. For these purposes the Contract's Accumulation Account
value will not be reduced by the amount of any loan, assignment, or pledge of
the Contract. In addition, all non- qualified deferred annuity contracts that
are issued by the Company to the same Owner during any calendar year will be
treated as a single annuity contract. Therefore, the proceeds of a withdrawal or
loan from, or assignment or pledge of, one or more such contracts will be fully
includible in the Owner's income to the extent of the aggregate excess of the
accumulation account values over the cost bases of all such contracts entered
into during the calendar year).
The taxable portion of a cash withdrawal or a lump-sum payment prior to the
Annuity Commencement Date is subject to tax at ordinary income rates. In the
case of payments after the Annuity Commencement Date under the annuity option
elected, a portion of each payment generally is taxable at ordinary income
rates. The nontaxable portion is determined by applying to each payment an
"exclusion ratio" which is the ratio that the cost basis of the Contract bears
to the expected return under the Contract. The remainder of the payment is
taxable.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the cost basis in the Contract. If an
Annuitant survives for his full life expectancy so that the Payee recovers the
entire basis in the Contract, any subsequent annuity payment after basis
recovery will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire basis, the Payee will be allowed a
deduction for the amount of the unrecovered basis. This limitation applies to
distributions made under a Contract with an Annuity Commencement Date after
December 31, 1986.
In the case of Non-Qualified Contracts, taxable cash withdrawals and
lump-sum payments will be subject to a 10% penalty, except in the circumstances
described below. This 10% penalty also affects certain annuity payments. In a
situation where this penalty applies, the recipient's tax for the tax year in
21
<PAGE>
which the amount is received shall be increased by an amount equal to 10% of the
portion of the amount which is includible in the recipient's gross income. This
penalty will not apply to distributions which are: (a) made after the Owner has
reached age 59 1/2; (b) made to a Beneficiary or to the estate of the Owner upon
the death of the Owner; (c) attributable to the Owner's becoming disabled, so as
to be unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or to be of long-continued and indefinite duration; (d)
allocable to Purchase Payments made before August 14, 1982; or (e) one of a
series of substantially equal periodic payments made for the life of the Owner
or over the joint lives of the Owner and a designated beneficiary. In the case
of this last exception payments cannot be made less frequently than annually.
Further, any modification of the payment schedule before the later of five years
after payments commence or the Owner reaching age 59 1/2 will trigger the
penalty tax with respect to current and prior distributions (plus, in the case
of prior distributions, interest thereon). The withdrawal penalty does not apply
to distributions under an immediate annuity (defined as a single premium
contract with an annuity commencement date within one year of the date of
purchase). In the case of Contracts issued prior to January 18, 1985, the
penalty on taxable cash withdrawals and lump sum distributions will not apply if
the amount withdrawn is allocable to a Purchase Payment made prior to the
preceding ten year period. For this purpose, a "first in, first out" rule is
used, so that the earliest Purchase Payment with respect to which amounts have
not been previously fully allocated will be deemed to be the source of the
amount.
If the Owner of a Non-Qualified Contract dies before the Annuity
Commencement Date, the entire value of the Contract's Accumulation Account must
be either (1) distributed within five years after the date of death of the
Owner, or (2) distributed over some period not greater than the expected life of
the designated Payee, with annuity payments beginning within one year after the
date of death of the Owner. These distribution requirements will not apply where
the spouse of the Owner is the designated Beneficiary; rather, in such a case,
the Contract may be continued in the name of the spouse as Owner. If the
Owner/Annuitant dies on or after the Annuity Commencement Date and before the
entire accumulation under the Contract has been distributed, the remaining
portion of such accumulation, if any, must be distributed at least as rapidly as
the method of distribution then in effect. In the case of Contracts issued prior
to January 18, 1985, these rules regarding distributions upon the death of the
Owner or the Annuitant will not apply. In the case of Contracts issued after
April 22, 1987, where the Owner of a Contract is not an individual, the rules
requiring distributions upon the death of the Owner will be applied with respect
to the Annuitant, resulting in income to the Payee. In such a case, a change in
the Annuitant would be treated as the death of the Owner. Distributions required
due to the death of the Owner (or, where the Owner is not an individual, to the
death of the Annuitant) will not be subject to the 10% penalty on premature
distributions. A purchaser of a Qualified Contract should refer to the terms of
the applicable retirement plan and consult a tax adviser regarding distribution
requirements upon death.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis. This
provision applies to Contracts issued after April 22, 1987.
In the case of Qualified Contracts, 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. Certain distributions, known as "eligible rollover
distributions," if rolled over to certain other qualified retirement plans
(either directly or after being distributed to the Owner or Payee), are not
taxable until distributed from the plan to which they are rolled over. In
general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more. Owners, Annuitants, Payees and
Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans in
connection with which the Contracts are purchased.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use 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.
22
<PAGE>
In the case of distributions from a Qualified Contract (other than
distributions from 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 Qualified Contract is
not an eligible rollover distribution, then the Owner or Payee can choose not to
have amounts withheld as described above for Non-Qualified Contracts and
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 non-qualified variable contracts.
Contracts that do not comply with these regulations do not qualify as
"annuities" for income tax purposes. The Internal Revenue Service has issued
Regulations containing diversification requirements for segregated asset
accounts and mutual fund series underlying non-qualified variable contracts. The
Regulations provide generally that a segregated asset account (such as the
Variable Accounts) will be adequately diversified if (1) not more than 55% of
its total assets are invested in the securities of one issuer, (2) not more than
70% of its total assets are invested in the securities of two issuers, (3) not
more than 80% of its total assets are invested in the securities of three
issuers, and (4) not more than 90% of its total assets are invested in the
securities of four issuers. In the case of "government securities," each United
States government agency or instrumentality is treated as a separate issuer.
"Government securities" include any security that is issued or guaranteed by the
United States or an instrumentality of the United States and related options,
Futures Contracts and Options on Futures Contracts. The Company believes the
Variable Accounts comply with the Regulations.
The preamble to the Regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract or the
Variable Accounts) necessary to comply with the guidelines.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
contracts participating in the Variable Accounts and the Variable Accounts.
These functions include, among other things, maintaining the books and records
of the Variable 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 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"), 500 Boylston
Street, Boston, Massachusetts 02116, a wholly-owned subsidiary of MFS.
Commissions and other distribution compensation will be paid by the Company and
will not be more than 5.11% of the Purchase Payments under Compass 2 Contracts
and 6.11% of the Purchase Payments under Compass 3 Contracts. In addition, after
the first Contract Year broker dealers who have entered into distribution
agreements with the Company may receive an annual renewal commission of no more
than 0.20% of the Contract's Accumulation Account value. In addition to
commissions, the Company may, from time to time, pay or allow additional
promotional incentives, in the form of cash or other compensation. In some
instances, such other incentives may be offered only to
23
<PAGE>
certain broker-dealers that sell or are expected to sell during specified time
periods certain minimum amounts of the Contracts or other contracts offered by
the Company. Commissions will not be paid with respect to Contracts established
for the personal accounts of employees of the Company or any of its affiliates
or of persons engaged in the distribution of the Contracts. During 1992, 1993
and 1994, approximately (in $ thousands) $933, $885 and $735, respectively, was
paid to and retained by Clarendon in connection with the distribution of Compass
3 Contracts participating in the Variable Accounts, and $404, $374 and $314,
respectively, was paid with respect to Compass 2 Contracts.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contracts and
the validity of the form of the Contracts have been passed upon by David D.
Horn, Esq., Senior Vice President and General Manager of the Company. Covington
& Burling, Washington, D.C. have advised the Company on certain legal matters
concerning federal securities laws applicable to the issue and sale of the
Contracts and federal income tax laws applicable to the Contracts.
ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110, are
the Variable Accounts' independent certified public accountants providing
auditing and other professional services.
The financial statements of the Company are included in this Statement of
Additional Information.
The financial statements of the Variable Accounts are incorporated in this
Statement of Additional Information by reference from the Variable Accounts'
Annual Report to contract owners for the year ended December 31, 1994. These
financial statements of the Variable Accounts have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing. A copy of the Annual Report accompanies this Statement of Additional
Information.
The financial statements of the Variable Accounts reflect units outstanding
and expenses incurred under both Compass 2 and Compass 3 Contracts, which impose
different contract charges (see "Contract Charges" in the Prospectuses and Note
3 to the financial statements of the Variable Accounts).
24
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1993
------------ -----------
<S> <C> <C>
(IN 000'S)
ASSETS
Bonds $ 2,471,152 $ 2,584,870
Mortgage loans 1,120,981 1,116,889
Investments in subsidiaries 134,807 146,176
Real estate 89,487 87,289
Other invested assets 26,036 0
Policy loans 36,584 34,222
Cash (11,459) 2,056
Investment income due and accrued 86,836 84,100
Funds withheld on reinsurance
assumed 535,953 336,126
Due from separate accounts 145,099 101,007
Other assets 15,080 12,219
------------ -----------
General account assets 4,650,556 4,504,954
------------ -----------
Unitized separate account assets 4,061,821 3,719,762
Non-unitized separate account assets 1,425,445 974,374
------------ -----------
$ 10,137,822 $ 9,199,090
------------ -----------
------------ -----------
LIABILITIES
Policy reserves $ 1,765,327 $ 1,545,993
Annuity and other deposits 2,277,104 2,346,645
Policy benefits in process of
payment 5,796 2,301
Accrued expenses and taxes 12,386 19,318
Other liabilities 50,086 10,227
Due to parent and affiliates--net 41,881 50,124
Interest maintenance reserve 18,140 31,414
Asset valuation reserve 28,409 20,033
------------ -----------
General account liabilities 4,199,129 4,026,055
------------ -----------
Unitized separate account
liabilities 4,057,759 3,715,473
Non-unitized separate account
liabilities 1,425,445 974,374
------------ -----------
9,682,333 8,715,902
------------ -----------
CAPITAL STOCK AND SURPLUS
Capital Stock--Par value $1,000:
Authorized 10,000 shares,
issued and outstanding 5,900
shares 5,900 5,900
Surplus 449,589 477,288
------------ -----------
Total capital stock and surplus 455,489 483,188
------------ -----------
$ 10,137,822 $ 9,199,090
------------ -----------
------------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
(IN 000'S)
INCOME
Premiums and annuity considerations $ 313,025 $ 469,157 $ 267,388
Annuity and other deposit funds 992,958 1,299,522 574,088
Net investment income 337,747 253,496 218,970
Amortization of interest maintenance
reserve 3,316 2,703 794
Realized losses on investments (6,166) (12,403) (10,677)
Expense allowance on reinsurance
ceded 0 8,475 10,030
Mortality and expense risk charges 52,338 42,981 33,681
Other income--net 33,377 46,102 23,746
----------- ----------- -----------
1,726,595 2,110,033 1,118,020
BENEFITS AND EXPENSES
Increase (decrease) in liability for
annuity and other deposit funds (69,542) 894,128 341,594
Increase in policy reserves 219,334 589,559 170,766
Death, surrender benefits, and
annuity payments 166,889 128,902 81,498
Annuity and other deposit fund
withdrawals 731,908 239,752 201,378
Transfers to non-unitized separate
account 455,688 28,070 125,944
----------- ----------- -----------
1,504,277 1,880,411 921,180
General expenses 32,231 24,170 21,778
Commissions 150,011 204,016 197,202
Dividends 22,928 8,074 7,145
Taxes, licenses and fees 4,649 4,180 6,096
----------- ----------- -----------
1,714,096 2,120,851 1,153,401
----------- ----------- -----------
Net income (loss) from operations
before surplus note interest and
equity in income of subsidiaries 12,499 (10,818) (35,381)
Surplus note interest (31,150) (26,075) (18,000)
----------- ----------- -----------
Net loss from operations before
equity in income of subsidiaries
and federal income tax (18,651) (36,893) (53,381)
Equity in income of subsidiaries 62,629 62,640 49,009
Federal income tax expense (42,521) (22,491) (4,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 1,457 $ 3,256 $ (8,372)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
(IN 000'S)
CAPITAL STOCK $ 5,900 $ 5,900 $ 5,900
PAID-IN SURPLUS 199,355 199,355 199,355
SURPLUS NOTES
Balance, beginning of year 335,000 265,000 180,000
Issued during year 0 70,000 85,000
--------- --------- ---------
Balance, end of year 335,000 335,000 265,000
--------- --------- ---------
UNASSIGNED SURPLUS
Balance, beginning of year (57,067) (57,485) (47,092)
Net income (loss) 1,457 3,256 (8,372)
Recapture (writedown) of goodwill (18,397) 0 5,132
Increase in non-admitted assets (1,485) (191) (788)
Unrealized loss on investments (671) (4,440) (9,357)
Earnings on and transfers of
separate account surplus (227) 117 0
Change in asset valuation reserve (8,376) 1,676 2,992
--------- --------- ---------
Balance, end of year (84,766) (57,067) (57,485)
--------- --------- ---------
TOTAL SURPLUS 449,589 477,288 406,870
--------- --------- ---------
TOTAL CAPITAL AND SURPLUS $ 455,489 $ 483,188 $ 412,770
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
(IN 000'S)
Cash flows from operating activities:
Net income (loss) from operations
before equity in income of
subsidiaries $ 12,499 $ (10,818) $ (35,381)
Adjustments to reconcile net income
(loss) to net cash:
Increase (decrease) in liability for
annuity and other deposit funds (69,542) 894,128 341,594
Increase in policy reserves 219,334 589,559 170,766
Increase in investment income due and
accrued (2,736) (21,746) (9,869)
Net accrual and amortization of
discount and premium on investments 7,272 5,911 2,770
Realized losses on investments 6,166 12,403 10,677
Increase in non-admitted assets (1,485) (191) (788)
Change in funds withheld on
reinsurance (199,826) (1,087,862) (244,439)
Other (71,746) 24,953 7,542
----------- ----------- ---------
Net cash (used in) provided by operating
activities (100,064) 406,337 242,872
----------- ----------- ---------
Cash flows from investing activities:
Proceeds from sale and maturity of
investments 1,596,851 1,173,345 535,495
Purchase of investments (1,491,159) (1,618,587) (889,399)
Net change in short-term investments (20,543) (38,782) 15,544
Dividends from subsidiaries 37,444 42,520 31,400
Investments in subsidiaries (4,894) (15,250) (6,000)
----------- ----------- ---------
Net cash provided by (used in) investing
activities 117,699 (456,754) (312,960)
----------- ----------- ---------
Cash flows from financing activities:
Interest paid on surplus notes (31,150) (26,075) (18,000)
Recapture of goodwill 0 0 5,132
Issue of surplus notes 0 70,000 85,000
----------- ----------- ---------
Net cash provided by (used in) financing
activities (31,150) 43,925 72,132
----------- ----------- ---------
Increase (decrease) in cash during the
year (13,515) (6,492) 2,044
Cash balance, beginning of year 2,056 8,548 6,504
----------- ----------- ---------
Cash balance, end of year $ (11,459) $ 2,056 $ 8,548
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1.__SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL--
Sun Life Assurance Company of Canada (U.S.) (the Registrant) is incorporated as
a life insurance company and is currently engaged in the sale of individual
fixed and variable annuities, group fixed and variable annuities and group
pension contracts. Sun Life Assurance Company of Canada (the parent company) is
a mutual life insurance company. The Registrant, which is domiciled in the State
of Delaware, prepares its financial statements in accordance with accounting
practices prescribed by the State of Delaware Insurance Department. Prescribed
accounting practices include 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 Registrant are not material to the financial
statements.
