<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
1933 Act File No. 2-19628
1940 Act File No. 811-3563
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 10
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 22
MONEY MARKET VARIABLE ACCOUNT
(Exact Name of Registrant)
Sun Life Assurance Company of Canada (U.S.)
(Name of Insurance Company)
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181 (617)237-6030
(Address of Insurance Company's Principal Executive Offices)
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
With Copies of Communications to:
Bonnie S. Angus, Sun Life Annuity Service Center
50 Milk Street, Boston, Massachusetts 02110
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
X on April 30, 1997 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on [DATE] pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii)
on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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, 19961996 was filed on February 28, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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
(Pursuant to Rule 495(a) under The Securities Act of 1933)
ITEM IN LOCATION IN
FORM N-3, PART A PROSPECTUS; CAPTION
1 Cover Page Cover Page
2 Definitions Definitions
3 Synopsis Synopsis; Expense Summary
4 Condensed Financial Information Condensed Financial Information
5 General Description of Registrant A Word about the Company and the
and Insurance Company Variable Accounts
6 Management Management of the Variable Accounts
7 Deductions and Expenses Contract Charges
8 General Description of Variable Purchase Payments and Contract Values
Annuity Contracts during Accumulation Period; Other
Contractual Provisions
9 Annuity Period Annuity Provisions
10 Death Benefit Death Benefit
11 Purchases and Contract Value Purchase Payments and Contract Values
during Accumulation Period
<PAGE>
ITEM IN LOCATION IN
FORM N-3, PART A PROSPECTUS; CAPTION
12 Redemptions Cash Withdrawals
13 Taxes Federal Tax Status
14 Legal Proceedings Legal Proceedings
15 Table of Contents of the Statement Table of Contents for Statement of
of Additional Information Additional Information
<PAGE>
ITEM IN LOCATION IN STATEMENT OF
FORM N-3, PART B ADDITIONAL INFORMATION; CAPTION
16 Cover Page Cover Page
17 Table of Contents Table of Contents
18 General Information and History General Information and History
19 Investment Objectives and Policies The Variable Accounts' Investment
Objectives, Policies and
Restrictions; a Word about the
Company and the Variable Accounts*
20 Management Management of the Variable Accounts
21 Investment Advisory and Other Management of the Variable Accounts
Services
22 Brokerage Allocation Management of the Variable Accounts
23 Purchase and Pricing of Securities Purchase Payments and Contract Values
being Offered during Accumulation Period*
24 Underwriters Distribution of the Contracts
25 Calculation of Performance Data Not Applicable
26 Annuity Payments Annuity Provisions
27 Financial Statements Accountants and Financial Statements
- ---------------------------
* In the Prospectus
<PAGE>
PROSPECTUS
MAY 1, 1997
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.
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. Under normal market conditions, at least 25% of the
Variable Account's assets will be invested in fixed income securities, and at
least 40% and no more than 75% of its assets will be invested in equity
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.
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, 1997, as amended or supplemented from time to time (the "SAI"),
which is incorporated herein by reference. The SAI 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 SAI is shown on page 33 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 5
Condensed Financial Information 6
Financial Statements 10
A Word About the Company and the Variable Accounts 10
Portfolio Transactions 19
Management of the Variable Accounts 20
Purchase Payments and Contract Values During Accumulation Period 20
Cash Withdrawals 22
Death Benefit 24
Contract Charges 25
Annuity Provisions 27
Other Contractual Provisions 29
Federal Tax Status 30
Distribution of the Contracts 32
Legal Proceedings 32
Contract Owner Inquiries 32
Table of Contents for Statement of Additional Information 33
Appendix A--State Premium Taxes 33
Appendix B--Commercial Paper and Bond Ratings 33
Appendix C--Investment Techniques 37
Appendix D--Industry Sectors 48
Appendix E--Portfolio Composition Chart 51
</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 20). 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 22).
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 22 and 26, 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 23).
In addition, under certain circumstances, withdrawals may result in tax
penalties (see "Federal Tax Status" on page 30).
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 24).
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 25).
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 25).
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" or the "Adviser").
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
20 and 26, respectively).
Premium taxes payable to any governmental entity will be charged against the
Contracts (see "Premium Taxes" on page 27).
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 27).
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 canceled 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.
4
<PAGE>
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 TOTAL WORLD MANAGED
MARKET YIELD APPRECIATION SECURITIES RETURN GOVERNMENTS SECTORS
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% 0.75% 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% 0.13% 0.03% 0.07% 0.07% 0.25% 0.10%
Total Annual Expenses.................... 1.98% 2.28% 2.18% 2.02% 2.22% 2.40% 2.25%
<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>
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 $ 225
High Yield Variable Account............................................... 77 116 158 256
Capital Appreciation Variable Account..................................... 76 113 153 246
Government Securities Variable Account.................................... 75 108 145 229
World Governments Variable Account........................................ 78 120 164 268
Managed Sectors Variable Account.......................................... 77 115 156 253
Total Return Variable Account............................................. 77 114 155 250
</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 $ 225
High Yield Variable Account............................................... 23 71 122 256
Capital Appreciation Variable Account..................................... 22 68 117 246
Government Securities Variable Account.................................... 21 63 109 229
World Governments Variable Account........................................ 24 75 128 268
Managed Sectors Variable Account.......................................... 23 70 120 253
Total Return Variable Account............................................. 23 69 119 250
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
5
<PAGE>
CONDENSED FINANCIAL INFORMATION--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 SAI. The financial statements have
been audited by Deloitte & Touche LLP, independent certified public accountants.
PER UNIT AND OTHER DATA
<TABLE>
<CAPTION>
CAPITAL APPRECIATION VARIABLE ACCOUNT
------------------------------------------------------------------------------------------
COMPASS 3
COMPASS 3 - LEVEL 2 ------------------------------------------------------------------------------------------
---------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
------------ ------------ -------- -------- -------- -------- -------- -------- -------- -------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
UNIT
DATA**
Investment
Income... $ 0.0790 $ 0.0196 $ 0.1893 $ 0.2402 $ 0.2870 $ 0.2617 $ 0.1919 $ 0.2748 $ 0.4690 $ 0.3098 $ 0.1699
Expenses... 0.2370 0.0517 0.6053 0.4847 0.4421 0.4498 0.4131 0.3323 0.3026 0.2842 0.1330
------------ ------------ -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income
(loss)... $(0.1580) $(0.0321) $(0.4160) $(0.2445) $(0.1551) $(0.1881) $(0.2212) $(0.0575) $ 0.1664 $ 0.0256 $ 0.0369
Net
realized
and
unrealized
gains
(losses)
on
investments... 2.2670 0.3374 5.5056 6.6821 (3.1259) 2.5911 1.9595 4.5591 (1.4616) 4.1843 0.3396
------------ ------------ -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $ 2.109 $ 0.3053 $ 5.0896 $ 6.4376 $(3.2810) $ 2.4030 $ 1.7383 $ 4.5016 $(1.2952) $ 4.2099 $ 0.3765
Unit
value:
Beginning
of
year... $10.3053 $10.0000++ $25.0907 $18.6531 21.9341 19.5311 17.7928 13.2912 14.5864 10.3765 10.0000++
------------ ------------ -------- -------- -------- -------- -------- -------- -------- -------- ----------
End
of
year... $12.4143 $10.3053 $30.1803 $25.0907 $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)##... 0.78% 0.80% 0.78% 0.80% 0.79% 0.78% 0.80% 0.79% 0.79% 0.78% 0.81%+
Net
investment
income
(expense)... (1.41)% (1.02%) (1.41)% (1.02%) (0.69%) (0.83%) (1.08%) (0.23%) 1.58% 0.36% 0.46%+
PORTFOLIO
TURNOVER... 66% 96% 66% 96% 95% 56% 34% 62% 36% 83% 73%
AVERAGE
COMMISSION
RATE###... $ 0.0371 -- $ 0.0371 -- -- -- --
NUMBER
OF
UNITS
OUTSTANDING
AT END
OF
YEAR
(000'S
OMITTED)... 2,494 955 3,721 4,272 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.
#For the period from May 1, 1995 (commencement of Level 2 Units) to December
31, 1995
##For years ending on or after December 31, 1995 expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
6
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
YEAR PERIOD ------------------------------------------------------------------------------------------
ENDED ENDED
DECEMBER DECEMBER YEAR ENDED DECEMBER 31,
31, 31, ------------------------------------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.7931 $0.1868 $ 1.3222 $ 1.2529 $ 1.1028 $ 1.1064 $ 1.0851 $ 1.0935 $ 1.0274 $ 0.9340 $ 0.5416
Expenses... 0.1966 0.0478 0.3586 0.3385 0.3146 0.3154 0.2950 0.2604 0.2357 0.2109 0.1352
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income... $0.5965 $0.1390 $ 0.9636 $ 0.9144 $ 0.7882 $ 0.7910 $ 0.7901 $ 0.8331 $ 0.7917 $ 0.7231 $ 0.4064
Net
realized
and
unrealized
gains
(losses)
on
investments... (0.5533 ) 0.2782 (0.9159) 1.5907 (1.3042) 0.3210 (0.0030) 0.9632 0.0699 0.4685 (0.1163)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $0.0432 $0.4172 $ 0.0477 $ 2.5051 $(0.5160) $ 1.1120 $ 0.7871 $ 1.7963 $ 0.8616 $ 1.1916 $ 0.2901
Unit
value:
Beginning
of
year... 10.4172 10.0000 ++ 18.0278 15.5227 16.0387 14.9267 14.1396 12.3433 11.4817 10.2901 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $10.4604 $10.4172 $18.0755 $18.0278 $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)##... 0.62% 0.63% 0.62% 0.63% 0.61% 0.61% 0.62% 0.60% 0.60% 0.55% 0.56%+
Net
investment
income... 5.53% 5.51% 5.53% 5.51% 5.09% 5.11% 5.51% 6.50% 6.81% 6.70% 6.24%+
PORTFOLIO
TURNOVER... 39% 80% 39% 80% 41% 81% 175% 149% 107% 156% 498%
NUMBER OF
UNITS
OUTSTANDING
AT END OF
YEAR
(000'S
OMITTED)... 1,079 608 1,549 1,888 2,922 2,697 2,722 2,327 1,757 1,271 558
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
YEAR PERIOD ------------------------------------------------------------------------------------------
ENDED ENDED
DECEMBER DECEMBER YEAR ENDED DECEMBER 31,
31, 31, ------------------------------------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.9246 $0.3803 $ 1.9450 $ 1.8912 $ 1.5336 $ 1.5179 $ 1.5969 $ 1.5178 $ 1.4777 $ 1.2654 $ 0.8079
Expenses... 0.2033 0.0765 0.4432 0.4253 0.3711 0.3671 0.3340 0.2582 0.2229 0.2411 0.1534
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income... $0.7213 $0.3038 $ 1.5018 $ 1.4659 $ 1.1625 $ 1.1508 $ 1.2629 $ 1.2596 $ 1.2548 $ 1.0243 $ 0.6545
Net
realized
and
unrealized
gains
(losses)
on
investments... 0.4262 (0.0661 ) 0.6387 1.0912 (1.6885) 1.5446 0.5037 2.8528 (2.7046) (1.3152) (0.1339)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $1.1475 $0.2377 $ 2.1405 $ 2.5571 $(0.5260) $ 2.6954 $ 1.7666 $ 4.1124 $(1.4498) $(0.2909) $ 0.5206
Unit
value:
Beginning
of
year... 10.2377 10.0000 ++ 19.3854 $16.8283 17.3543 14.6589 12.8923 8.7799 10.2297 10.5206 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $11.3852 $10.2377 $21.5259 $19.3854 $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)##... 0.88% 0.88% 0.88% 0.88% 0.91% 0.86% 0.93% 0.87% 0.86% 0.80% 0.82%+
Net
investment
income... 7.59% 7.91% 7.59% 7.91% 7.41% 6.97% 9.03% 10.85% 13.14% 9.47% 9.43%+
PORTFOLIO
TURNOVER... 108% 88% 108% 88% 77% 67% 61% 38% 14% 34% 37%
NUMBER OF
UNITS
OUTSTANDING
AT END OF
YEAR
(000'S
OMITTED)... 1,819 1,368 1,438 1,913 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.
#For the period from May 1, 1995 (commencement of Level 2 Units) to December
31, 1995
##For years ending on or after December 31, 1995 expenses are calculated
without reduction for fees paid indirectly.
</TABLE>
7
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
MANAGED SECTORS VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
PERIOD ------------------------------------------------------------------------------------------
YEAR ENDED
ENDED DECEMBER YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------------------
31, 1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.0873 $0.0231 $ 0.2830 $ 0.3259 $ 0.3031 $ 0.1817 $ 0.1156 $ 0.2307 $ 0.3473 $ 0.4110 $ 0.2035
Expenses... 0.2287 0.0539 0.7511 0.6452 0.5452 0.5313 0.5325 0.4141 0.3639 0.3890 0.1664
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income
(loss)... $(0.1414) $(0.0308) $(0.4681) $(0.3193) $(0.2421) $(0.3496) $(0.4169) $(0.1834) $(0.0166) $ 0.0220 $ 0.0371
Net
realized
and
unrealized
gains
(losses)
on
investments... 1.7971 0.0200 5.5914 7.7306 (0.6170) 1.2338 1.5249 8.8712 (2.3348) 5.3288 0.9684
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $1.6557 $(0.0108) $ 5.1233 $ 7.4113 $(0.8591) $ 0.8842 $ 1.1080 $ 8.6878 $(2.3514) $ 5.3508 $ 1.0055
Unit
value:
Beginning
of
year... 9.9892 10.0000 ++ 31.2371 23.8258 24.6849 23.8007 22.6927 14.0049 16.3563 11.0055 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $11.6449 $9.9892 $36.3604 $31.2371 $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)##... 0.85% 0.87% 0.85% 0.87% 0.90% 0.91% 0.92% 0.98% 1.08% 1.25% 1.25%+
Net
investment
income
(loss)... (1.36% ) (1.07% ) (1.36%) (1.07%) (0.97%) (1.49%) (1.75%) (0.97%) (0.05%) 0.25% 0.92%+
PORTFOLIO
TURNOVER... 64% 115% 64% 115% 111% 122% 34% 52% 71% 66% 66%
AVERAGE
COMMISSION
RATE###... $0.0459 -- $ 0.0459 -- -- -- --
NUMBER OF
UNITS
OUTSTANDING
AT END OF
YEAR
(000'S
OMITTED)... 1,204 418 1,552 1,729 1,810 1,819 1,728 1,276 887 500 129
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
YEAR PERIOD ------------------------------------------------------------------------------------------
ENDED ENDED
DECEMBER DECEMBER YEAR ENDED DECEMBER 31,
31, 31, ------------------------------------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.5993 $0.1358 $ 0.7437 $ 0.7885 $ 0.5688 $ 0.4065 $ 0.4888 $ 0.7619 $ 0.9503 $ 0.9975 $ 0.5403
Expenses... 0.2336 0.0361 0.2705 0.2631 0.2756 0.2512 0.2497 0.2386 0.2294 0.2113 0.1292
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income... $0.3657 $0.0997 $ 0.4732 $ 0.5254 $ 0.2932 $ 0.1553 $ 0.2391 $ 0.5233 $ 0.7209 $ 0.7862 $ 0.4111
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
in unit
value... $0.3657 $0.0997 $ 0.4732 $ 0.5254 0.2932 0.1553 0.2391 0.5233 0.7209 0.7862 0.4111
Unit
value:
Beginning
of
year... 10.0997 10.0000 ++ 13.6545 13.1291 12.8359 12.6806 12.4415 11.9182 11.1973 10.4111 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $10.4654 $10.0997 $14.1277 $13.6545 $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% 0.58% 0.58% 0.58% 0.58% 0.36% 0.59% 0.58% 0.57% 0.56% 0.58%+
Net
investment
income... 3.49% 4.00% 3.49% 4.00% 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)... 897 561 1,930 3,929 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.
#For the period from May 1, 1995 (commencement of Level 2 Units) to December
31, 1995
##For years ending on or after December 31, 1995 expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
8
<PAGE>
PER UNIT AND OTHER DATA -- CONTINUED
<TABLE>
<CAPTION>
TOTAL RETURN VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
PERIOD ------------------------------------------------------------------------------------------
YEAR ENDED
ENDED DECEMBER YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------------------
31, 1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.5280 $0.1247 $ 1.0817 $ 1.0122 $ 0.8371 $ 0.8304 $ 0.9284 $ 0.8989 $ 0.7763 $ 0.8508 $ 0.4733
Expenses... 0.2317 0.0525 0.5068 0.4358 0.3904 0.3829 0.3607 0.3002 0.2716 0.2564 0.1568
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income... $0.2963 $0.0722 $ 0.5749 $ 0.5764 $ 0.4467 $ 0.4475 $ 0.5677 $ 0.5987 $ 0.5047 $ 0.5944 $ 0.3165
Net
realized
and
unrealized
gains
(losses)
on
investments... 1.0173 0.4216 2.1418 4.1265 (0.9992) 1.5264 0.7446 1.9505 (0.7025) 1.0696 0.2281
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $1.3136 $0.4938 $ 2.7167 $ 4.7029 $(0.5525) $ 1.9739 $ 1.3123 $ 2.5492 $(0.1978) $ 1.6640 $ 0.5446
Unit
value:
Beginning
of
year... 10.4938 10.0000 ++ 21.9966 17.2937 17.8462 15.8723 14.5600 12.0108 12.2086 10.5446 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $11.8074 $10.4938 $24.7133 $21.9966 $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% 0.83% 0.82% 0.83% 0.82% 0.76% 0.86% 0.84% 0.85% 0.81% 0.94%+
Net
investment
income... 2.59% 2.99% 2.59% 2.99% 2.60% 2.43% 3.63% 4.52% 4.26% 5.24% 4.65%+
PORTFOLIO
TURNOVER... 140% 105% 140% 105% 63% 89% 94% 80% 53% 78% 13%
AVERAGE
COMMISSION
RATE###... $0.0538 -- $ 0.0538 -- -- -- -- -- -- -- --
NUMBER OF
UNITS
OUTSTANDING
AT END OF
YEAR
(000'S
OMITTED)... 3,717 1,637 5,177 6,322 7,349 7,013 5,721 4,752 3,624 2,624 793
</TABLE>
<TABLE>
<CAPTION>
WORLD GOVERNMENTS VARIABLE ACCOUNT
COMPASS 3 - LEVEL ------------------------------------------------------------------------------------------
2
------------------ COMPASS 3
PERIOD ------------------------------------------------------------------------------------------
YEAR ENDED
ENDED DECEMBER YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------------------
31, 1996 1995# 1996 1995 1994 1993 1992 1991 1990 1989 1988*
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER UNIT
DATA**
Investment
Income... $0.7308 $0.1819 $ 1.2367 $ 1.3045 $ 1.0666 $ 1.1293 $ 1.2979 $ 1.1961 $ 0.9588 $ 1.0001 $ 0.5779
Expenses... 0.2391 0.0554 0.4322 0.4086 0.3760 0.3890 0.3876 0.3380 0.3103 0.2770 0.1599
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
investment
income... $0.4917 $0.1265 $ 0.8045 $ 0.8959 $ 0.6906 $ 0.7403 $ 0.9103 $ 0.8581 $ 0.6485 $ 0.7231 $ 0.4180
Net
realized
and
unrealized
gains
(losses)
on
investments... (0.1663 ) 0.2317 (0.2699) 1.3298 (1.7764) 1.6795 (1.0699) 0.7089 0.9628 (0.0016) 0.1783
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Net
increase
(decrease)
in unit
value... $0.3254 $0.3582 $ 0.5346 $ 2.2257 $(1.0858) $ 2.4198 $(0.1596) $ 1.5670 $ 1.6113 $ 0.7215 $ 0.5963
Unit
value:
Beginning
of
year... 10.3582 10.0000 ++ 17.8962 15.6705 16.7563 14.3365 14.4961 12.9291 11.3178 10.5963 10.0000++
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
End of
year... $10.6836 $10.3582 $18.4308 $17.8962 $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% 1.00% 1.00% 1.00% 1.00% 0.94% 1.15% 1.18% 1.22% 1.22% 1.25%+
Net
investment
income... 4.54% 5.25% 4.54% 5.25% 4.45% 4.12% 6.03% 6.51% 5.55% 6.92% 9.55%+
PORTFOLIO
TURNOVER... 397% 330% 397% 330% 256% 202% 133% 229% 120% 148% 87%
NUMBER OF
UNITS
OUTSTANDING
AT END OF
YEAR
(000'S
OMITTED)... 563 316 789 1,021 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.