Assets in the balance sheets are stated at values prescribed or permitted to be
reported by state regulatory authorities. Bonds are carried at cost adjusted for
amortization of premium or accrual of discount. Investments in subsidiaries are
carried on the equity basis. Mortgage loans acquired at a premium or discount
are carried at amortized values and other mortgage loans at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost or
appraised value, adjusted for accumulated depreciation, less encumbrances.
Depreciation of buildings and improvements is calculated using the straight line
method over the estimated useful life of the property. 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. Furniture and equipment
acquisitions are capitalized but treated as nonadmitted assets. Furniture and
equipment depreciation is calculated on a straight line basis over the useful
life of the assets.
MANAGEMENT AND SERVICE CONTRACTS--
The Registrant has an agreement with its parent company which provides that the
parent company will furnish, as requested, personnel as well as certain services
and facilities on a cost reimbursement basis. Expenses under this agreement
amounted to approximately $18,452,000 in 1994, $13,883,000 in 1993, and
$11,049,000 in 1992.
REINSURANCE--
The Registrant has agreements with the parent company which provide that the
parent company will reinsure the mortality risks of the individual life
insurance contracts sold by the Registrant. 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
$2,138,000, $1,046,000, and $1,443,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
Effective January 1, 1991, the Registrant entered into an agreement with the
parent company under which 100% of certain fixed annuity contracts issued by the
Registrant were reinsured. Effective December 31, 1993 this agreement was
terminated. This agreement had the effect of decreasing income from operations
by approximately $9,930,000 in 1993 and $2,925,000 in 1992.
Effective January 1, 1991, the Registrant entered into an agreement with the
parent company under which certain individual life insurance contracts issued by
the parent company were reinsured by the Registrant on a 90% coinsurance basis.
Also, effective January 1, 1991, the Registrant entered into an agreement with
the parent company which provides that the parent company will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Registrant in the reinsurance
29
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1.__SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
agreement described above. Such death benefits are reinsured on a yearly
renewable term basis. These agreements had the effect of decreasing income from
operations by approximately $29,188,000, $43,591,000, and $68,357,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
The life reinsurance assumed agreement requires the reinsurer to withhold funds
in amounts equal to the reserves assumed.
The following are summarized pro-forma results of operations of the Registrant
for the years ended December 31, 1994, 1993 and 1992 before the effect of
reinsurance transactions with the parent company.
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
Income:
Premiums, annuity deposits and other
revenues $1,153,877 $ 856,045 $ 804,539
Net investment income and realized
gains 304,155 293,557 281,097
---------- ---------- ----------
1,458,032 1,149,602 1,085,636
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 1,283,749 1,020,319 966,091
Other expenses 130,457 85,575 82,201
---------- ---------- ----------
1,414,206 1,105,894 1,048,292
---------- ---------- ----------
Income from operations $ 43,826 $ 43,708 $ 37,344
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Registrant 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 $1,854,000 in 1994, decreasing
income by $390,000 in 1993 and increasing income by $237,000 in 1992.
SEPARATE ACCOUNTS--
The Registrant 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 values.
Deposits to all separate accounts are reported as increases in separate account
liabilities and are not reported as revenues. Mortality and expense charges and
surrender fees incurred by the separate accounts are included in income of the
Registrant.
The Registrant has 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.
Any difference between the net assets and reserves of the separate accounts is
treated as payable to or receivable from the general account of the Registrant.
Amounts payable to the general account of the Registrant were $138,255,000 in
1994 and $101,007,000 in 1993.
30
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1.__SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
OTHER--
Income on investments is recognized on the accrual method.
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.
Net income reported in the Registrant's statutory Annual Statement differs from
net income reported in these financial statements. Dividends from subsidiaries
are included in income and undistributed income (losses) of subsidiaries are
included as gains (losses) in unassigned surplus in the statutory Annual
Statement. Equity in income of subsidiaries is included in net income in these
financial statements.
Certain reclassifications have been made in the 1993 and 1992 financial
statements to conform to the classifications used in 1994.
2.__INVESTMENTS IN SUBSIDIARIES:
The Registrant owns all of the outstanding shares of Massachusetts Financial
Services Company (MFS), Sun Life Insurance and Annuity Company of New York (Sun
Life (N.Y.)), Sun Investment Services Company (Sunesco), Sun Benefit Services
Company, Inc. (Sunbesco), Massachusetts Casualty Insurance Company (MCIC), New
London Trust F.S.B. (NLT) and Sun Capital Advisers, Inc. (Sun Capital).
Effective January 1, 1994, The New London Trust Company acquired all of the
outstanding shares of Danielson Federal Savings and Loan Association of
Danielson, Connecticut. These two banks have been merged into a newly formed
federally chartered savings bank now called New London Trust, F.S.B.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds and certain mutual funds and separate accounts
established by the Registrant, and the MFS Asset Management Group provides
investment advice to substantial private clients. Clarendon Insurance Agency,
Inc., a wholly-owned subsidiary of MFS, serves as the distributor of certain
variable contracts issued by the Registrant and Sun Life (N.Y.). Sun Life (N.Y.)
is engaged in the sale of individual fixed and combination fixed/ variable
annuity contracts and group life and disability insurance contracts in the state
of New York. Sunesco is a registered investment adviser and broker-dealer.
Sunbesco provides administrative, claims and actuarial services to employee
benefits plans. MCIC is a life insurance company which issues only individual
disability income policies. Sun Capital, a registered investment adviser, and
Sunbesco are currently inactive.
In 1994, the Registrant reduced its carrying value of MCIC by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus.
During 1994, 1993 and 1992, the Registrant contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
MCIC $6,000,000 $6,000,000 $6,000,000
Sun Capital 0 250,000 0
New London Trust 0 9,000,000 0
</TABLE>
31
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
2.__INVESTMENTS IN SUBSIDIARIES (CONTINUED):
Summarized combined financial information of the Registrant's unconsolidated
subsidiaries as of December 31, 1994, 1993 and 1992 and for the years then ended
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Goodwill (net of amortization of $10,277,
$10,277 and $7,075) $ 0 $ 0 $ 3,202
Other intangible assets 13,485 14,891 17,298
Other assets, net of liabilities 121,321 112,332 92,492
--------- --------- ---------
Total net assets $ 134,806 $ 127,223 $ 112,992
--------- --------- ---------
--------- --------- ---------
Total income $ 495,097 $ 424,324 $ 429,180
Operating expenses (425,891) (355,679) (374,145)
Income tax expense (29,374) (24,507) (26,250)
--------- --------- ---------
Net income $ 39,832 $ 44,138 $ 28,785
--------- --------- ---------
--------- --------- ---------
</TABLE>
3.__STOCK, SURPLUS NOTES, CONTRIBUTIONS AND NOTE PAYABLE:
Prior to 1994, the Registrant issued to the parent a $70,000,000 surplus note
bearing interest at 7.25% per annum, a total of $180,000,000 of surplus notes
bearing interest at 10% per annum and $85,000,000 of surplus notes bearing
interest at 9.5% per annum. Included in these amounts are $70,000,000 and
$85,000,000 of surplus notes issued on December 31, 1993 and 1992, respectively.
Principal and interest on surplus notes are payable only to the extent that the
Registrant meets specified requirements as regards free surplus exclusive of the
principal amount and accrued interest, if any, on these notes; and, in the case
of principal repayments, with the consent of the Delaware Insurance
Commissioner. After December 31, 1993, interest payments require the consent of
the Delaware Insurance Commissioner. The Registrant expensed $31,150,000,
$26,075,000, and $18,000,000 in respect of interest on surplus notes for the
years 1994, 1993 and 1992, respectively.
32
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4.__BONDS:
The amortized cost, gross unrealized gains and losses, and estimated market
values of investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and
government agencies and authorities $ 444,100 $ 5,017 $ 11,010 $ 438,107
States, provinces and political
subdivisions 252 0 17 235
Foreign governments 20,965 147 187 20,925
Public utilities 458,839 11,414 11,619 458,633
Transportation 215,478 5,099 9,444 211,133
Finance 193,355 3,734 4,010 193,080
All other corporate bonds 1,055,455 15,785 31,171 1,040,069
---------- ---------- ---------- ----------
Total long-term bonds 2,388,444 41,196 67,458 2,362,182
Short-term bonds:
U.S. Treasury Bills, bankers
acceptances and commercial paper 82,708 0 0 82,708
---------- ---------- ---------- ----------
$2,471,152 $ 41,196 $ 67,458 $2,444,890
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and
government agencies and authorities $ 412,551 $ 22,436 $ 1,407 $ 433,580
States, provinces and political
subdivisions 252 20 0 272
Foreign governments 65,478 3,714 358 68,834
Public utilities 524,309 60,018 272 584,055
Transportation 232,012 30,132 441 261,703
Finance 208,200 18,838 131 226,907
All other corporate bonds 1,079,903 94,732 1,909 1,172,726
---------- ---------- ---------- ----------
Total long-term bonds 2,522,705 229,891 4,518 2,748,077
Short-term bonds:
U.S. Treasury Bills, bankers
acceptances and commercial paper 62,165 0 0 62,165
---------- ---------- ---------- ----------
$2,584,870 $229,891 $ 4,518 $2,810,242
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
33
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4.__BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1994 and
1993 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
(IN 000'S)
Maturities are:
Due in one year or less $ 209,875 $ 209,527
Due after one year through five years 953,222 930,578
Due after five years through ten years 319,858 311,360
Due after ten years 877,062 885,462
---------- ----------
$2,360,017 $2,336,927
Mortgage-backed securities 111,135 107,963
---------- ----------
$2,471,152 $2,444,890
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
(IN 000'S)
Maturities are:
Due in one year or less $ 139,693 $ 141,811
Due after one year through five years 792,203 819,545
Due after five years through ten years 539,943 575,868
Due after ten years 927,359 1,082,036
---------- ----------
$2,399,198 $2,619,260
Mortgage-backed securities 185,672 190,982
---------- ----------
$2,584,870 $2,810,242
---------- ----------
---------- ----------
</TABLE>
Long-term bonds at December 31, 1994 and 1993 included $20,000,000 of bonds
issued to the Registrant by MFS during 1987.
Bonds included above with an amortized cost of approximately $1,561,000 and
$1,523,000 at December 31, 1994 and 1993, respectively, were on deposit with
governmental authorities as required by law.
5.__MORTGAGE LOANS:
The Registrant invests in non-residential mortgage loans throughout the United
States. The return on and the ultimate recovery of these loans is generally
dependent on the successful operation, sale or refinancing of the real estate.
The Registrant employs a system to monitor the effects of current and expected
market conditions and other factors on the collectability of real estate loans.
When, in management's judgement, these assets are impaired, appropriate losses
are recorded. Such estimates necessarily include assumptions, which may often
include anticipated improvements in market conditions for real estate which may
or may not occur. The
34
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
5.__MORTGAGE LOANS (CONTINUED):
more significant assumptions management considers involve estimates of the
following: lease, absorption and sales rates; real estate values and rates of
return; operating expenses; inflation; and sufficiency of collateral independent
of the real estate including, in limited instances, personal guarantees.
Significant concentrations of mortgage loans in various states at amortized cost
were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
---------- -----------
(IN 000'S)
<S> <C> <C>
California $ 131,953 $ 144,615
Massachusetts 101,932 92,414
Pennsylvania 136,778 138,967
Ohio 79,478 85,700
Washington 90,422 88,241
Michigan 75,592 77,416
New York 93,178 81,132
All other 411,648 408,404
---------- -----------
$1,120,981 $1,116,889
---------- -----------
---------- -----------
</TABLE>
The Registrant has restructured mortgage loans totalling approximately
$43,381,000 and there are two loans in the process of foreclosure at December
31, 1994.
The Registrant has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $5,000,000 at
December 31, 1994.
6.__INVESTMENTS--GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
Realized gains (losses): 1994 1993 1992
------- -------- --------
(IN 000'S)
<S> <C> <C> <C>
Stocks $ 0 $ 445 $ 0
Bonds 0 0 107
Mortgage loans (5,689) (9,975) (10,089)
Real estate (334) (2,873) (695)
Other assets (143) 0 0
------- -------- --------
$(6,166) $(12,403) $(10,677)
------- -------- --------
------- -------- --------
Changes in unrealized gains (losses):
Bonds $ 0 $ 84 $ 740
Real estate (671) (4,113) (10,508)
Stocks 0 (411) 411
------- -------- --------
$ (671) $ (4,440) $ (9,357)
------- -------- --------
------- -------- --------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to
interest rate risk are charged or credited to an interest maintenance reserve
and amortized into income over the remaining historical life of the security
sold. The amounts charged were capital losses of $14,070,000 in 1994; the
amounts credited were capital gains of $40,993,000 and $12,715,000 in 1993 and
1992.
35
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
7.__INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $200,339 $204,405 $197,981
Interest income from mortgage loans 106,347 99,790 92,203
Interest income from policy loans 2,670 2,503 2,118
Real estate investment income 8,649 8,593 8,634
Interest income on funds withheld 30,741 19,420 7,894
Other 1,418 645 1,169
-------- -------- --------
Gross investment income 350,614 335,356 309,999
Investment expenses 12,417 12,679 11,125
Interest expense on funds withheld 0 69,181 79,904
-------- -------- --------
$337,747 $253,496 $218,970
-------- -------- --------
-------- -------- --------
</TABLE>
8.__DERIVATIVES:
Periodically, the Registrant uses derivative instruments for risk management
purposes, including the management of interest rate exposure and for
asset-liability immunization purposes. The Registrant's exposure to derivatives
has included U.S. Treasury note futures and interest rate and currency swap
agreements structured as forward spread lock contracts.
The strategy in utilizing interest rate futures is to hedge against interest
rate risk and to match investment maturities with insurance liabilities. The
futures contracts are marked to market daily. Gains and 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, deferred gains or losses are amortized over the remaining life of the
hedged assets. At December 31, 1994, the notional principal amounts outstanding
are $100,093,000.
The forward spread lock contracts protect the Registrant against the gap between
corporate and treasury interest rates for reinvestment risk purposes. Interest
rate and currency swap agreements are also used solely for the purpose of
minimizing the Registrant's exposure to fluctuations in interest rates and
foreign currency exchange rates. Gains and losses on spread lock transactions
are deferred until the swap has been terminated or completed. At that time, the
deferred gains or losses are amortized over the remaining life of the hedged
asset. The notional principal amounts of swaps outstanding at December 31, 1994,
are $99,905,000. The counterparties to hedge agreements are major financial
institutions and management believes that the risk of incurring losses related
to credit risk is remote. The estimated fair value of the Registrant's open swap
agreements at December 31, 1994, shows a potential amount due to counterparties
of $94,867.
9.__LEVERAGED LEASES:
The Registrant is a lessor in a leveraged lease agreement entered into in
October, 1994 under which a fleet of rail cars having an estimated economic life
of 25-40 years was leased for a term of 9.75 years. The Registrant's equity
investment represented 22.9% of the purchase price of the railcar equipment. The
balance of the purchase price was furnished by third party long-term debt
financing, secured by the rail equipment and non-recourse to the Registrant. The
Master Lessee's obligations under the lease are
36
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
9.__LEVERAGED LEASES (CONTINUED):
unconditionally guaranteed by a third party. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment. If such option is not exercised, the Registrant has the right to
require the Master Lessee to manage the fleet for 20 years. For federal income
tax purposes, the Registrant has the benefit of tax deductions for depreciation
on the entire leased asset and for interest on the long-term debt. Since during
the early years of the lease those deductions exceed the lease rental income,
substantial excess deductions are available to be applied against the
Registrant's other income. In later years, when rental income exceeds
deductions, taxes will be payable.
The Registrant's net investment in leveraged leases at December 31, 1994, is
composed of the following elements:
<TABLE>
<CAPTION>
(IN 000'S)
<S> <C>
Lease contracts receivable $ 121,716
Less non-recourse debt (121,699)
----------
17
Estimated residual value of leased assets 41,150
Less unearned and deferred income (15,292)
----------
Investment in leveraged leases 25,875
Less fees (237)
----------
Net investment in leveraged leases $ 25,638
----------
----------
</TABLE>
Such amount is classified as other invested assets in the accompanying balance
sheets.
10.__LOAN-BACKED AND STRUCTURED SECURITIES (CMO'S):
Loan-backed and structured securities are recorded at purchase cost with the
discount or premium amortized over the full term to maturity as an adjustment to
investment income. This results in the recognition of a constant rate of return
equal to the prevailing rate at the time of purchase.
The NAIC's Accounting Practices and Procedures Task Force has adopted new
accounting requirements which became effective January 1, 1995. This will
require that securities be revalued using prepayment assumptions resulting from
annual or quarterly review of prepayment experience. The effective yield on the
new basis is calculated using anticipated cash flows of the security based on an
assumption of prepayment rates of the underlying loans.
As of December 31, 1994, the Registrant had not yet determined which of two
acceptable adjustment methods (prospective or retrospective) would be
implemented for each security type when revaluing these investments. The impact
on investment income is not, however, expected to be significant under either
method.
37
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
11.__WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
Withdrawal characteristics of general account and separate account annuity
reserves and deposits:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------
AMOUNT % OF TOTAL
---------- ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal--with adjustment
-- with market value adjustment $3,083,623 35.98%
-- at book value less surrender charges
(surrender charge > 5%) 2,915,460 34.02
-- at book value (minimal or no charge or
adjustment) 1,252,843 14.62
Not subject to discretionary withdrawal provision 1,318,092 15.38
---------- ----------
Total annuity actuarial reserves and deposit
liabilities $8,570,018 100.00%
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------
AMOUNT % OF TOTAL
---------- ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal -- with
adjustment
-- with market value adjustment $2,429,921 30.67%
-- at book value less surrender charges
(surrender charge > 5%) 2,584,520 32.62
-- at book value (minimal or no charge or
adjustment) 1,506,264 19.01
Not subject to discretionary withdrawal provision 1,402,856 17.70
---------- ----------
Total annuity actuarial reserves and deposit
liabilities $7,923,561 100.00%
---------- ----------
---------- ----------
</TABLE>
12.__RETIREMENT PLANS:
The Registrant participates with its parent company in a non-contributory
defined benefit pension plan covering essentially all employees. The benefits
are based on years of service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA. The Registrant is charged
for its share of the pension cost based upon its covered participants. Pension
plan assets consist principally of an immediate participation guaranteed
investment contract issued by the parent company.
On January 1, 1994, the Registrant adopted Statement of Financial Accounting
Standards No. 87, "Employers Accounting for Pensions." As a result, the net
pension expense was $417,000 in 1994. There was no pension expense in 1993 and
1992.
38
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
12.__RETIREMENT PLANS (CONTINUED):
The following table sets forth the pension plan's funded status (for the parent
company and its participating subsidiaries and affiliates), as well as the
Registrant's share at December 31, 1994:
<TABLE>
<CAPTION>
TOTAL
PENSION REGISTRANT'S
PLAN SHARE
--------- ------------
(IN 000'S)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations, including
vested benefits of $(38,157) and $(1,662) $ (39,686) $ (1,741)
--------- ------------
--------- ------------
Projected benefit obligations for service
rendered to date (53,494) (3,205)
Plan assets at fair value 101,833 1,935
--------- ------------
Difference between assets and projected
benefit obligation 48,339 (1,270)
Unrecognized net loss since January 1, 1994 (1,238) (22)
Unrecognized net asset/liability at January
1, 1994, being recognized over 17 years (32,898) 875
--------- ------------
(Accrued) Prepaid pension cost included in
other assets $ 14,203 $ (417)
--------- ------------
--------- ------------
</TABLE>
The components of the 1994 pension cost for the pension plan, as well as the
Registrant's share were:
<TABLE>
<CAPTION>
TOTAL
PENSION REGISTRANT'S
PLAN SHARE
-------- ------------
(IN 000'S)
<S> <C> <C>
Service cost $ 2,847 $ 272
Interest cost 3,769 225
Actual return on plan assets (8,294) (156)
Net amortization and deferral (817) 76
-------- -----
Net pension cost (income) $ (2,495) $ 417
-------- -----
-------- -----
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.5% and 4.5%, respectively. The expected long-term rate of return on assets was
7.5%.
The Registrant also participates with its parent and certain affiliates in a
401(k) savings plan for which substantially all employees are eligible. The
Registrant matches, up to specified amounts, employees' contributions to the
plan. Employer contributions were $152,000, $124,000 and $87,000 for the years
ended December 31, 1994, 1993, and 1992, respectively.
13.__OTHER POST-RETIREMENT BENEFIT PLANS:
In addition to pension benefits the Registrant 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 Registrant,
or retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
Effective January 1, 1993, the Registrant adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers Accounting for Post-retirement
Benefits other than Pensions." SFAS No. 106 requires
39
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
13.__OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED):
the Registrant to accrue 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 Registrant has elected to
recognize this obligation of approximately $400,000 over a period of ten years.
The Registrant's cash flows are not affected by implementation of this standard,
but implementation decreased net income by $114,000 in 1994 and $120,000 in
1993. The Registrant's post-retirement health care plans currently are not
funded.
The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Registrant's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- ----------
(IN 000'S)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $ 0 $ 0
Fully eligible active plan participants 0 0
Other active plan participants (444) (480)
----- -----
Total (444) (480)
Plan assets at fair value 0 0
----- -----
Accumulated post-retirement benefit obligation in
excess of plan assets (444) (480)
Unrecognized gains from past experience (110) 0
Unrecognized transition obligation 320 360
----- -----
Accrued post-retirement benefit cost $ (234) $ (120)
----- -----
----- -----
Net periodic post-retirement benefit cost components:
Service cost--benefits earned $ 49 $ 44
Interest cost on accumulated post-retirement benefit
obligation 33 36
Amortization of transition obligation 40 40
Net amortization and deferral (8) 0
----- -----
Net periodic post-retirement benefit cost $ 114 $ 120
----- -----
----- -----
</TABLE>
The discount rate used in determining the accumulated post-retirement benefit
obligation was 8.0% and the assumed health care cost trend rate was 12.0% graded
to 6% over 10 years after which it remains constant.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the post-retirement
benefit obligation as of December 31, 1994 by $111,000 and the estimated service
and interest cost components of the net periodic post-retirement benefit cost
for 1994 by $22,000.
Since substantially all services to the Registrant are provided by employees of
Sun Life Assurance Company of Canada pursuant to the service agreement, their
benefits are covered under the parent company's plan.
40
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
14.__FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and fair values of the
Registrant's financial instruments at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $2,471,152 $2,444,890
Mortgages 1,120,981 1,107,012
Derivatives relating to assets* 200,000 199,999
LIABILITIES
Insurance reserves $ 129,302 $ 129,302
Individual annuities 475,557 476,570
Pension products 2,772,618 2,668,382
<CAPTION>
DECEMBER 31, 1993
-----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $2,584,870 $2,810,242
Mortgages 1,116,889 1,162,549
Derivatives relating to assets* 100,000 99,787
LIABILITIES
Insurance reserves $ 123,711 $ 123,711
Individual annuities 637,877 645,244
Pension products 2,035,265 2,130,236
<FN>
*Represents off-balance sheet notional amounts pertaining to interest rate
futures and interest rate and current swap agreements.