#For the period from May 1, 1995 (commencement of Level 2 Units) to December
31, 1995
##For years ending on or after December 31, 1995 expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
9
<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).
10
<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.
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 Ratings Services ("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, 1996, 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.
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 is aggressively managed and, thus, is subject to greater
fluctuations in the value of its Variable Accumulation Units and Annuity Units
and involves
11
<PAGE>
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.
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 (although these lower rated
securities are also affected by changes in interest rates, as described below).
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
12
<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 the Account'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, the Account 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 the Account'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 the Account 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 the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Account 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. The
Account'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 an account or a
fund investing primarily in higher quality bonds.
The value of the Account'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.
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 indices in an 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% 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",
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"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 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.
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 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).
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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. Under normal
market conditions, at least 25% of TRVA's assets will be invested in fixed
income securities and at least 40% and no more than 75% of TRVA's assets will be
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 Ratings Services ("S&P") or Fitch Investors Service, Inc.
("Fitch")), although TRVA may invest up to 20% of its net assets in lower rated
securities (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 of "Additional Risk Factors Regarding
Lower Rated Securities" under "High Yield Variable Account" above; see Appendix
E for a chart indicating the composition of TRVA's portfolio for the year ended
December 31, 1996, with the debt securities separated into rating categories and
comparable unrated securities). 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 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
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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% 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."
The portfolio will be managed actively with respect to fixed income
securities, and the asset allocations will be modified as the Adviser deems
necessary. Although TRVA does not intend to seek short-term profits, fixed
income securities in its portfolio will be sold whenever the Adviser believes it
is appropriate to do so without regard to the length of time the particular
asset may have been held. With respect to equity securities, TRVA does not
intend to trade in securities for short-term profits and anticipates that equity
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 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.
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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 indices, 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 future 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
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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, indices 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 thirteen industry sectors. Dividend income, if any, is
incidental to MSVA's objective of capital appreciation.
The thirteen sectors from among which MSVA chooses its investments are:
autos and housing; basic materials and consumer staples; defense and aerospace;
energy; financial services; health care; industrial goods and services; leisure;
retailing; technology; transportation; utilities; and foreign. (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 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
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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% 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 indices 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 Depositary Receipts" and "Investment
Techniques" and Appendix D to the SAI 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.
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, other contracts participating in the Variable Accounts and the
sale of shares of funds in the MFS Family of Funds 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 SAI.
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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 subsidiary of the
Company. 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 Institutional Advisors, Inc., a
subsidiary of MFS, provides investment advice to substantial private clients.
MFS provides the Variable Accounts with overall investment advisory
services. Certain 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
SAI.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial share
their views on a variety of investment related issues, such as the economy,
securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS has access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial has access to the extensive U.S. equity investment expertise of MFS.
MFS and Foreign & Colonial each have investment personnel working in each
other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for an
Account's portfolio as well as for portfolios of other clients of MFS or clients
of Foreign & Colonial. Some simultaneous transactions are inevitable when
several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as an Variable Account is concerned, in
other cases, however, it may produce increased investment opportunities for an
Variable Account.
ADMINISTRATOR -- MFS provides the Variable Accounts with certain
administrative services pursuant to a Master Administrative Services Agreement
dated March 1, 1997. Under this Agreement, MFS provides the Variable Accounts
with certain financial, legal, compliance, shareholder communications and other
administrative services. As a partial reimbursement for the cost of providing
these services, each Variable Account pays MFS an administrative fee up to
0.015% per annum of the Variable Account's average daily net assets, provided
that the adminstrative fee is not assessed on the Variable Account's assets that
exceed $3 billion.
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.
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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.
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.
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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
institutional-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.
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
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<PAGE>
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 Variable Accounts is not reasonably practicable, or (b) it is not
reasonably practicable to determine the value of the net assets of the Variable
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 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
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<PAGE>
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 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").
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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 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
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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, 1996 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, 0.75%;
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.
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>
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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 on or after the date 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."
On the Annuity Commencement Date the Contract's Accumulation Account will be
canceled 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.
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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 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.
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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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.
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
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<PAGE>
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.
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.
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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.
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.
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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 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.
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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, 1997 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, 1997 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%
Nevada -- 3.50%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
<FN>
</TABLE>
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATING SERVICES ("S&P"):
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"):
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.
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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 RATINGS SERVICES:
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.
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.
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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.
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.
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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.
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.
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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 liquid assets 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.
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 indices 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 indices of securities
only through a registered broker-dealer which is a member of the exchange on
which the option is traded.
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In addition, options on securities and options on indices 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 SAI.
OPTIONS ON INDICES
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 indices
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 indices, such as the Standard & Poor's 100 Index, or on indices 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.
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
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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 indices 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 securities and other obligations underlying 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 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.
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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
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 liquid assets
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.
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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.
Forward Contracts are traded over the counter and not on organized
commodities or securities exchanges; as a result, such contracts operate in a
manner distinct from exchange traded instruments, and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges.
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 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.
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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, U.S. Government Securities, or an irrevocable letter
of credit 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.
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
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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 are securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low- to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the security is issued
or guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws of,
and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country.
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 and less liquid 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 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
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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, a
decrease in the level of liquidity in the Account's portfolio 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, and in such markets the Account bears the risk that the
securities will not be delivered and that the Account's payments will not be
returned.
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, Dominican Republic, Argentina, Jordan,
Nigeria, Panama, 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. Under the
terms of most sponsored arrangements, depositaries agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depositary of an unsponsored ADR, on the
other hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. 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 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
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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 determination is made 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, retains oversight focusing on factors such as
valuation, liquidity and availability of information. Investing in Rule 144A
Securities could have the effect of decreasing the level of liquidity 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 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.
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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.
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
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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 indebtedness 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 indices, 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.
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-
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<PAGE>
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 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 (I.E., principal value) or interest rates rise or fall according to
the change in one or more specified underlying instruments. Indexed securities
may be positively or negatively indexed (I.E., their principal value or interest
rates 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 thirteen 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) BASIC MATERIALS AND CONSUMER STAPLES 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,
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the permissibility
of using various food additives and
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<PAGE>
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) INDUSTRIAL GOODS AND SERVICES 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 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.
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(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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 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.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
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APPENDIX E
PORTFOLIO COMPOSITION CHART
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
HIGH YIELD VARIABLE ACCOUNT
The tables below shows the percentages of each of HYVA's and TRVA's assets
at December 31, 1996 invested in securities assigned to the various rating
categories by S&P, Moody's (provided only for securities not rated by S&P) and
Fitch (provided only for securities not rated by S&P or Moody's) and in unrated
securities determined by MFS to be of comparable quality:
HIGH YIELD VARIABLE ACCOUNT
<TABLE>
<CAPTION>
UNRATED
BONDS OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ----------- ------------- ----------------- -----------
<S> <C> <C> <C>
AAA/Aaa -- -- --
AA/Aa -- -- --
A/A -- -- --
BBB/Baa -- -- --
BB/Ba 12.69% -- 12.69%
B/B 72.32% 2.98% 75.30%
CCC/Caa 4.38% 0.06% 4.44%
CC/Ca -- -- --
C/C -- -- --
Default 0.74% -- 0.74%
----- ----- -----
Total 90.13% 3.04% 93.17%
</TABLE>
TOTAL RETURN VARIABLE ACCOUNT
<TABLE>
<CAPTION>
UNRATED
BONDS OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ----------- ------------- ----------------- -----------
<S> <C> <C> <C>
AAA/Aaa 12.95% -- 12.95%
AA/Aa 0.66% -- 0.66%
A/A 4.35% -- 4.35%
BBB/Baa 12.04% -- 12.04%
BB/Ba 5.30% -- 5.30%
B/B 0.30% 0.18% 0.48%
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Default -- -- --
----- ----- -----
Total 35.60% 0.18% 35.78%
</TABLE>
These charts do not necessarily indicate what the composition of HYVA's or
TRVA's portfolio will be in subsequent years. Rather, the Accounts' investment
objective, policies and restrictions indicate the extent to which it may
purchase securities in the various categories.
51
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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, 1997 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
-------------------------------------------
52
<PAGE>
PROSPECTUS
MAY 1, 1997
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-1-5/97/67M
<PAGE>
MAY 1, 1997
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................................................ 6
Annuity Provisions................................................................. 9
Other Contractual Provisions....................................................... 10
Federal Tax Status................................................................. 11
Administration of the Contracts.................................................... 14
Distribution of the Contracts...................................................... 14
Legal Matters...................................................................... 15
Accountants and Financial Statements............................................... 15
</TABLE>
This Statement of Additional Information, as amended or supplemented from
time to time (the "SAI"), 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, 1997. This SAI 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 SAI have the same meanings as in the Prospectus.
- --------------------------------------------------------------------------------
THIS SAI 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 ("Sun Life
(Canada)"). The Company's 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., Sun Life Financial Services Limited
and Sun Capital Advisers, Inc. It is expected that as of May 1, 1997, all of the
outstanding common stock of the Company will be held by a wholly-owned
subsidiary of Sun Life (Canada), Sun Life of Canada (U.S.) Holdings, Inc., which
has been formed to serve as the holding company for the U.S. subsidiaries of Sun
Life (Canada) and for general corporate financing purposes.
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 and policies applicable to the Variable Accounts
are discussed in the Compass 2 and 3 Prospectuses. Certain Variable Accounts may
engage in the following investment techniques: options; Futures Contracts;
Options on Futures Contracts; Forward Foreign Currency Contracts; options on
foreign currencies; loan participations and other direct indebtedness; and swaps
and related transactions. These investment techniques and their risks are
described in Appendix D hereto. The investment restrictions applicable to the
Variable Accounts are discussed below.
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
<PAGE>
(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 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.
3
<PAGE>
(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
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.
4
<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.
5
<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.
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, dates of birth, 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 &
(born 10/19/25) Stackpole; and a Trustee of MFS/Sun Life Series Trust.
75 State Street
Boston, Massachusetts 02106
Geoffrey Crofts, Member He is Professor Emeritus, the University of Hartford; and a
(born 5/12/24) Trustee of MFS/Sun Life Series Trust.
74 Scott Drive
Bloomfield, Connecticut 06002
David D. Horn*, Member He is Senior Vice President and General Manager for the
(born 6/7/41) United States of Sun Life Assurance Company of Canada;
One Sun Life Executive Park Senior Vice President and General Manager and a Director of
Wellesley Hills, Massachusetts 02181 Sun Life Assurance Company of Canada (U.S.); Chairman and
President and a Director of Sun Investment Services Company;
President and a Director of Sun Benefit Services Company,
Inc., Sun Canada Financial Co. and Sun Life Financial
Services Limited; a Director of Sun Capital Advisers, Inc.;
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.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BUSINESS
AFFILIATIONS AND PRINCIPAL OCCUPATIONS
MEMBERS AND OFFICERS DURING PAST FIVE YEARS
- --------------------------------------------------- ------------------------------------------------------------
<S> <C>
Derwyn F. Phillips, Member He is Vice Chairman--Retired of The Gillette Company; and a
(born 8/31/30) Trustee of MFS/Sun Life Series Trust.
One Cliff Street
Marblehead, Massachusetts 01945
Garth Marston, Member He is Former Chairman and Chief Executive Officer of the
(born 4/28/26) Provident Institution for Savings; and a Trustee of MFS/Sun
90 Beacon Street Life Series Trust.
Boston, Massachusetts 02108
John D. McNeil*, Chairman and Member He is Chairman and a Director of Sun Life Assurance Company
(born 2/17/34) of Canada, Sun Life Assurance Company of Canada (U.S.) and
150 King Street West Sun Life Insurance and Annuity Company of New York; a
Toronto, Ontario, Canada M5H 1J9 Director of MFS; Chairman and a Trustee of MFS/Sun Life
Series Trust; and a Director of Shell (Canada) Limited and
Canadian Pacific, Ltd.
Stephen E. Cavan*, Secretary He is a Senior Vice President, General Counsel and Assistant
(born 11/6/53) Secretary of Massachusetts Financial Services Company.
500 Boylston Street
Boston, Massachusetts 02116
James R. Bordewick, Jr.*, Assistant Secretary He is a Senior Vice President and Associate General Counsel
(born 3/6/59) of Massachusetts Financial Services Company.
500 Boylston Street
Boston, Massachusetts 02116
<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, received from $625 to $2,800 annually from each Variable Account
depending on attendance at meetings.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEE FEES
TRUSTEE FEES FROM FROM THE VARIABLE ACCOUNTS
TRUSTEE EACH VARIABLE ACCOUNT(1) AND FUND COMPLEX(2)
- ------------------------------------------------ ------------------------- --------------------------
<S> <C> <C>
Samuel Adams.................................... $ 2,500 $ 23,000
Geoffrey Crofts................................. 2,800 26,200
David D. Horn................................... 0** 0**
John D. McNeil.................................. 0** 0**
Garth Marston................................... 2,500 23,500
Derwyn F. Phillips.............................. 2,500 23,500
</TABLE>
- ------------------------
(1) For the year ended December 31, 1996.
(2) Information provided for calendar year 1996. All Trustees receiving
compensation from the Variable Accounts served as Trustees of 27 funds
within the MFS fund complex, having aggregate net assets at December 31,
1996 of $6.9 billion.
** Messrs. Horn and McNeil are affiliated with MFS and receive no compensation
from the Variable Accounts.
7
<PAGE>
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, MFS/Sun Life Series Trust and certain
other investment companies established or distributed by MFS and/or its
affiliates. MFS Institutional Advisors, 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 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.
(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 and manage its investments.
MFS is paid maximum investment management fee for each Variable Account as
follows:
<TABLE>
<CAPTION>
INVESTMENT MANAGEMENT FEE AS A
VARIABLE ACCOUNT % OF AVERAGE DAILY NET ASSETS ("ADNA")
- ------------------------------------ -----------------------------------------------------------------
<S> <C>
Money Market 0.50%
Government Securities 0.55% of first $300 million in ADNA and 0.495% of ADNA
in excess of $300 million
High-Yield
Capital Appreciation 0.75% of first $300 million in ADNA and 0.675% of ADNA in excess
World Governments of $300 million
Total Return
Managed Sectors
</TABLE>
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
charges payable to the Company exceed 1.25% of the average daily net assets of
the Variable Account for the calendar year. No reimbursements were made in 1994,
1995 or 1996. The investment management fees paid by the Variable Accounts
during 1994, 1995 and 1996, respectively, were as follows:
<TABLE>
<CAPTION>
MANAGEMENT MANAGEMENT MANAGEMENT
FEES PAID FOR FEES PAID FOR FEES PAID FOR
FISCAL YEAR FISCAL YEAR FISCAL YEAR
VARIABLE ACCOUNT ENDED 1996 % ADNA ENDED 1995 % ADNA ENDED 1994 % ADNA
- ----------------------------------------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Money Market............................. $ 734,295 0.50% $ 878,426 0.50% $ 884,848 0.50%
Government Securities.................... 1,360,942 0.55 1,510,782 0.55 1,778,596 0.55
High Yield............................... 1,416,024 0.75 1,467,065 0.75 1,408,547 0.75
Capital Appreciation..................... 3,818,062 0.75 3,366,566 0.75 3,468,122 0.75
World Governments........................ 252,025 0.75 281,714 0.75 292,120 0.75
Total Return............................. 2,058,627 0.75 1,834,114 0.75 1,743,343 0.75
Managed Sectors.......................... 674,276 0.75 569,227 0.75 465,258 0.75
</TABLE>
8
<PAGE>
(2) ADMINISTRATOR
MFS provides the Variable Accounts with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Variable Accounts with certain financial,
legal, compliance, shareholder communications and other administrative services.
As a partial reimbursement for the cost of providing these services, each
Variable Account pays MFS an administrative fee up to 0.015% per annum of the
Variable Account's average daily net assets, provided that the administrative
fee is not assessed on the Variable Account's assets that exceed $3 billion.
(3) 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 certain Variable Accounts during 1994,
1995 and 1996 were as follows:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS PAID
-----------------------------------------
VARIABLE ACCOUNT 1994 1995 1996
- ----------------------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
Capital Appreciation................................................... $ 1,345,000 $ 1,372,000 $ 765,000
High Yield............................................................. 13,000 0 0
Total Return........................................................... 124,000 183,000 236,000
Managed Sectors........................................................ 244,000 291,000 264,000
</TABLE>
No commissions were paid by MMVA, GSVA or WGVA in 1994, 1995 and 1996.
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.
9
<PAGE>
ANNUITY PROVISIONS
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Contract's Accumulation Account will be
canceled and its adjusted value will be applied to provide a Variable Annuity or
a Fixed Annuity or a combination of both. The adjusted value will be equal to
the value of the Accumulation Account for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by any applicable
premium or similar taxes and a proportionate amount of the contract maintenance
charge to reflect the time elapsed between the last Contract Anniversary and the
day before the Annuity Commencement Date.
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
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, 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
10
<PAGE>
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) 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
11
<PAGE>
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.
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.
12
<PAGE>
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
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
13
<PAGE>
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.
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
14
<PAGE>
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 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 1994, 1995 and 1996, the following
approximate amounts were paid to and retained by Clarendon in connection with
the distribution of Compass 2 and Compass 3 Contracts participating in the
Variable Accounts:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Compass 2........................................................ $ 314,000 $ 244,000 $ 208,000
Compass 3........................................................ 735,000 542,000 576,000
</TABLE>
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, 1996. 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 SAI.
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).