</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
using prices for publicly traded bonds of similar credit risk and maturity and
repayment characteristics.
The fair values of the Registrant's general account 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.
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.
41
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 gains and losses on bonds and mortgages, which relate to interest rate
risk, are charged to an interest maintenance reserve (IMR) and amortized into
income over the remaining historical life of the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1994 1993
----------------- ------------------
AVR IMR AVR IMR
------- ------- ------- --------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $20,033 $31,414 $21,709 $ 7,471
Realized investment gains (losses),
net of tax (1,320) (9,146) (8,432) 26,646
Amortization of investment (gains)
losses 0 (4,128) 0 (2,703)
Unrealized investment gains
(losses) (3,537) 0 (5,351) 0
Required by formula 13,233 0 12,107 0
------- ------- ------- --------
Balance, end of year $28,409 $18,140 $20,033 $ 31,414
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
16.__FEDERAL INCOME TAXES:
The Registrant 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 $43,200,000, $25,000,000 and
$12,000,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
17.__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
Registrant has met the minimum risk-based capital requirements for 1994 and
1993.
18.__NEW ACCOUNTING PRONOUNCEMENT:
In April, 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual LIfe Insurance and Other Enterprises." Under this
interpretation, annual financial statements of mutual life insurance enterprises
for fiscal years beginning after December 15, 1992, shall provide a brief
description that financial statements prepared on the basis of statutory
accounting practices will no longer be described as prepared in conformity with
generally accepted accounting principles. In January, 1995, Statement of
Financial Accounting Standards No. 120 (SFAS No. 120) "Accounting and Reporting
by Mutual Life Insurance Enterprises for Certain Long Duration Participating
Contracts" was issued. SFAS No. 120 delays the effective date of Interpretation
No. 40 until fiscal years beginning after December 15, 1995.
42
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
18.__NEW ACCOUNTING PRONOUNCEMENT (CONTINUED):
The Registrant has not yet determined whether it will continue to file statutory
financial statements with the Securities and Exchange Commission as permitted by
Regulation S-X, Rule 7-02(b) or file financial statements prepared in accordance
with all applicable authoritative accounting pronouncements that define
generally accepted accounting principles for all enterprises.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
WELLESLEY HILLS, MASSACHUSETTS
We have audited the accompanying balance sheets of Sun Life Assurance Company of
Canada (U.S.) (wholly-owned subsidiary of Sun Life Assurance Company of Canada)
as of December 31, 1994 and 1993, and the related statements of operations,
capital stock and surplus, and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Registrant's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Registrant as of December 31, 1994 and
1993, and the results of its operations, its capital stock and surplus and its
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 31, 1995
43
<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 law.
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.
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 Contract 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 borne by the Company in connection
with Fixed Account Contracts. The Company expects to derive a profit from this
compensation. The amount of such 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.
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).
44
<PAGE>
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
The 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.
LOANS FROM THE FIXED ACCOUNT (QUALIFIED CONTRACTS ONLY)
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)
UNDER QUALIFIED CONTRACTS ONLY. 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.
45
<PAGE>
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 EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net assets attributable to the Contracts of a particular
Variable Account at the end of the preceding Valuation Period are
$111,234,567.89; the investment income and capital gains credited to such assets
of the Variable Account in the Valuation Period are $434,782.61; the capital
losses charged against such assets of the Variable Account in the Valuation
Period are $63,778.99; and the expenses are $10,634.77. The net investment
factor is then (111,234,567.89 + 434,782.61 - 63,778.99 -10,634.77) DIVIDED BY
111,234,567.89, or 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 Contract is credited with
8,765.4321 Variable Accumulation Units of a particular Variable Account but is
not credited with any Fixed Accumulation Units; that the Variable Accumulation
Unit value and the Annuity Unit value for the particular Variable 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).
APPENDIX C
WITHDRAWALS AND WITHDRAWAL CHARGES--COMPASS 2 CONTRACTS
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 fee withdrawal amount would be $200, $400, $600, $800,
and $1,000 in Contract Years 1, 2, 3, 4, and 5, respectively; these amounts are
determined as 10% of the new Payments (as new Payments are defined in each
Contract Year).
In years after the 5th, the maximum free withdrawal amount will be increased
by any old Payments which have not already been liquidated. Continuing the
example, consider a partial withdrawal of $4,500 made during the 7th Contract
Year. Let us consider this withdrawal under two sets of circumstances, first
where there were no previous partial withdrawals, and second where there had
been an $800 cash withdrawal payment made in the 5th Contract Year.
46
<PAGE>
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 to 7.
Because the $4,500 partial withdrawal is less than the maximum free
withdrawal amount of $5,000, no withdrawal charge would be imposed.
This withdrawal would liquidate the Purchase Payments which were made in
Contract Years 1 and 2, and would liquidate $500 of the Purchase Payment
which was made in Contract Year 3.
2. In the second instance, an $800 cash withdrawal payment had been
made in the 5th Contract Year. Because the cash withdrawal payment was less
than the $1,000 maximum free withdrawal amount in the 5th Contract Year, no
surrender charge would have been imposed. The $800 cash withdrawal payment
would have liquidated $800 of the Purchase Payment in the 1st Contract Year.
As a consequence, the maximum free withdrawal amount in the 7th Contract
Year is only $4,200, consisting of $3,200 in old Payments ($1,200 remaining
from year 1 and $2,000 from year 2) and $1,000 as 10% of new Payments. A
$4,500 partial withdrawal exceeds the maximum free withdrawal amount by
$300. Therefore the amount subject to a 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 cancelled Accumulation Units.
This withdrawal would liquidate the remaining $1,200 from the Purchase
Payment in Contract Year 1, the full $2,000 Purchase Payment from Contract
Year 2, and $1,300 of the Payment from Contract Year 3.
Suppose that the Owner of the Contract wanted to make a full surrender of
the Contract in year 7 instead of a $4,500 partial withdrawal. The consequences
would be as follows:
1. In the first instance, where there were no previous cash withdrawal
payments, we know from above that the maximum free withdrawal amount in the
7th Contract year is $5,000. The sum of the old and new Payments not
previously liquidated is $14,000 ($2,000 from each Contract Year). The
amount subject to 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 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.
WITHDRAWALS AND WITHDRAWAL CHARGES -- COMPASS 3 CONTRACTS
This example assumes that the date of the full surrender or partial
withdrawal is during the 9th Contract Year.
<TABLE>
<CAPTION>
1 2 3 4 5 6
- --- ------- ------ ------- --- --------
<S> <C> <C> <C> <C> <C>
1 $ 1,000 $1,000 $ 0 0% $ 0
2 1,200 1,200 0 0 0
3 1,400 1,280 120 3 3.60
4 1,600 0 1,600 4 64.00
5 1,800 0 1,800 4 72.00
6 2,000 0 2,000 5 100.00
7 2,000 0 2,000 5 100.00
8 2,000 0 2,000 6 120.00
9 2,000 0 2,000 6 120.00
------- ------ ------- --------
$15,000 $3,480 $11,520 $ 579.60
------- ------ ------- --------
------- ------ ------- --------
</TABLE>
47
<PAGE>
EXPLANATION OF COLUMNS IN TABLE
COLUMNS 1 AND 2:
Represent Purchase Payments ("Payments") and amounts of Payments. Each
Payment was made on the first day of each Contract Year.
COLUMNS 3:
Represents the amounts that may be withdrawn without the imposition of
withdrawal charges, as follows:
a) Payments 1 and 2, $1,000 and $1,200, respectively, have been
credited to the Contract for more than seven years.
b) $1,280 of Payment 3 represents 10% of Payments that have been
credited to the Contract for less than seven years. The 10% amount is
applied to the oldest unliquidated Payment, then the next oldest and so
forth.
COLUMN 4:
Represents the amount of each Payment that is subject to a withdrawal
charge. It is determined by subtracting the amount in Column 3 from the Payment
in Column 2.
COLUMN 5:
Represents the withdrawal charge percentages imposed on the amounts in
Column 4.
COLUMN 6:
Represents the withdrawal charge imposed on each Payment. It is determined
by multiplying the amount in Column 4 by the percentage in Column 5.
For example, the withdrawal charge imposed on Payment 8
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 x 6%
= $120
FULL SURRENDER:
The total of Column 6, $579.60, represents the total amount of withdrawal
charges imposed on Payments in this example.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated
reflects the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4, and 5) were
withdrawn, the amount of the withdrawal charges imposed would be the sum of
amounts in Column 6 for Payments 1, 2, 3, 4 and 5 which is $139.60.
48
<PAGE>
APPENDIX D
OPTIONS AND FUTURES
A discussion of options, Futures Contracts, Options on Futures Contracts,
Forward Foreign Currency Contracts and options on foreign currencies follows.
OPTIONS ON SECURITIES--A call option written by an Account will be covered
(i) through ownership of the security underlying the option or through ownership
of an absolute and immediate right to acquire such security upon conversion or
exchange of other securities held in its portfolio; or (ii) in such other manner
as may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. A put option will be covered through
(i) segregation in a segregated account held by the custodian of cash,
short-term U.S. government securities or money market instruments or high
quality debt securities in an amount equal to the exercise price of the option;
or (ii) in such other manner as may be in accordance with the requirements of
the exchange on which the option is traded and applicable laws and regulations.
Effecting a closing transaction in the case of a written call option will
permit an Account to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit an Account to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Such transactions permit an Account to generate
additional premium income, which will partially offset declines in the value of
portfolio securities or increases in the cost of securities to be acquired.
Also, effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
investments, provided that another option on such security is not written. If an
Account desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction in connection with
the option prior to or concurrent with the sale of the security.
An Account will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by it is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by it is more than the
premium paid for the original purchase. Conversely, an Account will suffer a
loss if the premium paid or received in connection with a closing transaction is
more or less, respectively, than the premium received or paid in establishing
the option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by an
Account is likely to be offset in whole or in part by appreciation of the
underlying security owned by an Account.
An Account may write options in connection with buy-and-write transactions;
that is, an Account may purchase a security and then write a call option against
that security. The exercise price of the call option will depend upon the
expected price movement of the underlying security. The exercise price of a call
option may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the time
the option is written. If the call options are exercised in such transactions,
the Account's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Account's
purchase price of the security and the exercise price. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options could be used by an
Account in the same market environments that call options would be used in
equivalent buy-and-write transactions.
An Account may write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, an Account
undertakes a simultaneous obligation to sell and purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Account will be required to sell the underlying
49
<PAGE>
security at a below market price. This loss may be offset, however, in whole or
in part, by the premiums received on the writing of the two options. Conversely,
if the price of the security declines by a sufficient amount, the put will
likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of a security remains stable and neither the
call nor the put is exercised. In an instance where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, an Account limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, an Account assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a loss unless the security
subsequently appreciated in value. The writing of options on securities by CAVA,
WGVA and MSVA, therefore, will not be undertaken by an Account solely for
hedging purposes, and could involve certain risks which are not present in the
case of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
An Account also may purchase put and call options on securities. Put options
would be purchased to hedge against a decline in the value of the securities
held in its portfolio. If such a decline occurs, the put options will permit an
Account to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Account will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and related transaction costs. An
Account may purchase call options to hedge against an increase in the price of
securities that the Account anticipates purchasing in the future. If such an
increase occurs, the call option will permit the Account to purchase the
securities at the exercise price or to close out the option at a profit. The
premium paid for a call or put option plus any transaction costs will reduce the
benefit, if any, realized by the Account upon exercise of the option, and,
unless the price of the underlying security rose or declined sufficiently, the
option may expire worthless to the Account.
OPTIONS ON INDEXES--An Account will cover call options on indexes by owning
securities whose price changes, in the opinion of MFS, are expected to be
similar to those of the index, or in such other manner as may be in accordance
with the rules of the exchange on which the option is traded and applicable laws
and regulations. Nevertheless, where an Account covers a call option on an index
through ownership of securities, such securities may not match the composition
of the index. In that event, the Account will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. An Account will cover put options on indexes by segregating assets equal
to the option's exercise price, or in such other manner as may be in accordance
with the rules of the exchange on which the option is traded and applicable laws
and regulations.
An Account will receive a premium from writing a put or call option, which
increases its gross income in the event the option expires unexercised or is
closed out at a profit. If the value of an index on which an Account has written
a call option falls or remains the same, the Account will realize a profit in
the form of the premium received (less transaction costs) that could offset all
or a portion of any decline in the value of the securities it owns. If the value
of the index rises, however, the Account will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Account's stock investments. By writing a put option, an Account assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by the Account correlate with changes in the value of the
index, writing covered put options on indexes will increase the Account's losses
in the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The purchase of call options on indexes may be used by an Account to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when an Account holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Account will also bear the risk of losing all or a portion of
the premium paid, and related transaction costs, if the value of the index does
not rise. The purchase of call options on
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indexes when the Account is substantially fully invested is a form of leverage,
up to the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Account owns.
An Account also may purchase put options on indexes to hedge its investments
against a decline in value. By purchasing a put option on an index, an Account
will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Account's investments does
not decline as anticipated, or if the value of the option does not increase, the
Account's loss will be limited to the premium paid for the option, plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Account's security holdings.
FUTURES CONTRACTS--CAVA, GSVA, WGVA and MSVA may enter into interest rate or
stock index futures contracts ("Futures Contracts") in order to protect the
Account's current or intended investments from broad fluctuations in interest
rates or stock prices. WGVA may also enter into foreign currency futures
contracts.
For example, an Account may sell Futures Contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Account's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or in
part, by gains on the futures position. When an Account is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase Futures Contracts in order to gain rapid market exposure that may, in
part or in whole, offset increases in the cost of securities that the Account
intends to purchase. As such acquisitions are made, the corresponding positions
in Futures Contracts will be closed out. In a substantial majority of these
transactions, an Account will purchase such securities upon the termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.
OPTIONS ON FUTURES CONTRACTS--The writing of a call Option on a Futures
Contract constitutes a partial hedge against declining prices of the securities
underlying the Futures Contract or of the securities comprising the index
underlying the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Account will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Account's portfolio holdings. The writing of a put Option
on a Futures Contract constitutes a partial hedge against increasing prices of
the securities underlying the Futures Contract or of the securities comprising
the index underlying the Futures Contract. If the futures price at expiration of
the option is higher than the exercise price, an Account will retain the full
amount of the option premium which provides a partial hedge against any increase
in the price of securities which an Account intends to purchase. If a put or
call option an Account has written is exercised, it will incur a loss which will
be reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Account's losses from existing
Options on Futures Contracts may to some extent be reduced or increased by
changes in the value of portfolio securities.
An Account will cover the writing of call Options on Futures Contracts
through purchases of the underlying Futures Contract, and will cover the writing
of put Options on Futures Contracts through sales of the underlying Futures
Contract. Options on Futures Contracts may also be covered in such other manner
as may be in accordance with the requirements of the exchange on which they are
traded and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by an Account, the Account will be required to
sell the underlying Futures Contract which, if the Account has covered its
obligation through the purchase of such Contract, will serve to liquidate its
futures position. Similarly, where a put Option on a Futures Contract written by
an Account is exercised, the Account will be required to purchase the underlying
Futures Contract which, if the Account has covered its obligation through the
sale of such Contract, will close out its futures position.
An Account may purchase Options on Futures Contracts for hedging purposes as
an alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, an Account could, in lieu
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of selling Futures Contracts, purchase put options thereon. In the event that
such decrease occurs, it may be offset, in whole or part, by a profit on the
option. Conversely, where it is projected that the value of securities to be
acquired by an Account will increase prior to acquisition, due to a market
advance, the Account could purchase call Options on Futures Contracts, rather
than purchasing the underlying Futures Contracts.
FORWARD CONTRACTS--CAVA, WGVA and MSVA may enter into contracts for the
purchase or sale of a specific currency at a future date at a price set at the
time the contract is entered into (a "Forward Contract") for hedging purposes
only. An Account will enter into Forward Contracts for the purpose of protecting
its current or intended investments from fluctuations in currency exchange
rates. A Forward Contract to sell a currency may be entered into, for example,
in lieu of the sale of a foreign currency futures contract where an Account
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio securities
denominated in such currency. Conversely, an Account may enter into a Forward
Contract to purchase a given currency to protect against a projected increase in
the dollar value of securities denominated in such currency which an Account
intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline in
the value of portfolio securities or the increase in the cost of securities to
be acquired may be offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, an Account may be
required to forego all or a portion of the benefits which otherwise could have
been obtained from favorable movements in exchange rates. The Accounts do not
presently intend to hold Forward Contracts entered into until maturity, at which
time they would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to fix the
Accounts' profit or loss based upon the value of the Contracts at the time the
offsetting transaction is executed.
Each of these Accounts has established procedures consistent with the
statements of the Securities and Exchange Commission concerning purchases of
foreign currency through Forward Contracts. Since those policies currently
require the use of "cover" or that assets of the Account equal to the amount of
the purchase be held aside or segregated in an account maintained by the
custodian to be used to pay for the commitment, each Account will always use
"cover" or have cash, cash equivalents or high quality debt securities available
sufficient to cover any commitments under these contracts or to limit any
potential risk.
OPTIONS ON FOREIGN CURRENCIES--WGVA may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be utilized.
All call options written on foreign currencies will be covered. A call option
written on a foreign currency is "covered" if WGVA owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by WGVA's custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if WGVA has a call on the same foreign currency and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by WGVA in cash and high grade U.S. government securities in a
segregated account with its custodian. Options on foreign currencies may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which they are traded and applicable laws and regulations.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH AN ACCOUNT'S
PORTFOLIO--An Account's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, options on foreign
currencies, Options on Futures Contracts and Forward Contracts will depend on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Account's
portfolio. Because the securities in the portfolio will most likely not be the
same as those securities underlying an index, the correlation between movements
in the portfolio and in the securities underlying the index will not be perfect.
The trading of
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Futures Contracts and options entails the additional risk of imperfect
correlation between movements in the futures or option price and the price of
the underlying index or obligation. The anticipated spread between the prices
may be distorted due to the differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. In this regard,
trading by speculators in such instruments has in the past occasionally resulted
in market distortions, which may be difficult or impossible to predict
particularly near the expiration of such contracts. It should be noted that
Futures Contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than options or
Futures Contracts based on a broad market index, because a narrower index is
more susceptible to rapid and extreme fluctuations as a result of changes in the
value of a small number of securities. The trading of Options on Futures
Contracts also entails the risk that changes in the value of the underlying
Futures Contracts will not be fully reflected in the value of the option.
Further, with respect to options on securities, options on indexes and Options
on Futures Contracts, an Account is subject to the risk of market movements
between the time that the option is exercised and the time of performance
thereunder. In writing a covered call option on a security, index or Futures
Contract, an Account also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. Transactions in
Forward Contracts or options on foreign currencies designed to hedge against
exposure arising from currency fluctuations will subject an Account to the risk
of imperfect correlation between changes in the value of the currencies
underlying the forwards or options and changes in the value of the currencies
being hedged.
An Account will invest in a hedging instrument only if, in the judgment of
MFS, there would be expected to be a sufficient degree of correlation between
movements in the value of the instrument and movements in the value of the
relevant portion of the Account's portfolio for such hedge to be effective.
There can be no assurance that MFS's judgment will be accurate, and, under
extraordinary market conditions, it may be impossible to hedge successfully.
It should also be noted that CAVA, WGVA and MSVA would be able to purchase
and write options on securities and indexes not only for hedging purposes, but
also for the purpose of increasing their return on portfolio securities. As a
result, in the event of adverse market movements, such Account might be required
to forfeit the entire amount of the premium paid for an option purchased, which
might not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. In addition, the method of
covering an option employed by an Account may not fully protect it against risk
of loss and, in any event, an Account could suffer losses on the option position
which might not be offset by corresponding portfolio gains.
With respect to the writing of straddles on securities, an Account would
incur the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting loss
will not be offset by the amount of the premiums received.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET--Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While an Account will enter into options or futures positions only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by an Account and the Account could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Account
had insufficient cash available to meet margin requirements, it might be
necessary to liquidate portfolio securities at a time when it would be
disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on an Account's ability
effectively to hedge its portfolio, and could result in trading losses. The
liquidity of a secondary market in a Futures Contract or options thereon may
also be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. The trading of Futures Contracts and options is
also subject to the risk of trading halts,
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suspensions, exchange or clearing house equipment failures government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
MARGIN--Because of low initial margin deposits made upon the opening of a
futures position and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. Because an
Account would engage in the purchase or sale of Futures Contracts and the
writing of Options on Futures Contracts solely for hedging purposes, however,
and to the extent that the Account would purchase and write options on
securities and indexes for hedging purposes, any losses incurred in connection
therewith should, if the hedging strategy is successful, be offset, in whole or
in part, by increases in the value of securities held by an Account or decreases
in the prices of securities the Account intends to acquire. If an Account were
to write options on securities or options on indexes for other than hedging
purposes, the margin requirements associated with such transactions could expose
the Account to greater risk.
TRADING AND POSITION LIMITS--The exchanges on which Futures Contracts and
options are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or in
concert with others (regardless of whether such contracts are held on the same
or different exchanges or held or written in one or more accounts or through one
or more brokers). In addition, the Commodity Futures Trading Commission ("CFTC")
and the various contract markets have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures or option contract.
An exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. MFS does not
believe that these trading and position limits will have any adverse impact on
the strategies for hedging the portfolio of an Account.
RISK OF OPTIONS ON FUTURES CONTRACTS--The amount of risk an Account assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying index or Futures Contract.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES--Transactions in Forward Contracts
are subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by an Account. In
addition, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies. Further, unlike trading in most other types of
instruments, there is no systematic reporting of last sale information with
respect to the foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be as
complete as the comparable data on which an Account makes investment and trading
decisions in connection with other transactions. Moreover, because the foreign
currency market is a global, twenty-four hour market, events could occur on that
market which would not be reflected in the forward markets until the following
day, thereby preventing an Account from responding to such events in a timely
manner. Settlements of exercises of Forward Contracts generally must occur
within the country issuing the underlying currency, which in turn requires
traders to accept or make delivery of such currencies in conformity with any
United States or foreign restrictions and regulations regarding the maintenance
of foreign banking relationships, fees, taxes or other charges.
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Forward Contracts, over-the-counter options on securities, and options on
foreign exchanges are not traded on contract markets regulated by the CFTC or
the Securities and Exchange Commission, but through financial institutions
acting as market-makers. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. In
addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Account's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Account.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and an Account could be required to retain
options purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit an Account's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses. Further, over-the-counter transactions are not subject to the
performance guarantee of an exchange clearing house, and an Account will
therefore be subject to the risk of default by, or the bankruptcy of, the
financial institution serving as its counterparty.
While Forward Contracts are not presently subject to regulation by the CFTC,
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, an Account's ability to utilize Forward Contracts in
the manner set forth above could be restricted.
Options on securities, options on indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on United States exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES--Regulations of the CFTC
require that an Account enter into transactions in Futures Contracts, Options on
Futures Contracts and other commodity options for hedging purposes only, in
order to assure that an Account will not be deemed to be a "commodity pool" as
defined in CFTC regulations. In addition, an Account may not purchase or sell
such instruments if, immediately thereafter, the sum of the amount of initial
margin deposits on existing Futures Contracts and Options on Futures Contracts,
and premiums paid for the purchase of such options, would exceed 5% of the
Account's total assets taken at market value.
The Board of Managers of each of CAVA, GSVA, WGVA and MSVA has adopted the
additional restriction that such Account will not enter into a Futures Contract
if, immediately thereafter, the value of securities and other obligations
underlying all such Futures Contracts would exceed 50% of the value of the
Account's total assets, taken at market value. Moreover, an Account will not
purchase put and call options if, as a result, more than 5% of its total assets
would be invested in such options.
When an Account purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Account's
custodian so that the amount so segregated will at all times equal the value of
the Futures Contract, thereby insuring that the use of such Futures Contract is
unleveraged.
The staff of the Securities and Exchange Commission ("SEC") has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities held by an Account, cannot exceed 10% of such
Account's assets. Although the investment adviser disagrees with this position,
the investment adviser intends to limit an Account's writing of over-the-counter
options in accordance with the following procedure. Except as provided below,
each Account which may write options intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts these Accounts have in
place with such primary dealers provide that the Account has the absolute right
to repurchase an option it writes at any time at a price which represents the
fair market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula generally is based on a
multiple of the premium received by the Account for writing the option, plus the
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amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. An Account will treat all or a
portion of the formula as illiquid for purposes of the 10% test imposed by the
SEC staff. Each Account which may write options may also write over-the-counter
options with non-primary dealers, including foreign dealers (where applicable),
and will treat the assets used to cover these options as illiquid for purposes
of such 10% test.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
HYVA may purchase loan participations and other direct claims against a
borrower. In purchasing a loan participation, the Account acquires some or all
of the interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans that are fully secured
offer the Account more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Account would assume all of the rights of the lending institution in a loan, or
as an assignment, pursuant to which the Account would purchase an assignment of
a portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Account may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by the Account may involve
revolving credit facilities or other standby financing commitments which
obligate the Account to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Account to increase its
investment in a company at a time when the Account might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Account is
committed to advance additional funds, it will at all times hold and maintain in
a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Account's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which the Account will purchase, the Adviser will rely
upon its (and not that of the original lending institution's) own credit
analysis of the borrower. As the Account may be required to rely upon another
lending institution to collect and pass on to the Account amounts payable with
respect to the loan and to enforce the Account's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay or
prevent the Account from receiving such amounts. In such cases, the Account will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to the
diversification of the Account's portfolio investments. The highly leveraged
nature of many such loans may make such loans especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans may involve
additional risks to the Account. For example, if a loan is foreclosed, the
Account could become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In addition,
it is conceivable that under emerging legal theories of lender liability, the
Account could be held liable as a co-lender. It is unclear whether loans and
other forms of direct indebtedness offer securities law protections against
fraud and misrepresentation. In the absence
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of definitive regulatory guidance, the Account relies on the Adviser's research
in an attempt to avoid situations where fraud or misrepresentation could
adversely affect the Account. In addition, loan participations and other direct
investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Account may be unable to sell such
instruments at an opportune time or may have to resell them at less than fair
market value. To the extent that the Adviser determines that any such
investments are illiquid, the Account will include them in the investment
limitations applicable to the Account.