15
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
(IN 000'S)
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 2,258,858 $ 2,706,067
Preferred stock 0 1,149
Mortgage loans 938,932 1,066,911
Investments in subsidiaries 144,043 138,282
Real estate 100,385 95,574
Other invested assets 51,378 38,387
Policy loans 40,554 38,355
Cash 1,305 (20,280)
Investment income due and accrued 68,190 62,719
Funds withheld on reinsurance assumed 878,798 741,091
Due from separate accounts 220,999 148,675
Other assets 27,509 26,349
-------------- --------------
General account assets 4,730,951 5,043,279
Unitized separate account assets 6,919,219 5,275,808
Non-unitized separate account assets 2,108,835 2,040,596
-------------- --------------
Total Assets $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves $ 2,099,980 $ 1,937,302
Annuity and other deposits 1,898,309 2,290,656
Policy benefits in process of payment 2,677 5,884
Accrued expenses and taxes 57,719 44,114
Other liabilities 63,987 36,080
Due to (from) parent and affiliates--net (41,326) (130,502)
Interest maintenance reserve 28,676 25,218
Asset valuation reserve 53,911 42,099
-------------- --------------
General account liabilities 4,163,933 4,250,851
Unitized separate account liabilities 6,919,094 5,275,784
Non-unitized separate account liabilities 2,108,835 2,040,596
-------------- --------------
13,191,862 11,567,231
-------------- --------------
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 561,243 786,552
-------------- --------------
Total capital stock and surplus 567,143 792,452
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
16
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
Premiums and annuity considerations $ 282,466 $ 279,407 $ 316,008
Deposit-type funds 1,775,230 1,545,542 1,647,623
Considerations for supplementary
contracts without life contingencies
and dividend accumulations 2,340 1,088 2,906
Net investment income 303,753 312,872 315,433
Amortization of interest maintenance
reserve 1,557 1,025 4,128
Miscellaneous income 71,903 57,864 30,988
---------- ---------- ----------
Total 2,437,249 2,197,798 2,317,086
---------- ---------- ----------
Death benefits 12,394 15,317 4,836
Annuity benefits 146,654 140,497 135,256
Surrender benefits and other fund
withdrawals 1,507,263 1,074,396 965,186
Interest on policy or contract funds 2,205 739 572
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 2,120 1,888 2,334
Increase in aggregate reserves for life
and accident and health policies and
contracts 162,678 171,975 219,334
Increase in liability for premium and
other deposit funds (392,348) 13,553 (69,541)
Increase in reserve for supplementary
contracts without life contingencies
and for dividend and coupon
accumulations 327 (663) 714
---------- ---------- ----------
Total 1,441,293 1,417,702 1,258,691
Commissions on premiums and annuity
considerations (direct business only) 109,894 88,037 93,576
Commissions and expense allowances on
reinsurance assumed 18,910 22,012 59,085
General insurance expenses 37,206 34,580 31,243
Insurance taxes, licenses and fees,
excluding federal income taxes 8,431 7,685 5,638
Increase in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums 901 (1,377) (2,650)
Net transfers to Separate Account 678,663 551,784 820,671
---------- ---------- ----------
Total 2,295,298 2,120,423 2,266,254
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and federal
income tax 141,951 77,375 50,832
Dividends to policyholders 29,189 25,722 22,928
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and before federal
income tax 112,762 51,653 27,904
Federal income taxes incurred (excluding
tax on capital gains) (2,702) 17,807 19,469
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and federal income tax
and before realized capital gains or
(losses) 115,464 33,846 8,435
Net realized capital gains or (losses)
less capital gains tax and transferred
to the interest maintenance reserve 7,560 2,069 (6,978)
---------- ---------- ----------
NET INCOME $ 123,024 $ 35,915 $ 1,457
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
17
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
CAPITAL AND SURPLUS, BEGINNING OF YEAR $ 792,452 $ 455,489 $ 483,188
---------- ---------- ----------
Net income 123,024 35,915 1,457
Change in net unrealized capital gains or (losses) (1,715) 2,009 (671)
Change in non-admitted assets and related items 67 (2,270) (1,485)
Change in asset valuation reserve (11,812) (13,690) (8,376)
Other changes in surplus in Separate Accounts Statement 100 (4,038) (227)
Increase (decrease) in surplus notes (335,000) 315,000 0
Miscellaneous gains and losses in surplus 27 4,037 (18,397)
---------- ---------- ----------
Net change in capital and surplus for the year (225,309) 336,963 (27,699)
---------- ---------- ----------
Capital and surplus, end of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
18
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(IN 000'S)
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,059,577 $ 1,826,456 $ 2,287,695
Considerations for supplementary
contracts and dividend accumulations
received 2,340 1,088 2,906
Net investment income received 324,914 374,398 351,058
Other income received 88,295 25,348 30,989
----------- ----------- -----------
Total receipts 2,475,126 2,227,290 2,672,648
----------- ----------- -----------
Benefits paid (other than dividends) 1,671,483 1,231,936 1,326,223
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 172,015 150,463 187,699
Net cash transfers to Separate Accounts 755,605 568,188 963,127
Dividends paid to policyholders 22,689 17,722 13,303
Federal income tax (recoveries)
payments (excluding tax on capital
gains) (15,363) (20,655) 2,976
Other--net 2,205 739 572
----------- ----------- -----------
Total payments 2,608,634 1,948,393 2,493,900
----------- ----------- -----------
Net cash from operations (133,508) 278,897 178,748
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$1,554,873 for 1996, $8,610,951 for
1995 and $19,271,876 for 1994) 1,768,147 1,658,655 1,508,156
Issuance (repayment) of surplus notes (335,000) 315,000
Other cash provided 147,956 419,446 26,512
----------- ----------- -----------
Total cash provided 1,581,103 2,393,101 1,534,668
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 1,318,880 1,749,714 1,442,155
Other cash applied 235,982 796,207 264,233
----------- ----------- -----------
Total cash applied 1,554,862 2,545,921 1,706,388
----------- ----------- -----------
Net change in cash and short-term
investments (107,267) 126,077 7,028
Cash and short-term investments:
Beginning of year 197,326 71,249 64,221
----------- ----------- -----------
End of year $ 90,059 $ 197,326 $ 71,249
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
19
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual fixed
and variable annuities, group fixed and variable annuities and group pension
contracts. The Company also underwrites a block of individual life insurance
business through a reinsurance contract with its parent. Sun Life Assurance
Company of Canada (the "parent company") is a mutual life insurance company.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, that has changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position and results of operations
and capital in conformity with generally accepted accounting principles. (See
Note 19 for further discussion relative to the Company's basis of financial
statement presentation.) The effects on the financial statements of the
variances between the statutory basis of accounting and GAAP, although not
reasonably determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans at the amounts of the unpaid balances.
Real estate investments are carried at the lower of cost adjusted for
accumulated depreciation or appraised value, less encumbrances. Short-term
investments are carried at amortized cost, which approximates fair value.
Depreciation of buildings and improvements is calculated using the straight-line
method over the estimated useful life of the property, generally 40 to 50 years.
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
20
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED):
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market values.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience, not
applicable to contract owners, are transferred to (from) the general account.
Accumulated gains (losses) that have not been transferred are recorded as a
payable (receivable) to (from) the general account. Amounts payable to the
general account of the Company were $220,999,000 in 1996 and $148,675,000 in
1995.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
During 1996, the Company changed its method of accounting and reporting for
deposits withdrawals, and benefits with respect to unitized separate accounts.
Previously, deposits were recorded as direct increases in liabilities of the
separate accounts while withdrawals and benefits were recorded as direct
decreases in that liability. Effective for 1996, the Company recorded: deposits
as revenue in the general account; withdrawals and benefits as expenses in the
general account; and the transfer of those funds between the general account and
the separate account are reflected as an expense (income) item. Amounts
presented for the years ended December 31, 1995 and 1994 have been restated to
conform to this presentation. The effect of this change was to increase revenues
and expenses by $1.4 billion in 1996, $878 million in 1995, and $988 million in
1994; there is no impact on net income of the general account. This new method
of reporting is consistent with the accounting treatment for deposits and
withdrawals and benefits of the non-unitized separate account of the Company,
and is consistent with prescribed statutory accounting practices.
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995 and $1.4 million
greater than the Annual Statement in 1994. Effective for 1996, the Company
changed its method of accounting for investments in subsidiaries to conform with
the prescribed statutory accounting practices used in the preparation of its
Annual Statement. As a result of the change, $5.7 million in undistributed
losses of subsidiaries are reported directly as a separate component of
unassigned surplus rather than being included in net income for the year ended
December 31, 1996. The amounts as reported in prior years have not been
restated.
21
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED):
The Company has also revised the form of its statutory statements of operations,
changes in capital stock and surplus, and cash flow in order to match more
exactly the presentation used in the preparation of its Annual Statement. As a
result, reclassifications have been made in the amounts reported in 1995 and
1994 audited financial statements to conform to the presentation used for the
1996 amounts. Other than as described in the preceding paragraph, none of the
changes have impacted net income or statutory surplus as reported in the 1995
and 1994 audited financial statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York (Sun Life (N.Y.)), Massachusetts Casualty Insurance Company
(MCIC), Sun Investment Services Company (Sunesco), New London Trust, F.S.B.
(NLT), Sun Life Financial Services Limited, Inc. (SLFSL), Sun Benefit Services
Company, Inc. (Sunbesco), Sun Capital Advisers, Inc. (Sun Capital), and Sun Life
Finance Corporation (Sunfinco).
The Company owns 94.8% of the outstanding shares of Massachusetts Financial
Services Company (MFS). The Company previously owned 100% of the shares. During
1996, MFS issued additional shares to officers of MFS, thereby reducing the
Company's ownership to 94.8%.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC is a life insurance company which issues only individual disability
income policies. Sunesco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank. SLFSL serves as the marketing
administrator for the distribution of the Parent company's offshore products.
Sun Capital, a registered investment adviser, Sunfinco, and Sunbesco are
currently inactive.
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 Company, and, through a subsidiary, provides investment
advice to substantial private clients.
In 1994, the Company 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.
On December 31, 1996, the Company issued to the parent a $58,000,000 note which
is scheduled for repayment on February 15, 1997 at an interest rate of 5.70%.
Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at
an interest rate of 5.76% due on demand on or after March 1, 1997. On December
31, 1996 and 1995 the Company had an additional $20,000,000 in notes issued by
MFS, scheduled to mature in 2000. All of these notes are reported as due from
parent and affiliates.
During 1996, 1995 and 1994, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
MCIC $ 10,000,000 $ 6,000,000 $ 6,000,000
SLFSL 1,500,000 0 0
</TABLE>
22
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. INVESTMENTS IN SUBSIDIARIES: (CONTINUED):
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1996, 1995 and 1994 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 9,646 $ 12,174 $ 13,485
Other assets 1,376,014 1,233,372 1,165,595
Liabilities (1,241,617) (1,107,264) (1,044,273)
------------ ------------ ------------
Total net assets $ 144,043 $ 138,282 $ 134,807
------------ ------------ ------------
------------ ------------ ------------
Total revenues $ 717,280 $ 570,794 $ 495,097
Operating expenses (624,199) (504,070) (425,891)
Income tax expense (42,820) (31,193) (29,374)
------------ ------------ ------------
Net income $ 50,261 $ 35,531 $ 39,832
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
3. BONDS:
The amortized cost and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 (0) 2,273
Foreign governments 18,812 1,351 (0) 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,025 7,912 (472) 297,465
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,104 102,728 (27,361) 2,245,471
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 0 0 88,754
------------ ----------- ----------- ------------
$ 2,258,858 $ 102,728 $ (27,361) $ 2,334,225
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
23
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS: (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 467,597 $ 22,783 $ (443) $ 489,937
States, provinces and political subdivisions 2,252 81 (0) 2,333
Foreign governments 38,303 4,551 (6) 42,848
Public utilities 513,704 45,466 (203) 558,967
Transportation 215,786 22,794 (2,221) 236,359
Finance 225,074 13,846 (84) 238,836
All other corporate bonds 1,025,745 67,371 (7,415) 1,085,701
------------ ----------- ------------ ------------
Total long-term bonds 2,488,461 176,892 (10,372) 2,654,981
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 217,606 0 0 217,606
------------ ----------- ------------ ------------
$ 2,706,067 $ 176,892 $ (10,372) $ 2,872,587
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1996 and
1995 are shown below by contractual maturity. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 314,130 $ 315,507
Due after one year through five years 743,215 751,858
Due after five years through ten years 268,376 280,153
Due after ten years 714,504 775,051
------------ ------------
$ 2,040,225 $ 2,122,569
Mortgage-backed securities 218,633 211,656
------------ ------------
$ 2,258,858 $ 2,334,225
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 558,775 $ 561,119
Due after one year through five years 824,446 846,230
Due after five years through ten years 256,552 269,549
Due after ten years 884,187 1,000,908
------------ ------------
2,523,960 2,677,806
Mortgage-backed securities 182,107 194,781
$ 2,706,067 $ 2,872,587
------------ ------------
------------ ------------
</TABLE>
24
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS: (CONTINUED):
Proceeds from sales and maturities of investments in debt securities during
1996, 1995, and 1994 were $1,554,016,000, $1,510,553,000, and $1,390,974,000,
gross gains were $16,975,000, $24,757,000, and $15,025,000 and gross losses were
$10,885,000, $5,742,000, and $30,041,000 , respectively.
Bonds included above with an amortized cost of approximately $2,060,000 and
$2,059,000 at December 31, 1996 and 1995, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $51,537,000 and $250,729,000 and the income
resulting from this program was $137,000, $2,000 and $26,000 at December 31,
1996, 1995 and 1994, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
provisions have been made. In those cases where, in management's judgement, the
mortgage loans' values are impaired, appropriate losses are recorded.
The following table shows the geographical distribution of the mortgage
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ------------
(IN 000'S)
<S> <C> <C>
California $ 154,272 $ 153,811
Massachusetts 79,929 83,999
Michigan 57,119 69,125
New York 67,742 81,480
Ohio 75,405 83,915
Pennsylvania 115,584 141,468
Washington 75,819 91,900
All other 313,062 361,213
---------- ------------
$ 938,932 $ 1,066,911
---------- ------------
---------- ------------
</TABLE>
The Company has restructured mortgage loans totalling $29,261,000, and
$49,846,000 at December 31, 1996 and 1995, respectively, against which there are
provisions of $5,893,000 and $8,799,000 at December 31, 1996 and 1995,
respectively.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $9,800,000 and
$13,100,000 at December 31, 1996 and 1995, respectively.
25
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INVESTMENTS GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 5,631 $ 3,935 $ (858)
Mortgage loans 763 292 (5,689)
Real estate 599 391 (334)
Other assets 567 (2,549) (97)
--------- --------- ---------
$ 7,560 $ 2,069 $ (6,978)
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (5,739) $ 0 $ 0
Mortgage loans (600) (1,574) 0
Real estate 4,624 3,583 (671)
--------- --------- ---------
$ (1,715) $ 2,009 $ (671)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve (IMR) and amortized into income over the remaining contractual life of
the security sold. The gross realized capital gains and losses credited or
charged to the interest maintenance reserve were a credit of $7,710,000 in 1996,
a credit of $12,714,000 in 1995, and a charge of $14,070,000 in 1994. All gains
and losses are transferred net of applicable taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 178,695 $ 205,445 $ 200,338
Income from investment in common stock of affiliates 50,408 35,403 39,577
Interest income from mortgage loans 92,591 99,766 106,404
Real estate investment income 16,249 14,979 12,950
Interest income from policy loans 2,790 2,777 2,669
Other 1,710 2,672 1,212
---------- ---------- ----------
Gross investment income 342,443 361,042 363,150
Interest on surplus notes (23,061) (31,813) (31,150)
Investment expenses (15,629) (16,357) (16,567)
---------- ---------- ----------
$ 303,753 $ 312,872 $ 315,433
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
26
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocates gains (losses) to specific hedged
assets or liabilities, gains ( losses) are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1996 and December 31,
1995 there were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1995
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 367,000 $ 3,275
Foreign currency swap 2,745 290
Forward spread lock swaps 50,000 112
</TABLE>
The market value is the estimated amount that the Company would receive or pay
on termination or sale, taking into account current interest rates and the
current creditworthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
27
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. LEVERAGED LEASES: (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 101,244 $ 111,611
Less non-recourse debt 101,227 (111,594)
---------- ----------
17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (11,501) (13,132)
---------- ----------
Investment in leveraged leases 29,666 28,035
Less fees (188) (213)
---------- ----------
Net investment in leveraged leases $ 29,478 $ 27,822
---------- ----------
---------- ----------
</TABLE>
The net investment is classified as other invested assets in the accompanying
statements of admitted assets, liabilities, capital stock and surplus.
10. REINSURANCE:
The Company 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 Company. Under these agreements basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively. Reinsurance transactions under these agreements
had the effect of decreasing income from operations by approximately $1,603,000,
$2,184,000, and $2,138,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Effective January 1, 1991, the Company entered into an agreement with the parent
company under which certain individual life insurance contracts issued by the
parent company were reinsured by the Company on a 90% coinsurance basis. Also,
effective January 1, 1991, the Company 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 Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. These agreements had
the effect of increasing income from operations by approximately $35,161,000 and
$11,821,000 for the years ended December 31, 1996 and 1995, respectively, and
decreasing income by approximately $29,188,000 for the year ended December 31,
1994. The life reinsurance assumed agreement requires the reinsurer to withhold
funds in amounts equal to the reserves assumed.
28
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. REINSURANCE: (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1996, 1995 and 1994 before the effect of
reinsurance transactions with the parent company.
<TABLE>
<CAPTION>
PRO-FORMA RESULTS PRE-REINSURANCE
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 1,858,145 $ 1,619,337 $ 2,053,408
Net investment income and realized gains 312,870 315,967 312,582
------------ ------------ ------------
Subtotal 2,171,015 1,935,304 2,365,990
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 1,928,720 1,760,917 2,183,282
Other expenses 155,531 130,302 130,456
------------ ------------ ------------
Subtotal 2,084,251 1,891,219 2,313,738
------------ ------------ ------------
Income from operations $ 86,764 $ 44,085 $ 52,252
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $46,000 in 1996, and by
$1,599,000 in 1995, and increasing income from operations by $1,854,404 in 1994.
29
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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, 1996
----------------------------
AMOUNT % OF TOTAL
-------------- ------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment
--with market value adjustment $ 3,547,683 30.44%
--at book value less surrender charges (surrender charge >5%) 5,626,117 48.27
--at book value (minimal or no charge or adjustment) 1,264,586 10.85
Not subject to discretionary withdrawal provision 1,218,157 10.44
-------------- ------
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100.00%
-------------- ------
-------------- ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
AMOUNT % OF TOTAL
-------------- ------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment
--with market value adjustment $ 3,796,596 36.36%
--at book value less surrender charges (surrender charge >5%) 4,066,126 38.94
--at book value (minimal or no charge or adjustment) 1,278,215 12.24
Not subject to discretionary withdrawal provision 1,301,259 12.46
-------------- ------
Total annuity actuarial reserves and deposit liabilities $ 10,442,196 100.00%
-------------- ------
-------------- ------
</TABLE>
12. RETIREMENT PLANS:
The Company 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 Company is charged for
its share of the pension cost based upon its covered participants. Pension plan
assets consist principally of separate accounts of the parent company.
The Company's share of the group's accrued pension cost at December 31, 1996,
1995 and 1994 was $446,000, $420,000, and $417,000, respectively. The Company's
share of net periodic pension cost was $27,000, $3,000, and $417,000, for 1996,
1995 and 1994, respectively.
The Company also participates with its parent and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $233,000, $185,000 and $152,000 for the years ended December
31, 1996, 1995, and 1994, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS:
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
30
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. RETIREMENT PLANS: (CONTINUED):
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Post-retirement Benefits
Other than Pensions.' SFAS No. 106 requires the Company 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 Company has elected to recognize this obligation
of approximately $400,000 over a period of ten years. The Company's cash flows
are not affected by implementation of this standard, but implementation
decreased net income by $209,000, $142,000, and $114,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Effective June 5, 1996, the
Company made certain changes regarding eligibility and benefits to its post-
retirement health benefits plans for retirees on or after that date. The impact
of these changes is a decrease of 1996 post-retirement benefit costs of
$599,000. The Company's post-retirement health care plans currently are not
funded.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $ 2,258,858 $ 2,339,126
Mortgages 938,932 958,909
LIABILITIES
Insurance reserves 122,606 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $ 2,706,067 $ 2,872,586
Mortgages 1,066,911 1,111,895
LIABILITIES
Insurance reserves 124,066 124,066
Individual annuities 434,261 431,263
Pension products 2,227,882 2,265,386
Derivatives -- 3,387
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
31
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED):
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
taking into account prices for publicly traded bonds of similar credit risk and
maturity and repayment and liquidity characteristics.
The fair values of the Company's general account reserves and liabilities under
investment-type contracts (insurance, annuity and pension contracts that do not
involve mortality or morbidity risks) are estimated using discounted cash flow
analyses or surrender values. Those contracts that are deemed to have short-term
guarantees have a carrying amount equal to the estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note #8.
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 42,099 $ 25,218 $ 28,409 $ 18,140
Realized investment gains (losses), net of tax 3,160 5,011 (1,524) 7,977
Amortization of investment (gains) losses 0 (1,557) 0 (899)
Unrealized investment gains (losses) 1,502 0 3,650 0
Required by formula 7,150 4 11,564 0
--------- --------- --------- ---------
Balance, end of year $ 53,911 $ 28,676 $ 42,099 $ 25,218
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $19,264,000, $12,429,000 and
$43,200,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
32
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
16. SURPLUS NOTES AND NOTE RECEIVABLE:
The Company had issued and outstanding surplus notes to its parent with an
aggregate carrying value of $335,000,000 during the period 1982 through January
16, 1996 at interest rates between 7.25% and 10%. The Company repaid all
principal and interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totalling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007, and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes; and, in the case
of principal repayments, with the consent of the Delaware Insurance
Commissioner. In addition, with regard to surplus notes outstanding through
January 16, 1996, subsequent to December 31, 1994 interest payments required the
consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 also requires the consents of the Delaware
Insurance Commissioner and Canadian Office of the Superintendent of Financial
Institutions.
During 1996, 1995 and 1994, the Company obtained the required consents, and
expensed $23,061,000, $31,813,000 and $31,150,000 in respect of interest on
surplus notes for the years 1996, 1995 and 1994, respectively.
On December 19, 1995, the parent borrowed $120,000,000 at 5.6% through a
short-term note from the Company maturing on January 16, 1996. The note, which
is included in due from parent and affiliates at December 31, 1995, was repaid
in full by the parent at maturity.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company 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 $20,192,000 in 1996, $20,293,000 in 1995, and
$18,452,000 in 1994.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1996
and 1995.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices, which prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the
33
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
19. ACCOUNTING POLICIES AND PRINCIPLES: (CONTINUED):
Company's surplus. Changes in the net equity value of the common stock of all
other subsidiaries are directly reflected in the Company's Investment Valuation
Reserves. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: Statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP-- deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices than under GAAP. Actuarial assumptions and reserving
methods differ under statutory accounting practices and GAAP. Premiums for
universal life and investment type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of the Company has determined that the cost
of complying with Statement No. 120 would exceed the benefits that the Company,
or the users of its financial statements would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1996 and 1995, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 signficant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of Dcember 31, 1996
and 1995, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1996 on the basis of accountng
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1996 and 1995 or the results of its operations or its cash flow for each of
the three years in the period ended December 31, 1996.
In our previous report dated February 7, 1996, we expressed an opinion that the
1995 and 1994 financial statements, prepared using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
presented fairly, in all material respects, the financial position of Sun Life
Assurance Company of Canada (U.S.) as of December 31, 1995, and the results of
its operations, and its cash flow for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles. As described in
Notes 1 and 19 to the financial statements, pursuant to the provisions of
Statement of Financial Accounting Standards No. 120, ACCOUNTING AND REPORTING BY
MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN
LONG-DURATION PARTICIPATING CONTRACTS, financial statements of mutual life
insurance enterprises (and stock life insurance companies that are wholly owned
subsidiaries of mutual life insurance companies) for periods ending on or before
December 15, 1996, prepared using accounting practices prescribed or permitted
by insurance regulators, are not considered presentations in conformity with
generally accepted accounting principles when presented for comparative purposes
with the enterprise's financial statements for periods subsequent to the
effective date of Statement No. 120. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
As management as stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
February 3, 1997
35
<PAGE>
APPENDIX A
THE FIXED ACCOUNT
THAT PORTION OF THE CONTRACT RELATING TO THE FIXED ACCOUNT IS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") AND THE FIXED ACCOUNT IS NOT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940
("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN
ARE SUBJECT TO THE PROVISIONS OR RESTRICTIONS OF THE 1933 ACT OR THE 1940 ACT,
AND THE DISCLOSURE IN THIS APPENDIX A HAS NOT BEEN REVIEWED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION. HOWEVER, THE FOLLOWING DISCLOSURE ABOUT THE
FIXED ACCOUNT MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE
FEDERAL SECURITIES LAWS REGARDING THE ACCURACY AND COMPLETENESS OF DISCLOSURE.
A WORD ABOUT THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to the Fixed Account as elected by the Owner at the time of purchase
or as subsequently changed. The Company will invest the assets of the Fixed
Account in those assets chosen by the Company and allowed by applicable 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).
36
<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.
37
<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.
38
<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 canceled Accumulation Units.
This withdrawal would liquidate the remaining $1,200 from the Purchase
Payment in Contract Year 1, the full $2,000 Purchase Payment from Contract
Year 2, and $1,300 of the Payment from Contract Year 3.
Suppose that the Owner of the Contract wanted to make a full surrender of
the Contract in year 7 instead of a $4,500 partial withdrawal. The consequences
would be as follows:
1. In the first instance, where there were no previous cash withdrawal
payments, we know from above that the maximum free withdrawal amount in the
7th Contract year is $5,000. The sum of the old and new Payments not
previously liquidated is $14,000 ($2,000 from each Contract Year). The
amount subject to 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>
39
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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.
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APPENDIX D
CERTAIN INVESTMENT TECHNIQUES AND RISKS
A discussion of options, Futures Contracts, Options on Futures Contracts,
Forward Foreign Currency Contracts, options on foreign currencies, loan
participations and other direct indebtedness and swaps and related transactions
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 liquid assets
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
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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 INDICES--An Account will cover call options on indices 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 indices by segregating liquid 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 indices 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 indices 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
42
<PAGE>
indices 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 indices 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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<PAGE>
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 liquid assets 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 liquid assets 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 Futures Contracts and options entails the additional risk of
imperfect correlation between movements in
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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 indices 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 indices 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, suspensions, exchange or clearing
house equipment failures government intervention, insolvency of a
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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 indices 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 indices 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 indices, 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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<PAGE>
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 liquid assets 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 indebtedness 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 of definitive regulatory guidance,
the Account relies on the Adviser's research in an attempt to avoid
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situations where fraud or misrepresentation could adversely affect the Account.
In addition, loan participations and other direct indebtedness 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.
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APPENDIX E
TRANSACTIONS IN SECURITIES OF REGULAR
BROKER-DEALERS AND THEIR AFFILIATES
During the year ended December 31, 1996 each of the Government Securities
Variable Account ("GSVA"), Money Market Variable Account ("MMVA"), High Yield
Variable Account ("HYVA"), Total Return Variable Account ("TRVA") and Managed
Sectors Variable Account ("MSVA") purchased and retained securities of
affiliates of their regular broker-dealers, as follows:
<TABLE>
<CAPTION>
AMOUNT AS OF
ACCOUNT PURCHASED AND RETAINED SECURITIES OF AFFILIATES DECEMBER 31, 1996
- ----------- ---------------------------------------------------------------------------------- -------------------
<S> <C> <C>
GSVA Goldman Sachs & Co. $ 65,465,000
MSVA Ford Motor Credit 1,135,000
MMVA Bank of America 2,962,000
MMVA Ford Motor Credit 5,980,000
TRVA Ford Motor Credit 7,999,000
TRVA General Electric Co. 7,506,000
TRVA Lehman Brothers 1,556,000
TRVA Merrill Lynch, Pierce Fenner & Smith, Inc. 366,000
HYVA Ford Motor Credit 5,474,000
</TABLE>
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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
COUS-13-5/97/350
<PAGE> 1
DEAR CONTRACT OWNERS:
The pattern of slow but sustainable growth seen in most of the world in 1996
seems likely to continue in 1997. While it appears that U.S. growth in 1997 will
slow modestly relative to 1996, there is evidence that the European economies
and, to a lesser degree, Japan, are continuing to recover from recession. At the
same time, companies in many emerging markets are reporting robust increases in
earnings as these economies benefit from higher-than-average growth and open
market reforms, which should continue to provide more opportunities for
development and trade.
U.S. OUTLOOK
After more than six years of expansion, the U.S. economy appears headed toward
another year of at least moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and subdued inflation experienced over the
past few years now seems fairly well entrenched and appears to have enough
momentum to continue on track for some time. Also, recent gains in such
important sectors as housing, automobiles, industrial production, and exports
indicate a fair amount of underlying strength in the economy. However, some
reason for caution can be seen in the continuing high levels of consumer debt
and the attendant rise in personal bankruptcies, as well as the modestly
disappointing levels of holiday sales. Also, the ongoing tightness in labor
markets, and price rises in such important sectors as energy, could add some
inflationary pressures to the economy. Given these somewhat conflicting
indicators, we expect real (inflation-adjusted) growth to revolve around 2% in
1997, which would represent a modest decline from 1996.
GLOBAL OUTLOOK
Internationally, the environment of moderate growth, benign inflation, and
fairly steady interest rates is also providing support for investment markets
and should help sustain valuation levels in the coming year. Throughout the
world, the key to stock market performance in 1997 will be corporate earnings
growth. While U.S. earnings growth is slowing but still expected to be fairly
healthy, we anticipate that a number of European countries will see an
acceleration in earnings growth and improved valuations in 1997. Despite this
environment, many European stock markets trade at discounts to the United
States. In particular, we see opportunities in some of the multinationals and in
businesses with the ability to generate steady earnings growth. In Japan, a
recovery appears to be taking place, but at a very modest rate, with valuations
still at high levels. In the emerging markets, the long-term economic growth
story remains intact and, although selectivity is even more critical in these
markets, an increasing number of companies are benefiting from this economic
expansion while trading at below-average global valuations.
BOND MARKETS
Conflicting signals over the strength of the economy have created near-term
volatility in U.S. bond markets. Comments by Federal Reserve Chairman Alan
Greenspan late in 1996 have created some uncertainty over the Federal Reserve
Board's next move. However, we expect the Fed to maintain its anti-inflationary
stance should signs of more rapid economic growth and, particularly, higher
inflation resurface. While inflationary forces largely remained in check in
1996, the continued strength in labor markets and rising energy prices mean that
some pickup in inflation is still possible. However, the U.S. budget deficit
continues to decline
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and, as a percentage of gross domestic product, is now less than 2%, which we
consider a positive development for the bond markets. Although interest rates
may move higher over the coming months, we believe that, at current levels,
fixed-income markets remain fairly valued.
STOCK MARKET
While U.S. equity returns of the past two years have been impressive, we would
anticipate returns in 1997 to be closer to historical levels. Just as the
slowdown in corporate earnings growth and increases in interest rates in 1996
raised some near-term concerns, further interest rate increases and an
acceleration of inflation could negatively affect the stock market in 1997.
However, to the extent that some slowdown in earnings means that the economy is
not overheating, this may be beneficial for the equity market in the long run.
Also, we believe many of the technology-driven productivity gains that U.S.
companies have made in recent years will continue to enhance corporate America's
competitiveness and profitability. Therefore, while we have some near-term
concerns, we remain reasonably positive that the equity market will produce
satisfactory long-term returns.
Specific information on each Account's performance and our current investment
strategy are provided on the following pages. The performance figures provided
in the discussion do not reflect the deduction of separate account charges.
Results would have been lower had these charges been deducted. We appreciate
your support and welcome any questions or comments you may have.
On behalf of the
Board of Managers,
/s/ John D. McNeil
---------------------
John D. McNeil
January 12, 1997 Chairman
CAPITAL APPRECIATION VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account provided a total return of
21.99%, compared to a return of 22.95% for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock performance. The
Account's performance benefited from a significant weighting in the technology
sector, in particular Intel and Microsoft, both of which have strong market
positions related to the personal computer business. Lodging stocks such as HFS,
Inc., a hotel franchiser, also contributed significantly to performance. Other
significant contributors included Tyco International, a fire control and health
care products manufacturer, and Wisconsin Central, a railroad company.
Performance was negatively impacted by the underweighting in oil and oil
services, which benefited from rising oil prices, and financial services, which
performed well despite generally flat interest rates. Both of these sectors
outperformed the S&P 500 during the year.
The Account continues to seek companies possessing five key ingredients:
earnings momentum, reasonable valuations, good management, a strong balance
sheet, and positive secular trends. Given that current price/earnings multiples
are reasonable, earnings momentum is the focus to achieving further stock price
appreciation. Our largest concentration remains in the technology area, which is
seeing strong spending by corporations focused on improving their productivity.
Other large weightings are in lodging and in industrial goods such as
agricultural equipment, which should benefit from a continuing strong farm
economy.
GOVERNMENT SECURITIES VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account provided a total return of
1.65%, com-
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<PAGE> 3
pared to a 3.68% return for the Lehman Brothers Government/Mortgage Index (the
Lehman Index), an unmanaged index of U.S. Treasury, government-agency, and
mortgage-backed securities. Nearly half of the portfolio is held in U.S.
Treasury securities, U.S. agency debentures, and Small Business Association
loans. These issues currently yield between 6.0% and 7.4%. Issue maturities are
distributed across the entire maturity spectrum but vary from the Lehman Index,
with an overweighting in shorter maturities and an underweighting in longer
maturities. The agency issues add between 0.20% and 1.10% incremental yield
above comparable U.S. Treasury issues. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.)
The remainder of the portfolio is in U.S. agency mortgage-backed pass-through
certificates. These issues are held for both their yield characteristics and
extension-risk protection. Both 30- and 15-year issues are currently
represented, with yields that average 1.00% greater than comparable Treasury
issues. These issues have stable prepayment rates, which should make them move
in a predictable fashion with their Treasury counterparts. Should we become more
constructive on the market, we will decrease the portfolio's allocation to
mortgage-backed securities and increase its allocation to five- and 10-year
Treasury issues.
HIGH YIELD VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account posted a total return of
12.6%, compared to a return of 11.4% for the Lehman Brothers High Yield Bond
Index. The Account benefited as the credit quality of its typical high-yield
investment improved throughout the year. In addition, a number of companies in
the portfolio were acquired and their high-yield debt retired at premiums to
secondary-market prices. Performance was negatively impacted by the
overweighting of defensive industries such as supermarkets and media earlier in
the year.
The high-yield market was the best performing domestic fixed-income market in
1996. The economy was stronger than generally forecast, and most high-yield
issuers fared well. The improvement in credit quality more than compensated for
the rise in interest rates. Favorable technical factors reinforced these
positive credit fundamentals. The demand for high-yield bonds outpaced supply
due to strong cash inflows into high-yield mutual funds and increased buying
interest from traditional investment-grade accounts. These favorable credit and
technical factors caused the spread between the yield on high-yield bonds and
Treasury securities to narrow, which led to higher bond prices. (Principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity.) The high-yield market currently offers approximately 3.25
percentage points more yield than the Treasury bond market. We would not expect
this spread to widen significantly given our outlook for continued modest
economic growth and the prospects for further credit improvements. While this
spread is near the lower end of its historic range, it represents a 50% premium
to the yields currently available on Treasury securities, and we believe it is
adequate compensation for the credit risk associated with the high-yield market.
Recently, we have selectively added to the metals sector by buying bonds of
specialty steel manufacturers. Despite longer-term concerns regarding capacity
additions, steel prices have been firm, reflecting continued strong demand. We
have balanced this cyclical exposure with an
3
<PAGE> 4
overweighted position in such name-brand consumer products companies as
Westpoint Stevens, Sealy, Samsonite, and Revlon Cosmetics. The Account continues
to emphasize telecommunication credits in such high-growth areas as wireless
personal communication services. The Account is underweighted in the cable
television sector due to increased competition from alternative media sources.
We continue to seek companies which have improving credit quality and whose
high-yield bonds offer attractive expected returns.
MANAGED SECTORS VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account provided a total return of
18.03%, compared to a return of 22.95% for the S&P 500. Weakness in the
technology sector hindered performance in the first several months of 1996.
Also, weakness in the Account's gaming positions and continued softness in
stocks of health maintenance organizations (HMOs), recent additions to the
Account, have hurt results. This was offset to some degree by good performances
in the Account's energy holdings as well as by strong individual performance in
names such as First Interstate, Freddie Mac, Intel, BMC Software, Promus Hotels,
Tyco International, and ADT Ltd.
The Account has recently narrowed its sector focus to four areas. The technology
weighting has been increased as dramatic price corrections in many of that
industry's segments have presented what we believe is an opportunity to buy
high-quality companies at relative valuations well below both the market and
historic averages, despite our expectations of above-average earnings growth.
Energy weightings (primarily oil services companies) have been modestly
increased as the prospect for consolidation-driven cost savings and enhanced
operating leverage in a favorable overall environment for energy continues to
bode well for superior earnings growth in natural gas and oil. The Account's
allocation to the leisure sector, primarily gaming and cellular, has remained
approximately the same. The health care sector was added during the year and
consists primarily of HMOs. Stocks in this area suffered major corrections as
earnings growth slowed, primarily due to weaker-than-expected pricing. We still
believe the prospects for unit growth are very positive and pricing expectations
have improved, and we expect earnings for HMOs to reaccelerate in 1997 and
beyond, well above the current consensus. Finally, the "other" category, which
consists of prospective future sectors and/or individual ideas we believe the
Account is better off owning than not, has been concentrated to reduce the
number of holdings and increase weightings in stocks we believe represent
attractive values. Names such as Tyco International, ADT Ltd., Wisconsin
Central, Loral Space and Communications, Office Depot, McDonnell Douglas, Sears,
and Equitable of Iowa are examples of the above.
Looking ahead, we believe the best course of action for the Account is to
concentrate holdings in companies led by strong management teams and which have
visible earnings growth and attractive relative valuations.
MONEY MARKET VARIABLE ACCOUNT
Interest rates on short-term (30 days and less) debt instruments remained
relatively stable during the past 12 months. The Federal Reserve Board lowered
short-term interest rates on January 31, 1996 by 25 basis points (0.25%), from
5.50% to 5.25%. The federal funds' rate remained at 5.25% for the rest of 1996.
Because
4
<PAGE> 5
of this, we maintained average maturities between 40 and 50 days.
We continue to limit the Account's investments to securities issued or
guaranteed by the U.S. Treasury or agencies or instrumentalities of the U.S.
government, as well as to the highest quality corporate and bank issues, in an
effort to provide maximum security against credit risk. At the present time,
approximately 64% of the portfolio is invested in U.S. government or
government-guaranteed issues, and the balance is in corporate and bank issues.
The Account is neither insured nor guaranteed by the U.S. government, and there
can be no assurance that it will be able to maintain a stable net asset value of
$1.00 per share.
TOTAL RETURN VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account provided a total return of
13.92%, compared to returns of 22.95% for the S&P 500 and 2.90% for the Lehman
Brothers Government Corporate Bond Index (the Lehman Index), an unmanaged,
market-value-weighted index of U.S. Treasury and government-agency securities,
excluding mortgage-backed securities. Over the past year, the Account held about
55% of its assets in common stocks, preferred stocks, and convertible bonds.
This allocation provided the bulk of the Account's return as a whole, as the
U.S. stock market continued its trend of 1995, posting spectacular gains. The
remainder of the Account was invested in a blend of corporate bonds and U.S.
Treasury bonds, with an overall duration between five and six years. The fixed-
income sector also provided positive returns; however, their magnitude was far
less than that of the Account's stock portion.
The Account's stock investment strategy has focused on companies that, in our
view, have earnings prospects or asset values equal to or higher than the
overall market as measured by the S&P 500. Two sectors that we believe fit our
investment criteria are the energy and financial services sectors. Bank stocks
have done particularly well because earnings have risen steadily and an increase
in merger activity has made nearly all banks more valuable. We also favor the
health care sector, where strong earnings and industry consolidation have
improved the outlook for the stocks of many of these companies. In addition, we
currently favor the aerospace industry, which we believe will benefit from a
cyclical increase in the number of aircraft being built over the next three
years. During the period covered by this report, we avoided the technology
sector because, in our view, while many of these stocks have high growth
prospects, they also have high valuations, which means they often carry greater
risk. The Account is also underweighted in consumer companies because of their
inability to raise prices as the U.S. consumer continues to demand more value at
lower prices.