SWAPS AND RELATED TRANSACTIONS
WGVA may enter into interest rate swaps, currency swaps and other types of
available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Account's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Account is
not limited to any particular form or variety of swap agreement if MFS
determines it is consistent with the Account's investment objective and
policies.
The Account will maintain cash or appropriate liquid assets with its
custodian to cover its current obligations under swap transactions. If the
Account enters into a swap agreement on a net basis (i.e., the two payment
streams are netted out, with the Account receiving or paying, as the case may
be, only the net amount of the two payments), the Account will maintain cash or
liquid assets with its Custodian with a daily value at least equal to the
excess. If any of the Account's accrued obligations under the swap agreement
over the accrued amount the Account is entitled to receive under the agreement.
If the Account enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Account's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Account would be less than what it would have been if these investment
techniques had not been used. If a swap agreement calls for payments by the
Account, the Account must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of the swap
agreement would be likely to decline, potentially resulting in losses. If the
counterparty defaults, the Account's risk of loss consists of the net amount of
payments that the Account is contractually entitled to receive. The Account
anticipates that it will be able to eliminate or reduce its exposure under these
arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
APPENDIX E
TRANSACTIONS IN SECURITIES OF REGULAR
BROKER-DEALERS AND THEIR AFFILIATES
During the year ended December 31, 1994 each of the Capital Appreciation
Variable Account ("CAVA"), Total Return Variable Account ("TRVA"), Managed
Sectors Variable Account ("MSVA"), High Yield Variable Account ("HYVA"), World
Governments Variable Account ("WGVA") and Money Market Variable Account ("MMVA")
purchased and sold and/or retained securities of their regular broker-dealers
and/or securities of affiliates of their regular broker-dealers, as follows:
[TO COME]
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
SUN LIFE ANNUITY SERVICE CENTER
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
600 Boylston Street
Boston, Massachusetts 02116
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
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PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS
(a) The Following Financial Statements are included in this Registration
Statement:
Included in Part A:
A. Condensed Financial Information--Per Accumulation Unit Income and Capital
Changes.
Included in Part B:
A. Financial Statements of Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account.*
1. Portfolios of Investments, December 31, 1994;
2. Statements of Assets and Liabilities, December 31, 1994;
3. Statements of Operations, Year Ended December 31, 1994;
4. Statements of Changes in Net Assets, Years Ended December 31, 1994 and
1993;
5. Notes to Financial Statements; and
6. Independent Auditors' Report.
B. Financial Statements of Sun Life Assurance Company of Canada (U.S.).
1. Balance Sheets, December 31, 1994 and December 31, 1993;
2. Statements of Operations, Years Ended December 31, 1994, 1993 and
1992;
3. Statements of Capital Stock and Surplus, Years Ended December 31,
1994, 1993 and 1992;
4. Statements of Cash Flows, Years Ended December 31, 1994, 1993 and
1992;
5. Notes to Financial Statements; and
6. Independent Auditors' Report.
* Incorporated herein by reference from the Registrants' Annual Report to
contract owners for the year ended December 31, 1994.
<PAGE>
(b) The following Exhibits are incorporated in this Registration Statement
by reference unless otherwise indicated:
(1) Resolution of the Board of Directors of the Insurance Company dated
July 21, 1982 authorizing the establishment of Money Market Variable Account
("MMVA"), High Yield Variable Account ("HYVA"), Capital Appreciation Variable
Account ("CAVA"), Government/Guaranteed Variable Account ("GGVA"), Government
Markets Variable Account ("GMVA"), Total Return Variable Account ("TRVA") and
Managed Sectors Variable Account ("MSVA") (collectively, the "Registrants")
(Filed as Exhibit 1 to the Registration Statements of the Registrants on Form
N-3 (File Nos. 33-19628 (MMVA), 33-19631 (HYVA), 33-19632 (CAVA), 33-19630
(GCVA), 33-19629 (GMVA), 33-19626 (TRVA) and 33-19627 (MSVA) (collectively, the
"Registration Statements")). MMVA, HYVA, CAVA and GGVA are referred to herein
collectively as the "Previous Registrants."
(2) (a) Rules and Regulations of the Previous Registrants (Filed as
Exhibits 2.4 to the Registration Statements of the Previous Registrants on Form
N-1 (File Nos. 2-79141 (MMVA), 2-79142 (HYVA), 2-79143 (CAVA) and 2-90805
(GGVA);
(b) Rules and Regulations of GMVA (Filed as Exhibit 2(b) to the
Registration Statements);
(c) Rules and Regulations of TRVA (Filed as Exhibit 2(c) to the
Registration Statements); and
(d) Rules and Regulations of MSVA (Filed as Exhibit 2(d) to the
Registration Statements);
(3) (a) Custodian Agreements between State Street Bank and Trust Company
and the Previous Registrants (Filed as Exhibits 8.1, 8.2 and 8.3 to Amendment
No. 1 to the Registration Statements of MMVA, HYVA and CAVA on Form N-1 and as
Exhibit 8 to the Registration Statement of GGVA on Form N-1);
(b) Custodian Agreement between State Street Bank and Trust Company
and GMVA (Filed as Exhibit 3(b) to Pre-effective Amendment No. 1 to the
Registration Statement of GMVA on Form N-3);
(c) Custodian Agreement between State Street Bank and Trust Company
and TRVA (Filed as Exhibit 3(c) to Pre-effective Amendment No. 1 to the
Registration Statement of TRVA on Form N-3); and
(d) Custodian Agreement between State Street Bank and Trust Company
and MSVA (Filed as Exhibit 3(d) to Pre-effective Amendment No. 1 to the
Registration Statement of MSVA on Form N-3);
<PAGE>
(4) (a) Investment Management Agreements between Massachusetts
Financial Services Company and the Previous Registrants (filed as Exhibits 5.1,
5.2 and 5.3 to Amendment No. 1 to the Registration Statements of MMVA, HYVA and
CAVA on Form N-1 and as Exhibit 5 to the Registration Statement of GGVA on Form
N-1);
(b) Investment Management Agreement between Massachusetts Financial
Services Company and GMVA (Filed as Exhibit 4(b) to Pre-effective Amendment No.
1 to the Registration Statement of GMVA on Form N-3);
(c) Investment Management Agreement between Massachusetts Financial
Services Company and TRVA (Filed as Exhibit 4(c) to Pre-effective Amendment No.
1 to the Registration Statement of TRVA on Form N-3); and
(d) Investment Management Agreement between Massachusetts Financial
Services Company and MSVA (Filed as Exhibit 4(d) to Pre-effective Amendment No.
1 to the Registration Statement of MSVA on Form N-3);
(5) (a) Marketing Coordination and Administrative Services Agreement
between the Insurance Company, Massachusetts Financial Services Company and
Clarendon Insurance Agency, Inc. dated July 22, 1982 (Filed as Exhibit 6.1 to
Amendment No. 6 to the Registration Statements of MMVA, HYVA and CAVA on Form
N-1 and as Exhibit 6.1 to the Registration Statement of GGVA on Form N-1);
(b)(i) Specimen Sales Operations and General Agent Agreement;
(b)(ii) Specimen Broker-Dealer Supervisory and Service Agreement;
(b)(iii) Specimen Registered Representatives Agent Agreement; (Filed
as Exhibits 6.2, 6.3 and 6.4, respectively, to the Registration Statements of
the Previous Registrants on Form N-1);
(6) Compass 3 Flexible Payment Deferred Combination Variable and Fixed
Annuity Contract (Filed as Exhibit 6 to Pre-effective Amendment No. 1 to the
Registration Statements of the Registrants on Form N-3);
(7) Form of Application used with the Compass 3 variable annuity contract
filed as Exhibit 6 (Filed as Exhibit 7 to Pre-effective Amendment No. 1 to the
Registration Statements of the Registrants on Form N-3);
(8) Certificate of Incorporation and By-laws of the Insurance Company
(Filed as Exhibits 1 and 2.1, respectively, to the Registration Statements of
the Previous Registrants on Form N-1);
<PAGE>
(9) Not Applicable;
(10) Not Applicable;
(11) Service Agreement between Sun Life Assurance Company of Canada and the
Insurance Company dated January 18, 1971 (Filed as Exhibit No. 9 to the
Registration Statements of the Previous Registrants on Form N-1);
(12) Opinion of David D. Horn, Esq. and Consent to its use as to the
legality of the securities being registered (Filed as Exhibit 12 to
Pre-effective Amendment No. 1 to the Registration Statements of the Registrants
on Form N-3);
(13) (a) Consent of Deloitte & Touche LLP (Filed herewith); and
(b) Consent of David D. Horn, Esq. (Filed herewith)
(14) None;
(15) Not Applicable;
(16) Not Applicable; and
(17) Financial Data Schedule meeting the requirements of Rule 483 under the
Securities Act of 1933.
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH INSURANCE COMPANY WITH REGISTRANTS
- ------------------ ---------------------- ---------------------
John D. McNeil Chairman and Director Chairman and Member,
150 King Street West Boards of Managers
Toronto, Ontario
Canada M5H 1J9
John R. Gardner President and Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
David D. Horn Senior Vice President Member, Boards of
One Sun Life Executive and General Manager Managers
Park and Director
Wellesley Hills, MA
02181
John S. Lane Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
<PAGE>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH INSURANCE COMPANY WITH REGISTRANTS
- ------------------ ---------------------- ---------------------
Richard B. Bailey Director None
500 Boylston Street
Boston, MA 02116
A. Keith Brodkin Director None
500 Boylston Street
Boston, MA 02116
M. Colyer Crum Director None
Harvard Business School
Soldiers Field Road
Boston, MA 02163
Angus A. MacNaughton Director None
950 Tower Lane
Metro Tower, Suite 1170
Foster City, CA 94404
Robert P. Vrolyk Vice President None
One Sun Life Executive and Actuary
Park
Wellesley Hills, MA
02181
Robert A. Bonner Vice President, None
One Sun Life Executive Pensions
Park
Wellesley Hills, MA
02181
Robert E. McGinness Vice President and Counsel None
One Sun Life Executive
Park
Wellesley Hills, MA
02181
S. Caesar Raboy Vice President, None
One Sun Life Executive Individual Insurance
Park
Wellesley Hills, MA
02181
C. James Prieur Vice President, Investments None
One Sun Life Executive
Park
Wellesley Hills, MA
02181
<PAGE>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH INSURANCE COMPANY WITH REGISTRANTS
- ------------------ ---------------------- ---------------------
L. Brock Thomson Vice President None
One Sun Life Executive and Treasurer
Park
Wellesley Hills, MA
02181
Bonnie S. Angus Secretary Secretary, Boards of
One Sun Life Executive Managers
Park
Wellesley Hills, MA
02181
ITEM 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY
No person is directly or indirectly controlled by Registrants.
Registrants are separate accounts of Sun Life Assurance Company of
Canada (U.S.), a wholly-owned subsidiary of Sun Life Assurance Company of
Canada. Massachusetts Financial Services Company, a wholly-owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), is the
investment adviser to the Registrants and Clarendon Insurance Agency, Inc.,
a wholly-owned subsidiary of Massachusetts Financial Services Company is
the general distributor of the contracts issued in connection with the
separate accounts.