Given where equity valuations are today, we feel comfortable with our current
asset allocation. However, should the stock market experience a meaningful
correction, we would be looking to increase our stock allocation.
WORLD GOVERNMENTS VARIABLE ACCOUNT
For the year ended December 31, 1996, the Account provided a total return of
4.47%, compared to a 3.62% return for the Salomon Brothers World Government Bond
Index (the Salomon Index), an unmanaged index consisting of complete universes
of government bonds with remaining maturities of at least five years. The first
half of 1996 witnessed concerns about accelerating U.S. growth and its potential
boost to other
5
<PAGE> 6
major economies, which set off a rise in interest rates based on fears of higher
inflation and potential rate hikes by the Federal Reserve Board. However, during
the year's second half, these concerns proved unwarranted as the U.S. economy
slowed, inflation fears receded, and rates aggressively declined. During this
second half most central banks, with the exception of the United States, lowered
official interest rates.
By the end of the year, as measured in local currency returns and by the Salomon
Index, all markets registered positive returns but with significant differences.
For example, the core markets -- the United States, Japan, and Germany -- were
the worst performers, while the higher-yielding markets of Australia, Canada,
Japan, and Italy were among the better performers. The Account benefited by
being overweighted in these higher-yielding markets for most of the year.
In preparation for the monetary union due to commence in January 1999, almost
all European countries announced tight fiscal budgets, while at the same time
cutting interest rates due to slow growth and low inflation. Within Europe, a
dramatic narrowing of yield spread differentials, or outperformance, began in
earnest during the third quarter, with Spain, Italy, and Sweden being the main
beneficiaries. Although a good part of this convergence has now taken place, we
anticipate these markets will continue to outperform as European monetary union
approaches.
Meanwhile, in the dollar bloc, both Canada and Australia continue to benefit
from low inflation, slow growth, and tight fiscal budgets. The Account benefited
by being overweighted in both these markets for most of the year. Looking ahead,
while there still is no immediate threat of higher inflation in Canada, economic
growth is finally picking up and, therefore, we expect the Bank of Canada to be
accommodative in 1997. While an underweighted position in U.S. bonds has been
beneficial for the year, the Account's performance was hindered during the third
quarter as the U.S. position's duration (a measure of interest rate sensitivity)
was low in anticipation of a pickup in U.S. economic growth that never
materialized.
In regards to the Japanese bond market, the Account was underweighted for most
of the year because we felt other markets offered better value. However, the
Japanese bond market was helped by continued depressed real estate and banking
sectors, as well as by weak consumer spending. Our outlook calls for a
continuation of slow, choppy growth with a modest increase in inflation.
For the year, the overall rise in U.S. interest rates, coinciding with
reductions in short-term rates in Europe, has enabled the dollar to appreciate
against the German mark. In addition, the dollar also benefited from yield
convergence within Europe. The dollar has continued to strengthen versus the
Japanese yen, based primarily on Japan's low interest rates and the government's
policy of engineering a weaker currency in order to stimulate its beleaguered
economy. Looking forward, we anticipate modest but further central bank lowering
of interest rates in many European countries as well as in Australia and New
Zealand, an environment that we believe could continue to be positive for bonds.
However, some caution is warranted as, ultimately, the effect of lower rates in
these countries will result in a pickup in economic growth and, possibly,
inflation. Moreover, with the U.S. currency benefiting from positive interest
rate differentials, renewed hope for a
6
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balanced budget, and movement toward an inclusive, single European currency, the
prospects for a stable dollar remain favorable.
INVESTMENT OBJECTIVES AND POLICIES
CAPITAL APPRECIATION VARIABLE ACCOUNT (CAVA) seeks capital appreciation by
investing in securities of all types, with a major emphasis on common stocks.
GOVERNMENT SECURITIES VARIABLE ACCOUNT (GSVA) seeks current income and
preservation of capital by investing in U.S. government and government-related
securities.
HIGH YIELD VARIABLE ACCOUNT (HYVA) seeks current income and capital appreciation
by investing primarily in fixed-income securities of U.S. and foreign issuers
which may be in the lower-rated categories or unrated and may include equity
features.
MANAGED SECTORS VARIABLE ACCOUNT (MSVA) seeks 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.
MONEY MARKET VARIABLE ACCOUNT (MMVA) seeks maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months. Investments in the Account are
neither guaranteed nor insured by the U.S. government.
TOTAL RETURN VARIABLE ACCOUNT (TRVA) seeks 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. Under normal market conditions, at least 25% of the
Account's assets will be invested in fixed-income securities, and at least 40%
and no more than 75% of its assets will be invested in equity securities.
WORLD GOVERNMENTS VARIABLE ACCOUNT (WGVA) seeks moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
foreign government securities.
ONE-YEAR PERFORMANCE THROUGH
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Compass 2 (U.S.) Compass 3 (U.S.)
<S> <C> <C>
Capital Appreciation
Variable Account 20.41% 20.28%
Government Securities
Variable Account 0.36% 0.26%
High Yield Variable
Account 11.15% 11.04%
Managed Sectors Variable
Account 16.58% 16.40%
Money Market Variable
Account 3.57% 3.47%
Total Return Variable
Account 12.52% 12.35%
World Governments Variable
Account 3.14% 2.99%
</TABLE>
These performance results reflect any applicable contract or surrender charges.
Past performance is no guarantee of future results.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS -- December 31, 1996
CAPITAL APPRECIATION VARIABLE ACCOUNT -- CAVA
<TABLE>
<CAPTION>
STOCKS -- 98.9%
Issuer Shares Value
<S> <C> <C>
U.S. COMMON STOCKS -- 92.9%
ADVERTISING -- 0.2%
TMP Worldwide, Inc. ............... 18,600 $ 237,150
Universal Outdoor Holdings,
Inc.*............................ 36,700 862,450
------------
$ 1,099,600
------------
AEROSPACE -- 3.6%
Lockheed Martin Corp. ............. 57,800 $ 5,288,700
McDonnell-Douglas Corp. ........... 145,300 9,299,200
United Technologies Corp. ......... 82,800 5,464,800
------------
$ 20,052,700
------------
AGRICULTURAL PRODUCTS -- 2.3%
AGCO Corp. ........................ 150,400 $ 4,305,200
Case Corp. ........................ 157,700 8,594,650
------------
$ 12,899,850
------------
AIRLINES -- 0.9%
America West Airlines, "B"*........ 99,200 $ 1,574,800
Southwest Airlines Co. ............ 162,700 3,599,737
------------
$ 5,174,537
------------
AUTOMOTIVE -- 0.6%
APS Holding Corp., "A"*............ 57,300 $ 888,150
Goodrich (B.F.) Co. ............... 64,100 2,596,050
------------
$ 3,484,200
------------
BANKS AND CREDIT COMPANIES -- 0.7%
Fleet/Norstar Financial Group,
Inc. ............................ 77,900 $ 3,885,263
------------
BUSINESS MACHINES -- 0.8%
Sun Microsystems, Inc.*............ 165,800 $ 4,258,988
------------
BUSINESS SERVICES -- 5.9%
AccuStaff, Inc.*................... 67,200 $ 1,419,600
ADT Ltd.*.......................... 339,200 7,759,200
ALCO Standard Corp. ............... 164,400 8,487,150
Ceridian Corp.*.................... 101,900 4,126,950
Corestaff, Inc.*................... 61,050 1,446,122
DST Systems, Inc.*................. 167,800 5,264,725
Loewen Group, Inc. ................ 82,900 3,243,462
Sabre Group Holding, Inc., "A"*.... 50,600 1,410,475
------------
$ 33,157,684
------------
CHEMICALS -- 0.6%
Betzdearborn, Inc. ................ 15,000 877,500
Praxair, Inc. ..................... 56,000 2,583,000
------------
$ 3,460,500
------------
<CAPTION>
Issuer Shares Value
<S> <C> <C>
U.S. COMMON STOCKS -- continued
COMPUTER SOFTWARE -- PERSONAL COMPUTERS -- 4.1%
Electronic Arts, Inc.*............. 95,300 $ 2,853,044
First Data Corp. .................. 98,800 3,606,200
Microsoft Corp.*................... 197,000 16,277,125
------------
$ 22,736,369
------------
COMPUTER SOFTWARE -- SYSTEMS -- 8.8%
Adobe Systems, Inc. ............... 198,100 $ 7,403,987
BMC Software, Inc.*................ 25,100 1,038,513
Cadence Design Systems, Inc.*...... 378,200 15,033,450
Computer Associates International,
Inc. ............................ 119,700 5,955,075
Micros Systems, Inc.*.............. 102,400 3,148,800
Oracle Systems Corp.*.............. 298,650 12,468,638
Sybase, Inc.*...................... 121,500 2,027,531
Synopsys, Inc.*.................... 47,000 2,173,750
------------
$ 49,249,744
------------
CONSUMER GOODS AND SERVICES -- 7.8%
Colgate-Palmolive Co. ............. 53,500 $ 4,935,375
Gillette Co. ...................... 19,500 1,516,125
Philip Morris Cos., Inc. .......... 166,300 18,729,537
Tyco International Ltd. ........... 347,100 18,352,913
------------
$ 43,533,950
------------
DEFENSE ELECTRONICS -- 1.7%
Loral Space & Communications
Corp.*........................... 510,300 $ 9,376,762
------------
ELECTRICAL EQUIPMENT -- 1.0%
General Electric Co. .............. 58,600 $ 5,794,075
------------
ELECTRONICS -- 8.9%
Altera Corp.*...................... 118,100 $ 8,584,394
Analog Devices, Inc.*.............. 192,150 6,509,081
Intel Corp. ....................... 192,400 25,192,375
LSI Logic Corp.*................... 153,100 4,095,425
Maxim Integrated Products, Inc.*... 44,000 1,903,000
Xilinx, Inc.*...................... 84,800 3,121,700
------------
$ 49,405,975
------------
</TABLE>
8
<PAGE> 9
STOCKS -- continued
<TABLE>
<CAPTION>
Issuer Shares Value
<S> <C> <C>
U.S. COMMON STOCKS -- continued
ENTERTAINMENT -- 4.3%
Clear Channel Communications,
Inc.*............................ 57,100 $ 2,062,738
Cox Radio, Inc., "A"*.............. 4,900 85,750
Harrah's Entertainment, Inc.*...... 392,200 7,794,975
Infinity Broadcasting Corp.,
"A"*............................. 44,800 1,506,400
Jacor Communications, Inc.*........ 154,900 4,240,387
LIN Television Corp.*.............. 88,500 3,739,125
Mirage Resorts, Inc.*.............. 214,600 4,640,725
Univision Communications, Inc.,
"A"*............................. 3,300 122,100
------------
$ 24,192,200
------------
FINANCIAL INSTITUTIONS -- 5.9%
Associates First Capital Corp.,
"A".............................. 23,700 $ 1,045,762
Federal Home Loan Mortgage
Corp. ........................... 63,500 6,992,938
Financial Federal Corp.*........... 92,500 1,549,375
Finova Group, Inc. ................ 79,600 5,114,300
Franklin ReSources, Inc. .......... 40,200 2,748,675
Green Tree Financial Corp. ........ 137,000 5,291,625
Schwab (Charles) Corp. ............ 311,900 9,980,800
------------
$ 32,723,475
------------
FOOD AND BEVERAGE PRODUCTS -- 0.8%
PepsiCo, Inc. ..................... 144,600 $ 4,229,550
------------
INSURANCE -- 0.7%
Amerin Corp.*...................... 37,400 $ 963,050
Chubb Corp. ....................... 52,400 2,816,500
------------
$ 3,779,550
------------
MACHINERY -- 1.4%
Deere & Co., Inc. ................. 114,900 $ 4,667,812
IDEX Corp. ........................ 81,100 3,233,863
------------
$ 7,901,675
------------
MEDICAL AND HEALTH PRODUCTS -- 1.7%
Johnson & Johnson.................. 160,300 $ 7,974,925
Omnicare, Inc. .................... 40,000 1,285,000
------------
$ 9,259,925
------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 4.1%
HealthSource, Inc.*................ 275,900 3,621,188
HealthSouth Corp.*................. 142,300 5,496,337
Oxford Health Plans, Inc.*......... 75,200 4,403,900
United Healthcare Corp. ........... 208,900 9,400,500
------------
$ 22,921,925
------------
<CAPTION>
Issuer Shares Value
<S> <C> <C>
U.S. COMMON STOCKS -- continued
METALS AND MINERALS -- 0.5%
Minerals Technologies, Inc. ....... 65,300 $ 2,677,300
------------
OILS -- 1.1%
Mobil Corp. ....................... 49,400 $ 6,039,150
Titan Exploration, Inc.*........... 15,400 184,800
------------
$ 6,223,950
------------
PHOTOGRAPHIC PRODUCTS -- 1.5%
Eastman Kodak Co. ................. 102,000 $ 8,185,500
------------
RAILROADS -- 3.0%
Burlington Northern Santa Fe
Railway Co. ...................... 29,400 $ 2,539,425
Wisconsin Central Transportation
Corp.*........................... 363,200 14,391,800
------------
$ 16,931,225
------------
RESTAURANTS AND LODGING -- 6.5%
HFS, Inc.*......................... 381,500 $ 22,794,625
Promus Hotel Corp.*................ 364,150 10,787,944
Renaissance Hotel Group N.V.*...... 102,200 2,401,700
------------
$ 35,984,269
------------
STORES -- 5.2%
Ann Taylor Stores Corp.*........... 116,500 $ 2,038,750
Corporate Express, Inc.*........... 38,300 1,127,456
Duty Free International, Inc. ..... 17,500 253,750
Federated Department Stores,
Inc.*............................ 170,600 5,821,725
General Nutrition Cos., Inc.*...... 264,900 4,470,187
Linens N Things, Inc.*............. 21,200 416,050
Micro Warehouse, Inc.*............. 158,500 1,862,375
Office Depot, Inc.*................ 313,500 5,564,625
Officemax, Inc.*................... 149,900 1,592,688
Sears, Roebuck & Co. .............. 71,000 3,274,875
Staples, Inc.*..................... 129,100 2,331,869
------------
$ 28,754,350
------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS -- continued
STOCKS -- continued
<TABLE>
<CAPTION>
Issuer Shares Value
<S> <C> <C>
U.S. COMMON STOCKS -- continued
SUPERMARKETS -- 1.4%
Safeway, Inc.*..................... 187,800 $ 8,028,450
------------
TELECOMMUNICATIONS -- 6.9%
Ascend Communications, Inc.*....... 41,700 $ 2,590,613
Cisco Systems, Inc.*............... 176,500 11,229,812
Glenayre Technologies, Inc.*....... 358,600 7,732,312
Lucent Technologies, Inc. ......... 31,600 1,461,500
MFS Communications Co., Inc.*...... 18,800 1,024,600
Tel-Save Holdings, Inc.*........... 40,700 1,180,300
Telco Communications Group*........ 27,100 474,250
Teleport Communications Group,
Inc.,"A"*......................... 72,800 2,220,400
Tellabs, Inc.*..................... 70,800 2,663,850
WorldCom, Inc.*.................... 301,200 7,850,025
------------
$ 38,427,662
------------
Total U.S. Common Stocks................... $517,791,203
============
FOREIGN STOCKS -- 6.0%
CANADA -- 0.8%
Canadian National Railway Co.
(Railroads)*...................... 50,900 $ 1,934,200
Loewen Group, Inc. (Business
Services)##....................... 67,000 2,615,851
------------
$ 4,550,051
------------
GERMANY -- 0.7%
Sap AG, Preferred (Computer
Software -- Systems).............. 29,000 $ 4,052,648
------------
HONG KONG -- 0.4%
Peregrine Investment Holdings
(Finance)......................... 1,120,000 $ 1,918,800
------------
ITALY -- 1.5%
Gucci Group Designs N.V. (Apparel
and Textiles)..................... 25,400 $ 1,622,425
Telecom Italia S.p.A., Saving
Shares (Telecommunications)....... 3,255,700 4,642,576
Telecom Italia S.p.A.
(Telecommunications).............. 824,200 2,081,875
------------
$ 8,346,876
------------
<CAPTION>
Issuer Shares Value
<S> <C> <C>
FOREIGN STOCKS -- continued
SINGAPORE -- 0.3%
Mandarin Oriental International
Ltd. (Restaurants and Lodging).... 1,310,990 $ 1,848,496
------------
SOUTH KOREA -- 0.7%
Korea Mobile Telecom, ADR
(Telecommunications).............. 308,794 $ 3,975,723
------------
SWEDEN -- 1.6%
Astra AB, Free Shares, "B"
(Pharmaceuticals)................. 165,300 $ 7,980,000
Nobel Biocare AB (Medical and
Health Products).................. 62,800 1,105,796
------------
$ 9,085,796
------------
Total Foreign Stocks....................... $ 33,778,390
------------
Total Stocks (Identified Cost,
$414,717,285).............................. $551,569,593
------------
WARRANTS
Peregrine Investment Holdings
(Identified Cost, $22,163)....... 179 $ 57,187
============
Total Investments (Identified Cost,
$414,739,449).............................. $551,626,780
OTHER ASSETS, LESS LIABILITIES -- 1.1%....... 5,748,607
------------
Net Assets -- 100.0%....................... $557,375,387
============
See portfolio footnotes and notes to financial statements
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS -- December 31, 1996
GOVERNMENT SECURITIES VARIABLE ACCOUNT -- GSVA
<TABLE>
<CAPTION>
BONDS -- 92.9% GOVERNMENT GUARANTEED -- 56.0%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 32.3%
GNMA, 6.5s, 2023 - 2025........ $ 7,645 $ 7,291,737
GNMA, 7s, 2022 - 2026.......... 13,568 13,270,856
GNMA, 7.5s, 2008 - 2026........ 26,982 27,070,654
GNMA, 8s, 2025 - 2026.......... 15,751 16,066,012
GNMA, 9s, 2004 - 2022.......... 8,614 9,062,318
GNMA, 10s, 2016................ 9 9,346
GNMA, 11s, 2010 - 2019......... 731 833,227
GNMA, 12.5s, 2015 - 2015....... 105 123,526
GNMA, 13.25s, 2014............. 3 2,942
GNMA, 14s, 2014 - 2015......... 65 79,853
------------
$ 73,810,471
------------
SMALL BUSINESS ADMINISTRATION -- 5.4%
SBA, 10.35s, 1997.............. $ 188 $ 192,288
SBA, 8.2s, 2005................ 1,902 2,002,863
SBA, 8.4s, 2007................ 424 447,124
SBA, 9.95s, 2008............... 861 955,970
SBA, 8.7s, 2009................ 1,533 1,645,200
SBA, 10.05s, 2009.............. 861 960,886
SBA, 9.5s, 2010................ 5,584 6,152,646
------------
$ 12,356,977
------------
U.S. TREASURY OBLIGATIONS -- 18.3%
U.S. Treasury Notes, 6.125s,
1998.......................... $ 1,300 $ 1,306,292
U.S. Treasury Notes, 9.25s,
1998.......................... 11,500 12,098,345
U.S. Treasury Notes, 9.125s,
1999.......................... 9,110 9,734,855
U.S. Treasury Notes, 6.75s,
2000.......................... 2,000 2,037,820
U.S. Treasury Bonds, 12s,
2013.......................... 9,000 12,874,230
U.S. Treasury Bonds, 8.75s,
2020.......................... 3,000 3,693,270
------------
$ 41,744,812
------------
Total Government Guaranteed (Identified Cost,
$127,784,223)................................ $127,912,260
------------
U.S. FEDERAL AGENCIES -- 36.9%
Federal Agricultural Mortgage
Corp., 7.02s, 1998............ $ 1,800 $ 1,821,654
Federal Agricultural Mortgage
Corp., 7.25s, 1999............ 5,000 5,115,600
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. FEDERAL AGENCIES -- continued
Federal Agricultural Mortgage
Corp., 7.44s, 2000............ $ 3,725 $ 3,859,435
Federal Agricultural Mortgage
Corp., 8.07s, 2006............ 2,000 2,184,680
Federal Home Loan Mortgage
Corp., 8.5s, 2021............. 27 27,521
Federal Home Loan Mortgage
Corp., 9s, 2002 - 2007........ 3,705 3,862,107
Federal Housing Authority,
7.43s, 2022................... 9,238 9,460,709
Federal National Mortgage
Assn., 7.27s, 2005............ 3,951 3,921,431
Federal National Mortgage
Assn., 7.654s, 2020........... 755 755,793
Federal National Mortgage
Assn., 8s, 2019 - 2023........ 461 469,756
Federal National Mortgage
Assn., 8.5s, 2001 - 2007...... 2,068 2,152,091
Federal National Mortgage
Assn., 9s, 2009............... 503 525,053
Financing Corp., 9.8s, 2018.... 9,000 11,692,980
Private Export Funding Corp.,
8.4s, 2001.................... 12,000 12,937,920
Private Export Funding Corp.,
6.24s, 2002................... 3,200 3,166,592
Republic of Israel, U.S.
Government Guaranteed Notes,
5.89s, 2005................... 4,000 3,796,800
Resolution Funding Corp.,
8.875s, 2020.................. 12,700 15,458,313
U.S. Department of Veterans
Affairs, Vendee Mortgage
Trust, 7.75s, 2014............ 3,000 2,986,860
------------
Total U.S. Federal Agencies (Identified Cost,
$77,603,676).................................. $ 84,195,295
------------
Total Bonds (Identified Cost, $205,387,899)... $212,107,555
------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
<CAPTION>
REPURCHASE AGREEMENT -- 5.6%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Investments in repurchase
agreements with Goldman
Sachs, in a joint trading
account
($5,784,000 par), dated
12/31/96, due 1/01/97, total
to
be received $5,786,121,
collateralized by various U.S.
Treasury and federal agency
obligations (with $65,939,000
par and valued at
$65,464,808),
at Cost....................... $ 12,878 $ 12,878,000
------------
Total Investments (Identified Cost,
$218,265,899)................................. $224,985,555
OTHER ASSETS, LESS LIABILITIES -- 1.5% 3,295,425
------------
Net Assets -- 100.0%.......................... $228,280,980
===========
See portfolio footnotes and notes to financial statements
PORTFOLIO OF INVESTMENTS -- December 31, 1996
HIGH YIELD VARIABLE ACCOUNT -- HYVA
<CAPTION>
BONDS -- 90.9%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
AEROSPACE -- 0.8%
BE Aerospace, Inc., 9.875s,
2006.......................... $ 900 $ 945,000
CHC Helicopter Corp., 11.5s,
2002.......................... 700 714,000
------------
$ 1,659,000
------------
AIRLINES -- 1.0%
Airplane Pass-Thru Trust,
10.875s, 2019................. $ 750 $ 823,125
Continental Airlines, Inc.,
11.75s, 1995**................ 2,050 205
MOOG, Inc., 10s, 2006.......... 1,200 1,260,000
------------
$ 2,083,330
------------
AUTOMOTIVE -- 1.7%
Harvard Industries, Inc., 12s,
2004.......................... $ 325 $ 281,125
Harvard Industries, Inc.,
11.125s, 2005................. 750 622,500
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
AUTOMOTIVE -- continued
Hayes Wheels International,
Inc., 11s, 2006............... $ 1,950 $ 2,127,938
Lear Corp., 9.5s, 2006......... 400 432,000
------------
$ 3,463,563
------------
BUILDING -- 5.0%
American Standard, Inc., 0s to
1998, 10.5s to 2005........... 2,480 2,306,400
Building Materials Corp., 0s to
1999, 11.75s to 2004.......... 2,400 2,076,000
Building Materials Corp.,
8.625s, 2006##................ 200 199,500
Lone Star Industries, Inc.,
10s, 2003..................... 1,250 1,270,313
Nortek, Inc., 9.875s, 2004..... 2,000 2,020,000
UDC Homes, Inc., 14.5s, 2000... 3 1,465
USG Corp., 9.25s, 2001......... 1,950 2,076,750
------------
$ 9,950,428
------------
CELLULAR TELEPHONES -- 0.6%
Millicom International Cellular
Communications, 0s to 2000,
13.5s to 2006................. $ 1,900 $ 1,178,000
------------
CHEMICALS -- 2.8%
Harris Chemical North America,
Inc., 10.25s, 2001............ $ 1,000 $ 1,038,750
Indspec Chemical Corp., 0s to
1998, 11.5s to 2003........... 750 676,875
NL Industries, Inc., 11.75s,
2003.......................... 1,800 1,908,000
UCC Investors Holdings, Inc.,
0s to 1998, 12s to 2005....... 50 43,000
UCC Investors Holdings, Inc.,
10.5s, 2002................... 1,800 1,962,000
------------
$ 5,628,625
------------
CONGLOMERATES -- 1.0%
E & S Holdings Corp., 10.375s,
2006##........................ $ 1,900 $ 1,971,250
------------
CONSUMER GOODS AND SERVICES -- 9.7%
Consolidated Cigar Corp.,
10.5s, 2003................... $ 1,000 $ 1,045,000
FoodBrands America, Inc.,
10.75s, 2006.................. 1,300 1,365,000
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
CONSUMER GOODS AND SERVICES -- continued
International Semi-Tech
Microelectronics, Inc., 0s to
2000, 11.5s to 2003........... $ 1,850 $ 1,193,250
Iron Mountain, Inc., 10.125s,
2006.......................... 1,450 1,537,000
Pierce Leahy Corp., 11.125s,
2006.......................... 1,450 1,584,125
Reeves Industries, Inc., 11s,
2002.......................... 1,350 1,289,250
Remington Arms, Inc., 10s,
2003**##...................... 950 800,375
Revlon, Inc., 10.5s, 2003...... 1,900 1,995,000
Samsonite Corp., 11.125s,
2005.......................... 2,300 2,518,500
Sealy Corp., 9.5s, 2003........ 2,205 2,227,050
Westpoint Stevens, Inc.,
9.375s, 2005.................. 3,575 3,682,250
------------
$ 19,236,800
------------
CONTAINERS -- 5.2%
Atlantis Group, Inc., 11s,
2003.......................... $ 1,300 $ 1,319,500
Calmar, Inc., 11.5s, 2005...... 1,650 1,709,812
Ivex Packaging Corp., 12.5s,
2002.......................... 1,800 1,948,500
Owens-Illinois, Inc., 11s,
2003.......................... 1,500 1,668,750
Owens-Illinois, Inc., 9.95s,
2004.......................... 1,000 1,060,000
Silgan Corp., 11.75s, 2002..... 1,500 1,597,500
U.S. Can Corp., 10.125s,
2006##........................ 1,000 1,051,250
------------
$ 10,355,312
------------
CORPORATE ASSET-BACKED -- 0.4%
Merrill Lynch Mortgage
Investors, Inc., 8.083s,
2023+......................... $ 1,000 $ 840,625
------------
ELECTRONICS -- 0.5%
Clark Schwebel, Inc., 10.5s,
2006.......................... $ 950 $ 1,007,000
------------
ENTERTAINMENT -- 1.6%
Albritton Communications Corp.,
11.5s, 2004................... $ 900 $ 954,000
Cinemark USA, Inc., 9.625s,
2008.......................... 1,500 1,500,000
Lodgenet Entertainment Corp.,
10.25s, 2006##................ 500 500,000
Marvel Holdings, Inc., 0s,
1998.......................... 1,425 213,750
------------
$ 3,167,750
------------
FOOD AND BEVERAGE PRODUCTS -- 3.8%
Delta Beverage Group, Inc.,
9.75s, 2003##................. $ 575 $ 589,375
Keebler Corp., 10.75s,
2006##........................ 1,200 1,311,000
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
FOOD AND BEVERAGE PRODUCTS -- continued
PMI Acquisition Corp., 10.25s,
2003.......................... $ 2,000 $ 2,040,000
Specialty Foods Corp., 10.25s,
2001.......................... 1,950 1,803,750
Texas Bottling Group, Inc., 9s,
2003.......................... 1,750 1,771,875
------------
$ 7,516,000
------------
FOREST AND PAPER PRODUCTS -- 3.2%
Gaylord Container Corp.,
12.75s, 2005.................. $ 3,000 $ 3,315,000
Pacific Lumber Co., 10.5s,
2003.......................... 1,750 1,776,250
Specialty Paperboard, Inc.,
9.375s, 2006##................ 450 451,125
Stone Container Corp., 10.75s,
2002.......................... 850 895,687
------------
$ 6,438,062
------------
MACHINERY -- 0.4%
AGCO Corp., 8.5s, 2006......... $ 800 $ 821,000
------------
MEDICAL AND HEALTH PRODUCTS -- 0.3%
Quest Diagnosis, Inc., 10.75s,
2006.......................... $ 500 $ 525,000
------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 4.4%
Beverly Enterprises, Inc., 9s,
2006.......................... $ 2,000 $ 2,010,000
Genesis Health Ventures, 9.75s,
2005.......................... 1,000 1,050,000
Quorum Health Group, Inc.,
8.75s, 2005................... 1,900 1,947,500
Tenet Healthcare Corp.,
10.125s, 2005................. 3,200 3,544,000
Unilab Corp., 11s, 2006........ 325 219,375
------------
$ 8,770,875
------------
OIL SERVICES -- 3.3%
AmeriGas Partners LP, 10.125s,
2007.......................... $ 1,300 $ 1,369,875
Clark USA, Inc., 10.875s,
2005.......................... 1,350 1,397,250
Falcon Drilling, Inc., 8.875s,
2003.......................... 1,300 1,326,000
Ferrell Gas LP, 10s, 2001...... 900 940,500
Mesa Operating Co., 10.625s,
2006.......................... 1,400 1,519,000
------------
$ 6,552,625
------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
OILS -- 0.5%
Gulf Canada, 9.25s, 2004....... $ 850 $ 898,875
------------
PRINTING AND PUBLISHING -- 1.3%
Day International Group, Inc.,
11.125s, 2005................. $ 750 $ 791,250
Golden Books Publishing, Inc.,
7.65s, 2002................... 600 522,000
Newsquest Capital PLC, 11s,
2006##........................ 1,250 1,293,750
------------
$ 2,607,000
------------
RESTAURANTS AND LODGING -- 6.7%
Aztar Corp., 11s, 2002......... $ 1,250 $ 1,209,375
Boomtown, Inc., 11.5s, 2003.... 410 431,525
Coast Hotels & Casinos, Inc.,
13s, 2002..................... 750 827,813
Eldorado Resorts LLC, 10.5s,
2006##........................ 1,800 1,901,250
Four Seasons Hotels, Inc.,
9.125s, 2000##................ 650 667,875
Grand Casinos, Inc., 10.125s,
2003.......................... 1,850 1,859,250
Griffin Gaming & Entertainment,
Inc., 0s, 2000................ 1,000 980,000
Harrah's Jazz Co., 14.25s,
2001.......................... 825 405,281
Harvey's Casinos Resorts,
10.625s, 2006................. 750 802,500
Red Roof Inns, Inc., 9.625s,
2003.......................... 1,650 1,650,000
Sam Houston Race Park, Inc.,
11s, 2001..................... 309 123,414
Santa Fe Hotel, Inc., 11s,
2000.......................... 775 569,625
Station Casinos, Inc., 9.625s,
2003.......................... 1,850 1,840,750
------------
$ 13,268,658
------------
SPECIAL PRODUCTS AND SERVICES -- 10.0%
AAP-Mcquay, Inc., 8.875s,
2003.......................... $ 1,500 $ 1,496,250
Buckeye Cellulose Corp., 8.5s,
2005.......................... 1,650 1,650,000
Fairfield Manufacturing Corp.,
11.375s, 2001................. 300 313,500
Genmar Holdings, Inc., 13.5s,
2001.......................... 500 485,000
Haynes International, Inc.,
11.625s, 2004................. 1,550 1,635,250
Howmet Corp., 10s, 2003........ 1,050 1,155,000
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
SPECIAL PRODUCTS AND SERVICES -- continued
IMO Industries, Inc., 11.75s,
2006.......................... $ 2,050 $ 1,906,500
Interlake Corp., 12s, 2001..... 850 909,500
Interlake Corp., 12.125s,
2002.......................... 1,650 1,707,750
Interlake Revolver, "B", 5.75s,
1997##........................ 172 170,303
International Knife & Saw,
Inc., 11.375s, 2006##......... 1,000 1,032,500
K & F Industries, Inc.,
10.375s, 2004................. 1,370 1,445,350
Mettler Toledo, Inc., 9.75s,
2006.......................... 335 351,750
Motors & Gears, Inc., 10.75s,
2006##........................ 625 643,750
Polymer Group, Inc., 12.25s,
2002.......................... 834 911,145
Synthetic Industries, Inc.,
12.75s, 2002.................. 2,100 2,315,250
Thermadyne Holdings Corp.,
10.25s, 2002.................. 1,289 1,321,225
Thermadyne Holdings Corp.,
10.75s, 2003.................. 300 309,000
------------
$ 19,759,023
------------
STEEL -- 4.2%
Alaska Steel Corp., 9.125s,
2006##........................ $ 500 $ 513,750
Algoma Steel, Inc., 12.375s,
2005.......................... 1,500 1,620,000
Carbide/Graphite Group, Inc.,
11.5s, 2003................... 200 217,000
Commonwealth Aluminum Corp.,
10.75s, 2006.................. 1,100 1,133,000
Gulf States Steel, Inc., 13.5s,
2003.......................... 225 213,750
Jorgensen (Earl M.) Co.,
10.75s, 2000.................. 900 918,000
Kaiser Aluminum & Chemical
Corp., 9.875s, 2002........... 1,125 1,153,125
Kaiser Aluminum & Chemical
Corp., 12.75s, 2003........... 425 456,875
WCI Steel, Inc., 10s, 2004##... 2,000 2,040,000
------------
$ 8,265,500
------------
STORES -- 1.9%
Finlay Enterprises, Inc., 0s to
1998, 12s to 2005............. $ 3,000 $ 2,565,000
Parisian, Inc., 9.875s, 2003... 1,100 1,111,000
------------
$ 3,676,000
------------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
SUPERMARKETS -- 4.7%
Carr-Gottstein Foods Co., 12s,
2005.......................... $ 350 $ 373,625
Dominick's Finer Foods Co.,
10.875s, 2005................. 500 553,750
Fleming Cos., Inc., 10.625s,
2001.......................... 400 406,000
Grand Union Co., 12s, 2004..... 1,400 1,477,000
Jitney Jungle Stores of
America, Inc., 12s, 2006...... 1,750 1,850,625
Pathmark Stores, Inc., 9.625s,
2003.......................... 1,400 1,340,500
Ralph's Grocery Co., 10.45s,
2004.......................... 1,450 1,542,437
Smith's Food & Drug Centers,
11.25s, 2007.................. 1,500 1,657,500
Star Market, Inc., 13s, 2004... 50 56,250
------------
$ 9,257,687
------------
TELECOMMUNICATIONS -- 15.0%
American Radio Systems Corp.,
9s, 2006...................... $ 1,700 $ 1,666,000
Bell Cablemedia PLC, 0s to
2000, 11.875s to 2005......... 1,250 1,003,125
Brooks Fiber Properties, Inc.,
0s to 2001, 10.875s to 2006... 750 480,000
Brooks Fiber Properties, Inc.,
0s to 2001, 11.875s to
2006##........................ 1,250 796,875
Cablevision Systems Corp.,
9.25s, 2005................... 1,300 1,287,000
Charter Communications
Southeast LP, 11.25s, 2006.... 200 209,000
Colt Telecom Group PLC, 0s to
2001, 12s to 2006............. 1,350 799,875
Comeast Corp., 9.375s, 2005.... 850 881,875
Diamond Cable Communications
Corp., 0s to 2000, 11.75s to
2005.......................... 1,400 1,008,000
Echostar Communications Corp.,
0s to 1999, 12.875s to 2004... 975 801,937
Echostar Satellite Broadcasting
Corp., 0s to 2000, 13.125s to
2004.......................... 1,400 1,060,500
Falcon Holdings Group, Inc.,
11s, 2003..................... 1,123 1,004,791
Granite Broadcasting Corp.,
10.375s, 2005................. 1,000 1,025,000
ICG Holdings, Inc., 0s to 2001,
12.5s to 2006................. 1,650 1,068,375
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
TELECOMMUNICATIONS -- continued
Intermedia Capital Partners LP,
11.25s, 2006##................ $ 175 $ 182,875
Jones Intercable, Inc., 9.625s,
2002.......................... 500 525,000
Jones Intercable, Inc., 10.5s,
2008.......................... 200 216,000
Marcus Cable Operating Co., 0s
to 1999, 13.5s to 2004........ 875 717,500
MFS Communications, Inc., 0s to
2006, 8.875s to 2006.......... 3,150 2,291,625
Mobile Telecommunication
Technologies Corp., 13.5s,
2002.......................... 600 600,000
Mobilemedia Communications,
Inc., 0s to 1998, 10.5s to
2003**........................ 700 147,000
Mobilemedia Communications,
Inc., 9.375s, 2007............ 850 229,500
Paging Network, Inc., 8.875s,
2006.......................... 1,700 1,619,250
Park Broadcasting, Inc.,
11.75s, 2004.................. 750 881,250
Rifkin Acquisition Partners LP,
11.125s, 2006................. 200 208,500
Rogers Cablesystems, Inc.,
10.125s, 2012................. 1,750 1,815,625
Sprint Spectrum LP, 11s,
2006.......................... 1,100 1,190,750
Sprint Spectrum LP, 0s to 2001,
12.5s to 2006................. 1,750 1,194,375
Sygnet Wireless, Inc., 11.5s,
2006.......................... 875 896,875
Teleport Communications Group,
Inc., 0s to 2001, 11.125s to
2007.......................... 3,650 2,500,250
Videotron Holdings PLC, 0s to
2000, 11s to 2005............. 500 402,500
Western Wireless Corp., "A",
10.5s, 2007................... 1,000 1,048,750
------------
$ 29,759,978
------------
TRANSPORTATION -- 0.9%
Central Transport Rental
Finance Corp., 9.5s, 2003..... $ 1,332 $ 1,258,696
Moran Transportation Co.,
11.75s, 2004.................. 500 540,000
------------
$ 1,798,696
------------
Total Bonds (Identified Cost, $176,878,574)... $180,456,662
------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
<CAPTION>
STOCKS -- 0.8%
Issuer Shares Value
<S> <C> <C>
APPAREL AND TEXTILES -- 0.2%
Ithaca Industries, Inc......... 60,000 $ 480,000
------------
BUILDING
Atlantic Gulf Communities
Corp.*........................ 150 $ 647
------------
CONSUMER GOODS AND SERVICES
Ranger Industries, Inc.*....... 123,210 $ 34,499
------------
ENTERTAINMENT -- 0.5%
Gillett Holdings, Inc.+*....... 23,535 $ 894,330
------------
RESTAURANTS AND LODGING
Sam Houston Race Park, Inc.*... 82 $ 410
------------
SPECIAL PRODUCTS AND SERVICES -- 0.1%
Central Transport Rental Group
PLC, ADR (United Kingdom)..... 653,938 $ 245,227
Envirosource, Inc.+*........... 1,666 4,477
------------
$ 249,704
------------
Total Stocks (Identified Cost, $4,492,331).... $ 1,659,590
------------
PREFERRED STOCKS -- 3.4%
CONSUMER GOODS AND SERVICES -- 0.3%
Renaissance Cosmetics, Inc.,
14s+#......................... 600 $ 606,000
------------
ENTERTAINMENT -- 1.1%
Time Warner, Inc., "K",
10.25s........................ 1,991 $ 2,160,235
------------
<CAPTION>
PREFERRED STOCKS -- continued
Issuer Shares Value
<S> <C> <C>
SPECIAL PRODUCTS AND SERVICES -- 1.3%
K-III Communications Corp.,
"B", 11.625s#................. 26,065 $ 2,632,572
------------
TELECOMMUNICATIONS -- 0.7%
Cablevision Systems Corp.,
11.125s, 2008#................ 14,998 1,346,071
------------
Total Preferred Stocks (Identified Cost,
$5,272,448)................................... $ 6,744,878
------------
WARRANTS
OIL SERVICES
ICO, Inc.,*.................... 375,000 $ 243,750
------------
OILS
Crystal Oil Co., $0.075*....... 1,920,847 $ --
Crystal Oil Co., $0.10*........ 1,683,209 --
Crystal Oil Co., $0.125*....... 2,000,087 --
Crystal Oil Co., $0.15*........ 1,963,306 --