The following is a list of all corporations directly or indirectly
controlled by or under common control with Sun Life Assurance Company of
Canada, showing the state or other sovereign power under the laws of which
each is organized and the percentage ownership of voting securities giving
rise to the control relationship:
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
Sun Life Assurance Company of Canada Canada 100%
- --------------------------------------------------------------------------------
Sun Life Assurance Company of Canada
(U.S.).................................... Delaware 100%
Sun Life Assurance Company of Canada
(U.K.) Limited ........................... United Kingdom 100%
Sun Life of Canada Investment Management
Limited .................................. Canada 100%
<PAGE>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
- --------------------------------------------------------------------------------
Sun Life of Canada Benefit Management
Limited .................................. Canada 100%
Spectrum Bullock Holdings, Inc.............. Canada 100%
The Prudential Group Assurance Company
of England............................... United Kingdom 100%
Sun Life Insurance and Annuity Company of
New York ................................. New York 0%**
Sun Investment Services Company ............ Delaware 0%**
Sun Benefit Services Company, Inc. ......... Delaware 0%**
Sun Growth Variable Annuity Fund, Inc. ..... Delaware 0%*
Massachusetts Financial Services Company ... Delaware 0%**
New London Trust, F.S.B................. Federally Chartered 0%**
Massachusetts Casualty Insurance Company.... Massachusetts 0%**
Clarendon Insurance Agency, Inc. ........... Massachusetts 0%***
MFS Service Center, Inc..................... Delaware 0%***
MFS/Sun Life Series Trust .................. Massachusetts 0%****
Lifetime Advisers, Inc. .................... Delaware 0%***
MFS Financial Services, Inc. ............... Delaware 0%***
Sun Capital Advisers, Inc. ................. Delaware 0%**
MFS International, Ltd. .................... Ireland 0%***
MFS Asset Management, Inc. ................. Delaware 0%***
MFS Fund Distributors, Inc. ................ Delaware 0%***
MFS Retirement Services, Inc. .............. Delaware 0%***
- --------------
* 100% of the issued and outstanding voting securities of Sun Growth Variable
Annuity Fund, Inc. are owned by separate accounts of Sun Life Assurance
Company of Canada (U.S.).
** 100% of the issued and outstanding voting securities of Massachusetts
Financial Services Company, New London Trust, F.S.B., Sun Life Insurance
and Annuity Company of New York, Sun Investment Services Company, Sun
Benefit Services Company, Inc., Sun Capital Advisers, Inc. and
Massachusetts Casualty Insurance Company are owned by Sun Life Assurance
Company of Canada (U.S.).
*** 100% of the issued and outstanding voting securities of Clarendon Insurance
Agency, Inc., MFS Service Center, Inc., Lifetime Advisers, Inc., MFS
Financial Services, Inc., MFS International, Ltd., MFS Asset Management,
Inc., MFS Fund Distributors, Inc., and MFS Retirement Services, Inc. are
owned by Massachusetts Financial Services Company.
**** 100% of the issued and outstanding voting securities of MFS/Sun Life Series
Trust are owned by separate accounts of Sun Life Assurance Company of
Canada (U.S.) and Sun Life Insurance and Annuity Company of New York.
Omitted from the list are subsidiaries of Sun Life Assurance Company
of Canada which, considered in the aggregate, would not constitute a
"significant subsidiary" (as that term is defined in Rule 8b-2 under Section 8
of the Investment Company Act of 1940) of Sun Life Assurance Company of Canada.
<PAGE>
None of the companies listed is a subsidiary of the Registrants,
therefore the only financial statements being filed are those of Sun Life
Assurance Company of Canada (U.S.).
ITEM 31. NUMBER OF CONTRACT OWNERS (AS OF MARCH 31, 1995):
Number of
Contract Owners*
----------------------------
Qualified Non-Qualified
Registrant Contracts Contracts
- ---------- --------- -------------
Money Market Variable Account 4,433 2,570
High Yield Variable Account 3,477 1,783
Capital Appreciation Variable
Account 11,064 4,601
Government Securities Variable
Account 4,982 2,018
World Governments Variable Account 3,182 1,416
Total Return Variable Account 11,024 3,970
Managed Sectors Variable Account 6,038 2,522
- -----------------
* Number of Compass 3 Contracts participating in the investment experience of
the Variable Account.
ITEM 32. INDEMNIFICATION
Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of the
By-laws of Sun Life Assurance Company of Canada (U.S.), a copy of which was
filed as Exhibit 2.1 to Form N-1, provides for the indemnification of directors,
officers and employees of Sun Life Assurance Company of Canada (U.S.). At a
meeting held on October 21, 1982, the board of directors of Sun Life Assurance
Company of Canada (U.S.) adopted the following resolution with respect to
indemnification of the boards of managers of the Registrants.
"(a) Every person who is or was a member of the board of managers of any
separate account of this corporation shall have a right to be indemnified by
this corporation against all liability and reasonable expenses incurred by him
in connection with or resulting from any claim, action, suit or proceeding
in which he may become involved as a party or otherwise by reason of his being
or having been a member of the board of managers of any separate account of this
corporation, provided (1) said claim, action, suit or proceeding shall be
prosecuted to a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on the merits,
the board of directors shall determine that he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the separate accounts and/or the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful; said determination to be made by the board of directors acting through
a quorum of disinterested directors, or in its absence on the opinion of
counsel.
<PAGE>
(b) For purposes of the preceding subsection (a): (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel fees
and disbursements, amounts of any judgment, fine or penalty, and reasonable
amounts paid in settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether civil or criminal,
derivative or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or threat of
such a claim, action, suit or proceeding; (3) a settlement, plea of nolo
contendere, consent judgment, adverse civil judgment, or conviction shall not of
itself create a presumption that the conduct of the person seeking
indemnification did not meet the standard of conduct set forth in subsection
(a)(2) above.
(c) Notwithstanding the foregoing, the following limitations shall apply
with respect to any action by or in the right of the corporation: (1) no
indemnification shall be made in respect of any claim, issue or matter as to
which the person seeking indemnification shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court of Chancery or such other court
shall deem proper; and (2) indemnification shall extend only to reasonable
expenses, including reasonable counsel's fees and disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this resolution whether or not that person continues to be
a member of the board of managers of any separate account of this corporation at
the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the
requirements of this resolution with respect to some matters in a claim, action,
suit, or proceeding, but not with respect to others, he shall be entitled to
indemnification as the to former. Advances against liability and expenses may
be made by the corporation on terms fixed by the board of directors subject to
an obligation to repay if indemnification proves unwarranted.
(e) This resolution shall not exclude any other rights of indemnification
or other rights to which any member of the board of managers of any separate
account of the corporation may be entitled to by contract, vote of the
stockholders or as a matter of law. If any clause, provision or application of
this resolution shall be determined to be invalid, the other clauses, provisions
or applications of this section shall not be affected but shall remain in in
full force and effect. The
<PAGE>
provisions of this resolution shall be applicable to claims, actions, suits or
proceedings made or commenced after the adoption hereof, whether arising from
acts or omissions to act occurring before or after the adoption hereof.
(f) Nothing contained in this resolution shall be construed to protect any
member of the board of managers of any separate account of the corporation
against any liability to any separate account, the corporation or its security
holders to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office."
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of Sun
Life Assurance Company of Canada (U.S.) and to the boards of managers and
officers of the Registrants pursuant to the certificate of incorporation,
by-laws, or otherwise, Sun Life (U.S.) has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Sun Life (U.S.) or the Registrants of expenses incurred or paid by a
director, officer, controlling person of Sun Life (U.S.) or the Registrants in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Sun Life (U.S.) and/or the Registrants will, unless in the opinion
of their counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by them is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
<PAGE>
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS") serves as investment
adviser to the following open-end funds comprising the MFS Family of Funds:
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Mortgage Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has three series: MFS Managed Sectors Fund, MFS Cash Reserve Fund and MFS World
Asset Allocation Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Municipal Series Trust
(which has 19 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal
Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund,
MFS Georgia Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Texas Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS
West Virginia Municipal Bond Fund and MFS Municipal Income Fund) and MFS Series
Trust IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and
MFS Municipal Limited Maturity Fund) (the "MFS Funds"). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following no-load, open-end
funds: MFS Institutional Trust ("MFSIT") (which has two series), MFS Variable
Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust
("UST") (which has two series). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-end
funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust
and MFS Special Value Trust (the "MFS Closed-End Funds"). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") and Sun Growth Variable Annuity Fund, Inc. ("SGVAF").
The principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
<PAGE>
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of the Republic of Ireland and a subsidiary of MFS, whose principal
business address is 41-45 St. Stephen's Green, Dublin 2, Ireland, serves as
investment adviser to and distributor for MFS International Funds (which has
four portfolios: MFS International Funds-U.S. Equity Fund, MFS International
Funds-U.S. Emerging Growth Fund, MFS International Funds-International
Governments Fund and MFS International Fund-Charter Income Fund) (the "MIL
Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund,
MFS Meridian Money Market Fund and MFS Meridian U.S. Equity Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves
as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFS
Institutional Trust, MFS Variable Insurance Trust and MFS Union Standard Trust.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS,
markets MFS products to retirement plans and provides administrative and record
keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, James E. Russell is a Senior Vice President and the Treasurer,
Stephen E. Cavan is a Senior Vice President, General Counsel and an Assistant
Secretary, and Robert T. Burns is a Vice President and an Assistant Secretary of
MFS.
<PAGE>
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS GOVERNMENT MORTGAGE FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST VI
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is Assistant Treasurer, James R. Bordewick, Jr., Vice President and
Associate General Counsel of MFS, is Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and
James R. Bordewick, Jr., is Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost is Assistant Treasurer, and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson, Robert J.
Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice Presidents of MFS,
Bernard Scozzafava, Vice President of MFS, and Matthew Fontaine, Assistant Vice
President of MFS, are Vice Presidents, Sheila Burns-Magnan and Daniel E.
McManus, Assistant Vice Presidents of MFS, are Assistant Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is Assistant Treasurer, and James R. Bordewick, Jr., is Assistant
Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
<PAGE>
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie
J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr.,
Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer and
James R. Bordewick, Jr., is Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and David
R. King, Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant
Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS UNION STANDARD TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost and Karen C. Jordan
are Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, is Assistant Treasurer and James R.
Bordewick, Jr., is Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin, Leslie
J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W.
<PAGE>
Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is
Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Patricia
A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, and James O. Yost, is Assistant
Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the President, Arnold D. Scott, Jeffrey
L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is a Senior
Vice President and Managing Director, Thomas J. Cashman, Jr., a Vice President
of MFS, is a Senior Vice President, Stanley T. Kwok is a Vice President, Anthony
F. Clarizio is an Assistant Vice President, Stephen E. Cavan is a Director,
Senior Vice President and the Clerk, James R. Bordewick, Jr. is a Director,
Senior Vice President and an Assistant Clerk, Robert T. Burns is an Assistant
Clerk and James E. Russell is the Treasurer.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Arnold D. Scott
and Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary, and Ziad Malek is a Senior
Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Arnold D. Scott
and Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary and Ziad Malek is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L. Shames are
Directors, William W. Scott, Jr., an Executive Vice President of MFS, is the
President, Stephen E. Cavan is the Secretary, Robert T. Burns is the Assistant
Secretary, and James E. Russell is the Treasurer.
<PAGE>
CIAI
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L. Shames are
Directors, Cynthia Orcutt is President, Bruce C. Avery, Executive Vice President
of MFS, is the Vice President, James E. Russell is the Treasurer, Stephen E.
Cavan is the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L. Shames are
Directors, Joseph A. Recomendes, Senior Vice President of MFS, is the President,
James E. Russell is the Treasurer, Stephen E. Cavan is the Secretary, and Robert
T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, Leslie
J. Nanberg and Arnold D. Scott are Directors, Thomas J. Cashman is the President
and a Director, James E. Russell is the Treasurer and Robert T. Burns is the
Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery are
Directors, Arnold D. Scott is the Chairman, Douglas C. Grip, a Senior Vice
President of MFS, is the President, James E. Russell is the Treasurer, Stephen
E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary and Henry
A. Shea is an Executive Vice President.
<PAGE>
In addition, the following persons, Directors or Officers of MFS, have the
affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance
Company of Canada (U.S.)
One Sun Life Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance
and Annuity Company of New York
80 Broad Street, New York, New York
John R. Gardner President and Director, Sun Life
Assurance Company of Canada, 150 King Street,
West, Toronto, Ontario, Canada (Mr. Gardner is
also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman and Director,
Sun Life Assurance Company of Canada, 150 King
Street West, Toronto, Ontario, Canada (Mr.
McNeil is also an officer and/or Director of
various subsidiaries and affiliates of Sun Life)
ITEM 34. PRINCIPAL UNDERWRITERS
(a) Clarendon Insurance Agency, Inc., which is a wholly-owned subsidiary
of Massachusetts Financial Services Company, acts as general distributor for
Registrants, Sun Life of Canada (U.S.) Variable Accounts C, D, E and F and Sun
Life (N.Y.) Variable Accounts A, B and C.
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrants
- ----------------- --------------------- ---------------------
A. Keith Brodkin....... Chairman and Director None**
Arnold D. Scott........ Director None
Jeffrey L. Shames...... Director None
Cynthia M. Orcutt...... President None
Bruce C. Avery......... Vice President None
James E. Russell....... Treasurer None
Stephen E. Cavan....... Secretary and Clerk None
Robert T. Burns........ Assistant Secretary None
- -----------------
* The principal business address of all directors and officers of the
principal underwriter except Ms. Orcutt is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of Ms.
Orcutt is One Sun Life Executive Park, Wellesley Hills, Massachusetts
02181.