Crystal Oil Co., $0.25*........ 1,963,306 --
------------
$ --
------------
Total Warrants (Identified Cost, $178,993).... $ 243,750
------------
SHORT-TERM OBLIGATION -- 2.8%
<CAPTION>
Principal Amount
(000 Omitted)
<S> <C> <C>
Ford Motor Credit Corp., due
1/02/97....................... $ 5,475 $ 5,473,920
------------
Total Investments (Identified Cost,
$192,296,266)................................. $194,578,800
OTHER ASSETS, LESS LIABILITIES -- 2.0% 3,883,219
------------
Net Assets -- 100.0%............................ $198,462,019
===========
See portfolio footnotes and notes to financial statements
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS -- December 31, 1996
MANAGED SECTORS VARIABLE ACCOUNT -- MSVA
<TABLE>
<CAPTION>
STOCKS -- 99.1%
Issuer Shares Value
<S> <C> <C>
ENERGY -- 9.9%
BJ Services Co.*............... $ 27,400 $ 1,397,400
Camco International, Inc. ..... 27,500 1,268,438
Cooper Cameron Corp.*.......... 26,000 1,989,000
Occidental Petroleum Corp. .... 105,000 2,454,375
Tidewater, Inc. ............... 32,000 1,448,000
Weatherford Enterra, Inc.*..... 36,200 1,086,000
-----------
$ 9,643,213
-----------
FINANCIAL SERVICES -- 3.7%
Advanta Corp., "B"............. 31,500 $ 1,287,563
Equitable of Iowa Cos.......... 51,000 2,339,625
-----------
$ 3,627,188
-----------
LEISURE -- 19.0%
American Radio Systems Corp.,
"A"*.......................... 14,500 $ 395,125
Argosy Gaming Corp............. 34,400 159,100
Harrah's Entertainment,
Inc.*........................ 159,100 3,162,112
HFS, Inc.*..................... 13,000 776,750
Host Marriot Corp.............. 88,200 1,411,200
LIN Television Corp.*.......... 19,600 828,100
Louisiana Quinta Inns, Inc..... 40,000 765,000
MGM Grand, Inc.*............... 25,200 878,850
Promus Hotel Corp.*............ 52,700 1,561,238
Showboat, Inc.................. 42,000 724,500
Telephone & Data Systems,
Inc.......................... 216,500 7,848,125
-----------
$ 18,510,100
-----------
RETAIL -- 4.2%
Gymboree Corp.................. 1,400 $ 32,025
Office Depot, Inc.*............ 111,000 1,970,250
Sears, Roebuck & Co............ 41,500 1,914,187
Staples, Inc.*................. 6,600 119,213
-----------
$ 4,035,675
-----------
TECHNOLOGY -- 37.1%
ADT Ltd.*...................... 149,500 $ 3,419,812
Aerial Communications, Inc..... 72,000 585,000
AirTouch Communications,
Inc.*........................ 28,700 724,675
Analog Devices, Inc.*.......... 32,400 1,097,550
Atmel Corp..................... 59,000 1,954,375
Cabletron Systems, Inc.*....... 55,700 1,852,025
Cisco Systems, Inc.*........... 8,000 509,000
<CAPTION>
Issuer Shares Value
<S> <C> <C>
TECHNOLOGY -- continued
Computer Associates
International, Inc............ $ 31,600 $ 1,572,100
Digital Equipment Corp......... 65,000 2,364,375
Electronic Arts, Inc.*......... 64,100 1,918,994
Glenayre Technologies, Inc.*... 60,600 1,306,687
Intel Corp..................... 43,600 5,708,875
Loral Space and Communications
Corp.......................... 80,000 1,470,000
MCI Communications Corp........ 32,600 1,065,613
Microsoft Corp.*............... 14,500 1,198,062
National Semiconductor Corp.... 83,400 2,032,875
Oracle Systems Corp.*.......... 16,000 668,000
Spectrum Holobyte, Inc......... 212,000 1,590,000
Sun Microsystems, Inc.*........ 118,000 3,031,125
Sybase, Inc.*.................. 44,000 734,250
VLSI Technology, Inc........... 51,500 1,229,563
-----------
$ 36,032,956
-----------
OTHER -- 25.2%
AGCO Corp...................... 60,000 $ 1,717,500
Colgate-Palmolive Co........... 14,500 1,337,625
Coventry Corp.*................ 180,000 1,667,812
Genesis Health Ventures,
Inc.......................... 26,400 821,700
HBO & Co....................... 8,500 504,688
HealthSource, Inc.*............ 125,000 1,640,625
HealthSouth Corp.*............. 36,000 1,390,500
McDonnell Douglas Corp......... 23,000 1,472,000
Pacificare Health Systems,
Inc., "B"..................... 20,500 1,747,625
Pharmacia & Upjohn, Inc........ 38,000 1,505,750
PowerGen PLC (United
Kingdom)..................... 165,893 1,625,669
Rhone-Poulenc Rorer, Inc....... 10,000 781,250
St. Jude Medical, Inc.*........ 30,000 1,278,750
Tyco International Ltd......... 51,500 2,723,063
United Healthcare Corp......... 60,700 2,731,500
Ventritex, Inc................. 12,600 310,275
Wisconsin Central
Transportation Corp.*......... 32,300 1,279,887
-----------
$ 24,536,219
-----------
Total Stocks (Identified Cost, $87,723,023)... $ 96,385,351
-----------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
CONVERTIBLE BONDS -- 0.1%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Spectrum Holobyte, Inc., 6.5s,
2002##........................ $ 120,000 $ 77,550
Ventritex, Inc., 5.75s, 2001... 30,000 47,325
-----------
Total Convertible Bonds (Identified Cost,
$150,000)..................................... $ 124,875
-----------
SHORT-TERM OBLIGATION -- 1.2%
Ford Motor Credit Corp., due
1/02/97....................... $ 1,135 $ 1,134,776
-----------
Total Investments (Identified Cost,
$89,007,799).................................. $ 97,645,002
OTHER ASSETS, LESS LIABILITIES -- (0.4)%........ (363,256)
-----------
Net Assets -- 100.0%.......................... $ 97,281,746
===========
See portfolio footnotes and notes to financial statements
PORTFOLIO OF INVESTMENTS -- December 31, 1996
MONEY MARKET VARIABLE ACCOUNT -- MMVA
COMMERCIAL PAPER -- 36.4%
Principal Amount
Issuer (000 Omitted) Value
American Telephone & Telegraph
Co., due 2/20/97.............. $ 5,200 $ 5,161,072
Bank of America, due 3/27/97... 3,000 2,962,104
Beneficial Corp., due
2/20/97....................... 3,700 3,672,301
du Pont (E.I.) de Nemours &
Co., due 1/22/97.............. 2,000 1,993,863
Ford Motor Credit Corp., due
1/24/97....................... 6,000 5,979,645
General Motors Acceptance
Corp., due 1/31/97............ 4,300 4,280,507
Kimberly Clark Corp., due
2/14/97....................... 3,300 3,277,817
Knight-Ridder, Inc., due
1/28/97....................... 2,900 2,888,473
Pacific Gas and Electric Co.,
due 1/10/97................... 4,000 3,994,600
Pacific Gas and Electric Co.,
due 1/15/97................... 3,000 2,993,618
Raytheon Co., due 1/07/97...... 2,700 2,697,619
Raytheon Co., due 1/08/97...... 2,300 2,297,603
Transamerica Co., due
2/19/97....................... 4,000 3,970,600
-----------
Total Commercial Paper, at Amortized Cost..... $ 46,169,822
-----------
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS -- 63.9%
Principal Amount
Issuer (000 Omitted) Value
Federal Farm Credit Bank, due
1/13/97....................... $ 6,000 $ 5,989,620
Federal Farm Credit Bank, due
2/13/97....................... 4,000 3,975,108
Federal Farm Credit Bank, due
1/06/97....................... 4,000 3,997,100
Federal Home Loan Bank, due
1/02/97....................... 3,200 3,199,533
Federal Home Loan Bank, due
1/16/97....................... 4,800 4,789,600
Federal Home Loan Bank, due
2/07/97....................... 990 984,689
Federal Home Loan Bank, due
3/24/97....................... 2,400 2,371,136
Federal Home Loan Bank, due
2/03/97....................... 2,700 2,686,907
Federal Home Loan Bank, due
1/27/97....................... 3,000 2,988,192
Federal Home Loan Mortgage
Corp., due 3/03/97............ 4,000 3,964,688
Federal Home Loan Mortgage
Corp., due 2/06/97............ 6,900 6,863,982
Federal Home Loan Mortgage
Corp., due 2/24/97............ 2,300 2,281,577
Federal Home Loan Mortgage
Corp., due 2/21/97............ 5,000 4,962,954
Federal National Mortgage
Assn., due 6/10/97............ 3,500 3,419,733
Federal National Mortgage
Assn., due 6/11/97............ 5,300 5,177,457
Federal National Mortgage
Assn., due 4/21/97............ 5,000 4,920,250
Federal National Mortgage
Assn., due 1/09/97 -
2/18/97....................... 9,000 8,966,102
Federal National Mortgage
Assn., due 1/14/97............ 2,600 2,594,836
Tennessee Valley Authority, due
1/21/97....................... 7,000 6,979,778
-----------
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS -- continued
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Total U.S. Government and Agency Obligations, at
Amortized Cost................................ $ 81,113,242
-----------
Total Investments, at Amortized Cost.......... $127,283,064
OTHER ASSETS, LESS LIABILITIES -- (0.3)%........ (374,796)
-----------
Net Assets -- 100.0%.......................... $126,908,268
===========
See portfolio footnotes and notes to financial statements
PORTFOLIO OF INVESTMENTS -- December 31, 1996
TOTAL RETURN VARIABLE ACCOUNT -- TRVA
STOCKS -- 57.4%
Issuer Shares Value
U.S. COMMON STOCKS -- 51.9%
AEROSPACE -- 3.9%
Allied Signal, Inc. ........... 35,400 $ 2,371,800
General Dynamics Corp. ........ 13,500 951,750
Lockheed Martin Corp. ......... 10,200 933,300
Raytheon Co. .................. 42,600 2,050,125
United Technologies Corp. ..... 71,200 4,699,200
-----------
$ 11,006,175
-----------
APPAREL AND TEXTILES -- 0.5%
VF Corp........................ 22,500 $ 1,518,750
-----------
AUTOMOTIVE -- 2.0%
Dana Corp. .................... 33,000 1,076,625
Ford Motor Co. ................ 46,900 1,494,937
General Motors Corp. .......... 9,900 551,925
Goodrich (B.F.) Co. ........... 63,300 2,563,650
-----------
$ 5,687,137
-----------
BANKS AND CREDIT COMPANIES -- 5.5%
Bank of Boston Corp. .......... 25,700 $ 1,651,225
Bank of New York, Inc. ........ 54,500 1,839,375
Chase Manhattan Corp. ......... 34,760 3,102,330
Comerica, Inc. ................ 5,000 261,875
Fleet/Norstar Financial Group,
Inc. ......................... 38,200 1,905,225
<CAPTION>
STOCKS -- continued
Issuer Shares Value
U.S. COMMON STOCKS -- continued
<S> <C> <C>
BANKS AND CREDIT COMPANIES -- continued
National City Corp. ........... 53,200 $ 2,387,350
NationsBank Corp. ............. 29,500 2,883,625
Northern Trust Corp. .......... 11,400 413,250
Norwest Corp. ................. 30,800 1,339,800
-----------
$ 15,784,055
-----------
BUSINESS MACHINES -- 0.9%
Digital Equipment Corp.*....... 33,000 $ 1,200,375
International Business Machines
Corp. ........................ 8,300 1,253,300
-----------
$ 2,453,675
-----------
CELLULAR TELEPHONES -- 0.2%
Telephone & Data Systems,
Inc. ........................ 16,400 $ 594,500
-----------
CHEMICALS -- 2.2%
Air Products & Chemicals,
Inc. ........................ 3,000 $ 207,375
Dow Chemical Co. .............. 12,200 956,175
du Pont (E. I.) de Nemours &
Co., Inc. .................... 17,900 1,689,312
Praxair, Inc. ................. 19,700 908,663
Rohm & Haas Co. ............... 21,300 1,738,612
Witco Corp. ................... 29,600 902,800
-----------
$ 6,402,937
-----------
CONSUMER GOODS AND SERVICES -- 3.3%
American Brands, Inc. ......... 23,400 $ 1,161,225
Colgate-Palmolive Co. ......... 14,700 1,356,075
Olin Corp. .................... 25,200 948,150
Philip Morris Cos., Inc. ...... 34,200 3,851,775
Rubbermaid, Inc. .............. 28,400 646,100
Sherwin Williams Co. .......... 24,800 1,388,800
-----------
$ 9,352,125
-----------
ELECTRICAL EQUIPMENT -- 1.5%
General Electric Co. .......... 33,600 $ 3,322,200
Honeywell, Inc. ............... 14,400 946,800
-----------
$ 4,269,000
-----------
ELECTRONICS -- 0.1%
Analog Devices, Inc.*.......... 10,200 $ 345,525
-----------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
STOCKS -- continued
Issuer Shares Value
U.S. COMMON STOCKS -- continued
<S> <C> <C>
FINANCIAL INSTITUTIONS -- 2.0%
American Express Co. .......... 35,700 $ 2,017,050
Federal Home Loan
Mortgage Corp. ................ 14,200 1,563,775
Southern National Corp. ....... 59,000 2,138,750
-----------
$ 5,719,575
-----------
FOOD AND BEVERAGE PRODUCTS -- 1.3%
Anheuser Busch Cos., Inc. ..... 9,000 $ 360,000
Dimon, Inc. ................... 30,000 693,750
General Mills, Inc. ........... 21,600 1,368,900
McCormick & Co., Inc. ......... 21,200 499,525
PepsiCo, Inc. ................. 22,400 655,200
-----------
$ 3,577,375
-----------
FOREST AND PAPER PRODUCTS -- 0.3%
Weyerhaeuser Co. .............. 21,000 $ 994,875
-----------
INSURANCE -- 3.6%
Allstate Corp. ................ 32,100 $ 1,857,787
Chubb Corp. ................... 20,400 1,096,500
Cigna Corp..................... 15,900 2,172,337
Conseco, Inc. ................. 70 4,463
St. Paul Cos., Inc. ........... 30,600 1,793,925
Torchmark Corp. ............... 36,000 1,818,000
Travelers Group, Inc. ......... 31,300 1,420,238
-----------
$ 10,163,250
-----------
MACHINERY -- 1.2%
Cooper Industries, Inc. ....... 18,000 $ 758,250
Deere & Co., Inc. ............. 48,400 1,966,250
York International Corp. ...... 14,700 821,363
-----------
$ 3,545,863
-----------
MEDICAL AND HEALTH PRODUCTS -- 1.9%
American Home Products
Corp. ....................... 32,600 $ 1,911,175
Baxter International, Inc. .... 22,100 906,100
Pharmacia & Upjohn, Inc. ...... 33,000 1,307,625
Rhone-Poulenc Rorer, Inc. ..... 18,500 1,445,313
-----------
$ 5,570,213
-----------
<CAPTION>
Issuer Shares Value
U.S. COMMON STOCKS -- continued
<S> <C> <C>
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 1.0%
Columbia Healthcare Corp. ..... 23,900 $ 973,925
St. Jude Medical, Inc.*........ 11,400 485,925
United Healthcare Corp. ....... 29,200 1,314,000
-----------
$ 2,773,850
-----------
METALS AND MINERALS -- 0.6%
Aluminum Cos. of America....... 21,600 $ 1,377,000
Phelps Dodge Corp. ............ 6,000 405,000
-----------
$ 1,782,000
-----------
OIL SERVICES -- 0.7%
Schlumberger Ltd. ............. 19,600 $ 1,957,550
-----------
OILS -- 4.9%
Amoco Corp. ................... 20,500 $ 1,650,250
Atlantic Richfield Co. ........ 12,500 1,656,250
Exxon Corp. ................... 20,500 2,009,000
Mobil Corp. ................... 16,000 1,956,000
Occidental Petroleum Corp. .... 76,600 1,790,525
Sun, Inc. ..................... 6,459 157,438
Texaco, Inc. .................. 19,000 1,864,375
Ultramar Diamond Shamrock...... 13,100 414,288
USX-Marathon Group............. 109,400 2,611,925
-----------
$ 14,110,051
-----------
PHOTOGRAPHIC PRODUCTS -- 1.1%
Eastman Kodak Co. ............. 37,500 $ 3,009,375
-----------
POLLUTION CONTROL -- 0.6%
Browning Ferris Industries,
Inc. ........................ 31,500 $ 826,875
WMX Technologies, Inc. ........ 26,300 858,038
-----------
$ 1,684,913
-----------
RAILROADS -- 1.5%
Burlington Northern Santa Fe
Railway Co. .................. 21,300 $ 1,839,787
CSX Corp. ..................... 16,400 692,900
Illinois Central Corp. ........ 50,450 1,614,400
-----------
$ 4,147,087
-----------
REAL ESTATE -- 1.3%
Arden Realty, Inc.............. 13,000 $ 360,750
Hospitality Properties Trust... 41,000 1,189,000
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
STOCKS -- continued
Issuer Shares Value
U.S. COMMON STOCKS -- continued
<S> <C> <C>
REAL ESTATE -- continued
Meditrust Corp. ............... 42,100 $ 1,684,000
National Health Investors,
Inc. ........................ 11,400 431,775
-----------
$ 3,665,525
-----------
SPECIAL PRODUCTS AND SERVICES -- 0.4%
Stanley Works.................. 39,900 $ 1,077,300
-----------
STORES -- 1.3%
May Department Stores Co. ..... 20,000 $ 935,000
Rite Aid Corp. ................ 8,700 345,825
Sears, Roebuck & Co. .......... 33,300 1,535,963
Wal-Mart Stores, Inc. ......... 33,800 773,175
-----------
$ 3,589,963
-----------
UTILITIES -- ELECTRIC -- 3.3%
Allegheny Power Systems,
Inc.......................... 20,800 $ 631,800
CMS Energy Corp................ 20,000 672,500
Carolina Power & Light Co...... 28,700 1,047,550
Coastal Corp................... 35,300 1,725,286
DPL, Inc....................... 20,000 490,000
FPL Group, Inc................. 45,000 2,070,000
Peco Energy Co................. 20,000 505,000
Pinnacle West Capital Corp..... 27,000 857,250
Portland General Corp.......... 19,800 831,600
Texas Utilities Co............. 14,000 570,500
-----------
$ 9,401,486
-----------
UTILITIES -- GAS -- 2.0%
Eastern Enterprises............ 16,900 $ 597,838
Pacific Enterprises............ 18,000 546,750
PanEnergy Corp................. 41,000 1,845,000
Sonat, Inc..................... 15,000 772,500
UGI Corp....................... 20,000 447,500
Williams Cos., Inc............. 39,300 1,473,750
-----------
$ 5,683,338
-----------
UTILITIES -- TELEPHONE -- 2.8%
Ameritech Corp................. 16,900 $ 1,024,563
AT&T Corp...................... 7,400 321,900
BellSouth Corp................. 35,900 1,449,462
<CAPTION>
Issuer Shares Value
U.S. COMMON STOCKS -- continued
<S> <C> <C>
UTILITIES -- TELEPHONE -- continued
GTE Corp....................... 60,000 $ 2,730,000
MCI Communications Corp........ 79,600 2,601,925
-----------
$ 8,127,850
-----------
Total U.S. Common Stocks...................... $147,995,318
-----------
FOREIGN STOCKS -- 5.5%
CANADA -- 0.1%
Canadian National Railway Co.