** Mr. Brodkin is a Director of Sun Life Assurance Company of Canada
(U.S.) and Sun Life Insurance and Annuity Company of New York.
<PAGE>
(c) Inapplicable.
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained by Sun Life Assurance Company of Canada (U.S.), in whole or in
part, at its executive office at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181, at the offices of Massachusetts Financial Services Company
at 500 Boylston Street, Boston, Massachusetts 02116, at the offices of Sun Life
Annuity Service Center at 50 Milk Street, Boston, Massachusetts 02109, or at
the offices of the custodian, State Street Bank and Trust Company, at either 225
Franklin Street, Boston, Massachusetts 02110 or 5-West, North Quincy,
Massachusetts 02171.
ITEM 36. MANAGEMENT SERVICES
Registrants assert that all management-related service contracts have been
described in the Prospectus or Statement of Additional Information.
ITEM 37. UNDERTAKINGS
(a)(b)(c)(d) Inapplicable.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrants and have caused this amendment to the Registration
Statement to be signed on their behalf in the Town of Wellesley and
Commonwealth of Massachusetts on the 26th day of April, 1995.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
World Governments Variable Account
Total Return Variable Account
Managed Sectors Variable Account
(Registrants)
By: /s/ BONNIE S. ANGUS
-------------------------------
Bonnie S. Angus, Secretary
Boards of Managers
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF
1940, SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) HAS CAUSED THIS AMENDMENT TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF IN THE TOWN OF WELLESLEY
AND COMMONWEALTH OF MASSACHUSETTS ON THE 26TH DAY OF APRIL, 1995.
Sun Life Assurance Company of Canada (U.S.)
By:* /s/ JOHN D. MCNEIL
--------------------------------
John D. McNeil, Chairman
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following persons in the capacities with
the Registrants and on the dates indicated.
Signatures Title Date
---------- ----- ----
Chairman and
Member of the
* /s/ JOHN D. MCNEIL Boards of Managers April 26, 1995
- ---------------------------
John D. McNeil
Member of the
* /s/ SAMUEL ADAMS Boards of Managers April 26, 1995
- ---------------------------
Samuel Adams
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-effective
Amendment No. 7 to the Registration Statement on Form N-3 of Capital
Appreciation Variable Account (File No. 33-19632).
<PAGE>
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES WITH THE REGISTRANTS AND ON THE DATES INDICATED.
Member of the
* /s/ GEOFFREY CROFTS Boards of Managers April 26, 1995
- ---------------------------
Geoffrey Crofts
Member of the
* /s/ DAVID D. HORN Boards of Managers April 26, 1995
- ---------------------------
David D. Horn
Member of the
* /s/ GARTH MARSTON Boards of Managers April 26, 1995
- ---------------------------
Garth Marston
Member of the
* /s/ DERWYN F. PHILLIPS Boards of Managers April 26, 1995
- ---------------------------
Derwyn F. Phillips
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES WITH SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) AND ON THE DATES
INDICATED.
Signatures Title Date
---------- ----- ----
Chairman and Director
(Principal
* /s/ JOHN D. MCNEIL Executive Officer) April 26, 1995
- ----------------------------
John D. McNeil
Vice President and
Actuary (Principal
Financial &
/s/ ROBERT P. VROLYK Accounting Officer) April 26, 1995
- ----------------------------
Robert P. Vrolyk
* /s/ JOHN R. GARDNER President and Director April 26, 1995
- ---------------------------
John R. Gardner
* /s/ RICHARD B. BAILEY Director April 26, 1995
- ----------------------------
Richard B. Bailey
* /s/ A. KEITH BRODKIN Director April 26, 1995
- ----------------------------
A. Keith Brodkin
Senior Vice President
and General Manager
* /s/ DAVID D. HORN and Director April 26, 1995
- ----------------------------
David D. Horn
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-effective
Amendment No. 7 to the Registration Statement on Form N-3 of Capital
Appreciation Variable Account (File No. 33-19632).
<PAGE>
* /s/JOHN S. LANE Director April 26, 1995
- ----------------------------
John S. Lane
* /s/ ANGUS A. MACNAUGHTON Director April 26, 1995
- ----------------------------
Angus A. MacNaughton
* /s/ M. COLYER CRUM Director April 26, 1995
- ----------------------------
M. Colyer Crum
- ----------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-effective
Amendment No. 7 to the Registration Statement on Form N-3 of Capital
Appreciation Variable Account (File No. 33-19632).
<PAGE>
Exhibit 13(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-effective
Amendment to the Registration Statements on Form N-3 of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account of our report
dated February 3, 1995 appearing in the annual report to contract owners for the
year ended December 31, 1994, and to the use of our report dated January 31,
1995 accompanying the financial statements of Sun Life Assurance Company of
Canada (U.S.) contained in the Statement of Additional Information, which is
part of such Registration Statements. We also consent to the references to us
under the headings "Condensed Financial Information" in the Prospectus, which is
part of such Registration Statements and "Accountants and Financial Statements"
in the Statement of Additional Information.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 26, 1995
<PAGE>
Exhibit 13(b)
CONSENT OF COUNSEL
I hereby consent to the reference to me in this Amendment to the
Registration Statement on Form N-3 of Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account under the caption "Legal Matters"
in the Statement of Additional Information contained therein.
DAVID D. HORN, ESQ.
April 26, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MONEY MARKET VARIABLE ACCOUNT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 170,388
<INVESTMENTS-AT-VALUE> 170,388
<RECEIVABLES> 443
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 4
<TOTAL-ASSETS> 170,838
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 317
<TOTAL-LIABILITIES> 317
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 4,599
<SHARES-COMMON-PRIOR> 3,823
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 170,521
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,542
<OTHER-INCOME> 0
<EXPENSES-NET> 3,353
<NET-INVESTMENT-INCOME> 4,189
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,189
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,498
<NUMBER-OF-SHARES-REDEEMED> 722
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20,583
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 885
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,353
<AVERAGE-NET-ASSETS> 177,000
<PER-SHARE-NAV-BEGIN> 12.836
<PER-SHARE-NII> 0.293
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.129
<EXPENSE-RATIO> .58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HIGH YIELD VARIABLE ACCOUNT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> HIGH YIELD VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 221,340
<INVESTMENTS-AT-VALUE> 199,222
<RECEIVABLES> 5,640
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 222
<TOTAL-ASSETS> 205,087
<PAYABLE-FOR-SECURITIES> 14,415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 259
<TOTAL-LIABILITIES> 14,674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2,506
<SHARES-COMMON-PRIOR> 2,577
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 190,413
<DIVIDEND-INCOME> 24
<INTEREST-INCOME> 17,930
<OTHER-INCOME> 0
<EXPENSES-NET> 4,115
<NET-INVESTMENT-INCOME> 13,839
<REALIZED-GAINS-CURRENT> (13,619)
<APPREC-INCREASE-CURRENT> (4,411)
<NET-CHANGE-FROM-OPS> (4,191)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121
<NUMBER-OF-SHARES-REDEEMED> 192
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (33,189)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,409
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,115
<AVERAGE-NET-ASSETS> 187,867
<PER-SHARE-NAV-BEGIN> 17.354
<PER-SHARE-NII> 1.163
<PER-SHARE-GAIN-APPREC> (1.689)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.828
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPITAL APPRECIATION VARIABLE ACCOUNT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> CAPITAL APPRECIATION VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 376,107
<INVESTMENTS-AT-VALUE> 410,311
<RECEIVABLES> 5,467
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 104
<TOTAL-ASSETS> 415,890
<PAYABLE-FOR-SECURITIES> 6,797
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,317
<TOTAL-LIABILITIES> 8,114
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 4,686
<SHARES-COMMON-PRIOR> 4,899
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 407,776
<DIVIDEND-INCOME> 5,638
<INTEREST-INCOME> 1,057
<OTHER-INCOME> 0
<EXPENSES-NET> 9,989
<NET-INVESTMENT-INCOME> (3,294)
<REALIZED-GAINS-CURRENT> 65,369
<APPREC-INCREASE-CURRENT> (138,416)
<NET-CHANGE-FROM-OPS> (76,341)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 307
<NUMBER-OF-SHARES-REDEEMED> 520
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (159,065)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,468
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,989
<AVERAGE-NET-ASSETS> 475,068
<PER-SHARE-NAV-BEGIN> 21.934
<PER-SHARE-NII> (0.155)
<PER-SHARE-GAIN-APPREC> (3.126)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.653
<EXPENSE-RATIO> .79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GOVERNMENT SECURITIES VARIABLE ACCOUNT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> GOVERNMENT SECURITIES VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 240,073
<INVESTMENTS-AT-VALUE> 291,799
<RECEIVABLES> 5,087
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 67
<TOTAL-ASSETS> 296,957
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 407
<TOTAL-LIABILITIES> 407
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2,922
<SHARES-COMMON-PRIOR> 2,697
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 296,550
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,664
<OTHER-INCOME> 0
<EXPENSES-NET> 6,174
<NET-INVESTMENT-INCOME> 16,490
<REALIZED-GAINS-CURRENT> (3,837)
<APPREC-INCREASE-CURRENT> (23,235)
<NET-CHANGE-FROM-OPS> (10,582)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 575
<NUMBER-OF-SHARES-REDEEMED> 350
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (37,333)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,779
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,174
<AVERAGE-NET-ASSETS> 323,455
<PER-SHARE-NAV-BEGIN> 16.039
<PER-SHARE-NII> 0.788
<PER-SHARE-GAIN-APPREC> (1.304)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.523
<EXPENSE-RATIO> .61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WORLD GOVERNMENTS VARIABLE ACCOUNT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> WORLD GOVERNMENTS VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 36,530
<INVESTMENTS-AT-VALUE> 35,993
<RECEIVABLES> 1,080
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 148
<TOTAL-ASSETS> 37,224
<PAYABLE-FOR-SECURITIES> 56
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 789
<TOTAL-LIABILITIES> 845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,321
<SHARES-COMMON-PRIOR> 1,363
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 36,379
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,620
<OTHER-INCOME> 0
<EXPENSES-NET> 897
<NET-INVESTMENT-INCOME> 1,723
<REALIZED-GAINS-CURRENT> (4,475)
<APPREC-INCREASE-CURRENT> (63)
<NET-CHANGE-FROM-OPS> (2,815)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 71
<NUMBER-OF-SHARES-REDEEMED> 113
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (5,075)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 292
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 897
<AVERAGE-NET-ASSETS> 38,933
<PER-SHARE-NAV-BEGIN> 16.756
<PER-SHARE-NII> 0.691
<PER-SHARE-GAIN-APPREC> (1.776)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.671
<EXPENSE-RATIO> 1.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOTAL RETURN VARIABLE ACCOUNT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> TOTAL RETURN VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 204,585
<INVESTMENTS-AT-VALUE> 222,820
<RECEIVABLES> 2,355
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 94
<TOTAL-ASSETS> 225,272
<PAYABLE-FOR-SECURITIES> 1,422
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 101
<TOTAL-LIABILITIES> 1,523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 7,349
<SHARES-COMMON-PRIOR> 7,013
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 223,749
<DIVIDEND-INCOME> 4,856
<INTEREST-INCOME> 6,077
<OTHER-INCOME> 0
<EXPENSES-NET> 4,929
<NET-INVESTMENT-INCOME> 6,004
<REALIZED-GAINS-CURRENT> 3,921
<APPREC-INCREASE-CURRENT> (16,953)
<NET-CHANGE-FROM-OPS> (7,028)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,052
<NUMBER-OF-SHARES-REDEEMED> 716
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (9,669)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,743
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,929
<AVERAGE-NET-ASSETS> 232,400
<PER-SHARE-NAV-BEGIN> 17.846
<PER-SHARE-NII> 0.447
<PER-SHARE-GAIN-APPREC> (0.999)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.294
<EXPENSE-RATIO> .82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MANAGED SECTORS VARIABLE ACCOUNT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> MANAGED SECTORS VARIABLE ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 59,596
<INVESTMENTS-AT-VALUE> 62,256
<RECEIVABLES> 793
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 89
<TOTAL-ASSETS> 63,140
<PAYABLE-FOR-SECURITIES> 732
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 103
<TOTAL-LIABILITIES> 835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,810
<SHARES-COMMON-PRIOR> 1,819
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 62,305
<DIVIDEND-INCOME> 678
<INTEREST-INCOME> 104
<OTHER-INCOME> 0
<EXPENSES-NET> 1,378
<NET-INVESTMENT-INCOME> (596)
<REALIZED-GAINS-CURRENT> 2,824
<APPREC-INCREASE-CURRENT> (4,364)
<NET-CHANGE-FROM-OPS> (2,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 168
<NUMBER-OF-SHARES-REDEEMED> 177
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,347)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 465
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,378
<AVERAGE-NET-ASSETS> 62,000
<PER-SHARE-NAV-BEGIN> 24.685
<PER-SHARE-NII> (0.242)
<PER-SHARE-GAIN-APPREC> (0.617)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.826
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