(Railroads)................... 5,600 $ 212,800
-----------
GERMANY -- 0.4%
Henkel Kgaa, Preferred
(Consumer Goods and
Services)..................... 21,100 $ 1,060,143
-----------
NETHERLANDS -- 0.9%
Royal Dutch Petroleum Co., ADR
(Oils)........................ 15,600 $ 2,663,700
-----------
NEW ZEALAND
Lion Nathan Ltd. (Food and
Beverage Products)............ 53,800 $ 128,853
-----------
SPAIN -- 0.4%
Repsol S.A., ADR (Oil
Services).................... 27,000 $ 1,029,375
-----------
SWEDEN -- 0.5%
Astra AB, "A", ADR (Medical and
Health Products).............. 20,000 $ 980,000
Volvo AB, ADR (Automotive)..... 25,000 543,750
-----------
$ 1,523,750
-----------
SWITZERLAND -- 0.9%
Novartis AG
(Pharmaceuticals)*........... 2,133 $ 2,444,092
-----------
UNITED KINGDOM -- 2.3%
British Petroleum PLC, ADR
(Oils)........................ 28,861 $ 4,080,224
Smithkline Beecham PLC, ADR
(Medical and Health
Products)..................... 36,100 2,454,800
-----------
$ 6,535,024
-----------
Total Foreign Stocks.......................... $ 15,597,737
-----------
Total Stocks (Identified Cost,
$123,238,747)................................. $163,593,055
-----------
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
BONDS -- 30.5%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. BONDS -- 21.3%
AEROSPACE -- 0.1%
Northrop Grumman Corp., 9.375s,
2024.......................... $ 225 $ 248,740
-----------
AIRLINES -- 1.7%
Continental Airlines, Inc.,
9.5s, 2001##.................. $ 625 $ 637,500
Continental Airlines Pass-Thru
Trust, 9.5s, 2013............. 150 168,562
Continental Airlines Pass-Thru
Trust, 10.22s, 2014........... 500 585,505
Delta Air Lines, Inc., 8.5s,
2002.......................... 400 423,524
Delta Air Lines, Inc.,
10.375s, 2022................. 375 472,076
Jet Equipment Trust, 9.41s,
2010##........................ 330 380,771
Jet Equipment Trust, 8.64s,
2012##........................ 243 265,481
Jet Equipment Trust, 11.44s,
2014##........................ 300 355,572
Jet Equipment Trust, 10.69s,
2015##........................ 250 304,228
Qantas Airways Ltd., 7.5s,
2003##........................ 450 460,224
United Airlines, Inc., 9.12s,
2012.......................... 200 223,336
United Airlines Pass-Thru
Trust, 7.27s, 2013............ 500 484,155
-----------
$ 4,760,934
-----------
BANKS AND CREDIT COMPANIES -- 3.0%
Advanta Capital Trust, 8.99s,
2026##........................ $ 375 $ 375,581
Advanta Corp., 7.47s, 2001..... 250 254,310
BankAmerica Capital, 8s,
2026.......................... 500 506,850
BT Institutional Capital Trust,
"A", 8.09s, 2026.............. 400 402,000
Capital One Bank, 6.75s,
2000.......................... 900 898,875
Capital One Financial Corp.,
7.25s, 2003................... 400 395,000
Contifinancial Corp., 8.375s,
2003.......................... 300 309,000
Equitable Life Assurance
Society, 7.7s, 2015........... 1,250 1,249,475
First Chicago NBD Institutional
Capital, 7.95s, 2026##........ 250 245,625
First USA Capital Trust,
9.33s, 2027................... 600 599,382
MBNA Capital, 8.278s, 2026..... 400 401,500
Mellon Capital II, 7.995s,
2027......................... 500 500,000
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
BANKS AND CREDIT COMPANIES -- continued
NB Capital Trust, 7.83s,
2026......................... $ 420 $ 418,719
New York Life Insurance Co.,
7.5s, 2023.................... 300 290,676
Peoples Bank of Bridgeport,
7.2s, 2006.................... 125 122,208
State Street Bank & Trust,
7.94s, 2026................... 350 341,687
Travelers Capital III, 7.75s,
2036.......................... 985 947,137
United Cos. Financial Corp.,
7.7s, 2004.................... 200 201,000
-----------
$ 8,459,025
-----------
BUILDING -- 0.2%
Owens Corning Fiberglas Corp.,
8.875s, 2002.................. $ 200 $ 216,878
Owens Corning Fiberglas Corp.,
9.9s, 2015##.................. 200 220,500
-----------
$ 437,378
-----------
BUSINESS MACHINES -- 0.1%
International Business Machines
Corp., 7.125s, 2096........... $ 400 $ 380,332
-----------
BUSINESS SERVICES -- 0.5%
Loewen Group International,
Inc., 7.5s, 2001.............. $ 900 $ 901,125
Loewen Group International,
Inc., 7.75s, 2001##........... 400 407,000
-----------
$ 1,308,125
-----------
CELLULAR TELEPHONES -- 0.1%
360 Communications, 7.5s,
2006.......................... $ 200 $ 198,382
-----------
CONSUMER GOODS AND SERVICES -- 0.2%
Philip Morris Cos., Inc.,
7.65s, 2008................... $ 690 $ 704,676
-----------
CORPORATE ASSET BACKED -- 1.4%
AT&T Universal Card Master
Trust, 5.65s, 2003............ $ 3,500 $ 3,498,880
BCF LLC, 7.75s, 2026##......... 199 194,880
Merrill Lynch Mortgage
Investors, Inc., 8.9s, 2011... 347 366,339
-----------
$ 4,060,099
-----------
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
ENTERTAINMENT -- 1.8%
Time Warner, Inc., 7.45s,
1998.......................... $ 3,450 $ 3,487,984
Time Warner, Inc., 7.95s,
2000.......................... 400 413,076
Time Warner, Inc., 8.375s,
2023.......................... 800 811,096
Time Warner, Inc., 9.15s,
2023.......................... 349 378,313
-----------
$ 5,090,469
-----------
FINANCIAL INSTITUTIONS -- 1.6%
Alex Brown, Inc., 7.625s,
2005.......................... $ 320 $ 326,480
Auburn Hills Trust, 12s,
2020.......................... 725 1,099,057
First Merchants Acceptance
Corp., 9.5s, 2006............. 200 196,000
Humpuss Funding Corp.,
7.72s, 2009##................. 200 197,426
Lehman Brothers, Inc., 7.125s,
2003.......................... 400 399,692
Lehman Brothers, Inc., 7.5s,
2026.......................... 1,150 1,165,973
Salton Sea Funding Corp.,
7.37s, 2005................... 400 399,428
Salton Sea Funding Corp.,
7.84s, 2010................... 400 402,188
Salton Sea Funding Corp., 8.3s,
2011.......................... 200 207,130
-----------
$ 4,393,374
-----------
FOOD AND BEVERAGE PRODUCTS -- 0.5%
RJR Nabisco, Inc., 8.75s,
2004.......................... $ 165 $ 166,528
RJR Nabisco, Inc., 8.75s,
2007.......................... 500 499,230
RJR Nabisco, Inc., 7.55s,
2015.......................... 890 882,675
-----------
$ 1,548,433
-----------
FOREST AND PAPER PRODUCTS -- 0.9%
Boise Cascade Co., 9.85s,
2002.......................... $ 600 $ 678,522
Boise Cascade Co., 7.43s,
2005.......................... 250 253,750
Champion International Corp.,
6.4s, 2026.................... 400 381,876
Georgia Pacific Corp.,
9.875s, 2021.................. 1,150 1,285,482
-----------
$ 2,599,630
-----------
INSURANCE -- 1.0%
American Realty Corp.,
7.45s, 2026##................. $ 400 $ 399,500
Liberty Mutual Insurance Co.,
8.2s, 2007##.................. 875 929,197
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
INSURANCE -- continued
Liberty Mutual Insurance Co.,
7.875s, 2026##................ $ 200 $ 200,698
Metropolitan Life Insurance
Co., 7.7s, 2015##............. 400 400,996
Nationwide Mutual Life
Insurance Co., 7.5s, 2024##... 750 699,015
Travelers Group, Inc., 7.875s,
2025.......................... 275 287,235
-----------
$ 2,916,641
-----------
OIL SERVICES -- 0.2%
Transcontinental Gas Pipe Line,
7.25s, 2026................... $ 500 $ 492,500
-----------
OILS -- 0.9%
CITGO Petroleum, 7.875s,
2006.......................... $ 200 $ 203,920
Enserch Exploration, Inc.,
7.54s, 2009##................. 350 344,750
Husky Oil Ltd., 7.125s, 2006... 400 400,016
Mitchell Energy & Development
Corp., 6.75s, 2004............ 200 186,780
Oryx Energy Co., 10s, 2001..... 290 318,330
Oryx Energy Co., 8s, 2003...... 300 303,525
Oryx Energy Co., 8.375s,
2004.......................... 650 671,697
-----------
$ 2,429,018
-----------
REAL ESTATE -- 0.2%
Taubman Realty Group Ltd., 8s,
2001.......................... $ 600 $ 619,278
-----------
RESTAURANTS AND LODGING -- 0.1%
Circus Circus Enterprises,
Inc.,
6.7s, 2096.................... $ 300 $ 295,056
-----------
RETAIL -- 0.1%
Price/Costco, Inc., 7.125s,
2005.......................... $ 250 $ 250,030
-----------
SPECIAL PRODUCTS AND SERVICES -- 0.3%
Mark IV Industries, Inc.,
7.75s, 2006................... $ 550 $ 540,375
Stewart Enterprises, Inc.,
6.7s, 2003.................... 300 297,057
-----------
$ 837,432
-----------
TELECOMMUNICATIONS -- 1.6%
American Portable Telecom,
Inc., 0s, 2006##.............. $ 900 $ 405,144
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
TELECOMMUNICATIONS -- continued
Continental Cablevision, Inc.,
8.3s, 2006.................... $ 550 $ 591,938
TCI Communications, Inc.,
5.56s, 2003................... 500 497,500
Tele-Communications, Inc.,
7.38s, 2001................... 500 504,850
Tele-Communications, Inc.,
7.49s, 2003................... 800 807,432
Tele-Communications, Inc.,
10.125s, 2022................. 1,475 1,619,579
Viacom, Inc., 7.625s, 2016..... 260 238,875
-----------
$ 4,665,318
-----------
UTILITIES -- ELECTRIC -- 4.2%
Arkansas Power & Light Co.,
8.75s, 2026................... $ 75 $ 77,265
Central Maine Power Co., 7.45s,
1999.......................... 200 199,012
Cleveland Electric Illuminating
Co., 9.375s, 2017............. 700 717,927
Cleveland Electric Illuminating
Co., 9s, 2023................. 350 350,938
Coastal Corp., 7.75s, 2035..... 650 661,745
Edison Mission Energy Funding
Corp., 7.33s, 2008##.......... 100 101,373
El Paso Electric Co., 8.9s,
2006.......................... 575 599,518
First PV Funding Corp., 10.3s,
2014.......................... 474 504,810
First PV Funding Corp., 10.15s,
2016.......................... 362 384,625
Long Island Lighting Co.,
8.75s, 1997................... 500 501,305
Long Island Lighting Co., 7.5s,
2007.......................... 275 256,108
Long Island Lighting Co., 8.9s,
2019.......................... 870 887,617
Long Island Lighting Co., 9s,
2022.......................... 775 815,687
Long Island Lighting Co., 8.2s,
2023.......................... 100 98,991
Long Island Lighting Co.,
9.625s, 2024.................. 800 850,808
Louisiana Power & Light Co.,
10.67s, 2017.................. 400 428,111
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
UTILITIES -- ELECTRIC -- continued
Louisiana Power & Light Co.,
8.75s, 2026................... $ 87 $ 87,544
Midland Cogeneration Venture
Corp., 10.33s, 2002........... 468 497,593
Midland Funding Corp. II, "A",
11.75s, 2005.................. 750 830,370
Montana Power Co., 7.875s,
2026.......................... 750 756,563
Niagara Mohawk Power Corp., 8s,
2004.......................... 500 480,340
Pacificorp Holdings, 7.2s,
2006##........................ 680 676,600
System Energy Resources, 7.38s,
2000.......................... 700 697,935
Texas & New Mexico Power Co.,
12.5s, 1999................... 400 434,540
-----------
$ 11,897,325
-----------
UTILITIES -- GAS -- 0.6%
California Energy, Inc.,
10.25s, 2004.................. $ 600 $ 632,250
Louis Dreyfus Natural Gas
Corp., 9.25s, 2004............ 250 262,908
NGC Corp., 7.625s, 2026........ 200 202,990
Province of Quebec, 6.5s,
2006.......................... 312 301,030
Ras Laffan Liquefied Natural
Gas, 8.294s, 2014##........... 325 325,812
Tosco Corp., 7.625s, 2006...... 355 366,509
-----------
$ 2,091,499
-----------
U.S. FEDERAL AGENCIES -- 4.9%
Federal Home Loan Mortgage
Corp., 9s, 2020 - 2020........ $ 327 $ 346,558
Federal National Mortgage
Assn., 2016................... 1,345 1,315,197
Federal National Mortgage
Assn., 7.5s, 2010 - 2011...... 2,144 2,173,418
Federal National Mortgage
Assn., 8s, 2025 - 2026........ 10,099 10,288,499
-----------
$ 14,123,672
-----------
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
U.S. BONDS -- continued
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 6.4%
U.S. Treasury Notes, 6.5s,
2001.......................... $ 1,300 $ 1,314,222
U.S. Treasury Notes, 6.625s,
2001.......................... 3,400 3,454,706
U.S. Treasury Notes, 7.5s,
2001.......................... 2,920 3,073,767
U.S. Treasury Notes, 5.875s,
2005.......................... 100 96,422
U.S. Treasury Notes, 6.5s,
2006.......................... 3,615 3,634,775
U.S. Treasury Notes, 6.875s,
2006.......................... 300 309,141
U.S. Treasury Bonds, 12s,
2005.......................... 2,195 2,980,393
U.S. Treasury Bonds, 12s,
2013.......................... 705 1,008,481
U.S. Treasury Bonds, 6.5s,
2026.......................... 700 686,987
U.S. Treasury Bonds, 6.75s,
2026.......................... 1,684 1,696,630
-----------
$ 18,255,524
-----------
Total U.S. Bonds.............................. $ 93,062,890
-----------
FOREIGN BONDS -- 2.8%
ARGENTINA -- 0.3%
Hidroelectrica Alicura,
8.375s, 1999##................ $ 500 $ 495,000
Republic of Argentina, 9.25s,
2001.......................... 220 223,300
-----------
$ 718,300
-----------
CANADA -- 0.6%
Canadian Pacific Forest
Products Ltd., 9.25s, 2002.... $ 800 $ 812,784
Fairfax Financial Holdings
Ltd., 8.3s, 2026.............. 400 416,640
Gulf Canada Resources Ltd.,
8.35s, 2006................... 400 411,500
-----------
$ 1,640,924
-----------
CHILE -- 0.2%
Empresa Electrica Del Norts,
7.75s, 2006##................. $ 190 $ 193,800
Enersis S.A., 6.9s, 2006....... 350 341,596
-----------
$ 535,396
-----------
COLOMBIA -- 0.5%
Financiera Energetica Nacional
Colombia, 9.375s, 2006##...... $ 135 $ 143,438
Oleoducto Centrale S.A.,
9.35s, 2005##................. 300 303,000
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
FOREIGN BONDS -- continued
<S> <C> <C>
COLOMBIA -- continued
Republic of Colombia, 8.75s,
1999.......................... $ 250 $ 261,250
Republic of Colombia, 8.66s,
2016##........................ 200 210,000
Republic of Colombia, 8.7s,
2016.......................... 540 520,835
-----------
$ 1,438,523
-----------
ITALY -- 0.1%
City of Naples, 7.52s, 2006.... $ 375 $ 386,745
-----------
MALAYSIA -- 0.1%
Petroliam Nasional Berhad,
7.625s, 2026##................ $ 400 $ 403,228
-----------
NETHERLANDS -- 0.3%
ABN Amro Bank NV, 7.3s, 2026... $ 800 $ 760,640
-----------
SOUTH AFRICA -- 0.3%
Republic of South Africa,
8.375s, 2006.................. $ 900 $ 899,982
-----------
SWITZERLAND -- 0.2%
Ciba-Geigy AG, 6.25s, 2016##... $ 500 $ 504,375
-----------
THAILAND -- 0.1%
Total Access Communication
Public, 8.375s, 2006##........ $ 400 $ 401,324
-----------
UNITED KINGDOM -- 0.1%
Crown Cork & Seal Finance PLC,
7s, 2006...................... $ 200 $ 198,272
-----------
Total Foreign Bonds............................. $ 7,887,709
-----------
Total Bonds (Identified Cost, $87,132,486).... $100,950,599
-----------
<CAPTION>
PREFERRED STOCKS -- 0.3%
Shares
<S> <C> <C>
El Paso Tennessee Pipeline Co.,
8.25s......................... 4,000 $ 204,500
Enron Corp., Cv................ 10,000 240,000
Long Island Lighting Co.,
7.95s......................... 20,000 507,500
-----------
Total Preferred Stocks (Identified Cost,
$933,000).................................... $ 952,000
-----------
</TABLE>
25
<PAGE> 26
PORTFOLIO OF INVESTMENTS -- continued
<TABLE>
<CAPTION>
PREFERRED STOCKS -- 0.3%
Shares
<S> <C> <C>
<CAPTION>
SHORT-TERM OBLIGATIONS -- 6.4%
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Federal Home Loan Bank, due
1/03/97....................... $ 6,000 $ 5,998,180
Ford Motor Credit Corp., due
1/02/97....................... 8,000 7,998,555
General Electric Capital Corp.,
due 1/02/97................... 4,185 4,184,175
-----------
Total Short-Term Obligations, at Amortized
Cost......................................... $ 18,180,910
-----------
Total Investments (Identified Cost,
$243,673,683)................................ $283,676,564
OTHER ASSETS, LESS LIABILITIES -- (0.5)% 1,571,614
-----------
Net Assets -- 100.0% $285,248,178
===========
See portfolio footnotes and notes to financial statements
</TABLE>
PORTFOLIO OF INVESTMENTS -- December 31, 1996
WORLD GOVERNMENTS VARIABLE ACCOUNT -- WGVA
BONDS -- 97.4%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. BONDS -- 21.1%
U.S. TREASURY OBLIGATIONS
U.S. Treasury Notes, 6.25s,
2001......................... $ 1,000 $ 1,000,940
U.S. Treasury Notes, 6.625s,
2001......................... 5,600 5,689,264
-----------
$ 6,690,204
-----------
FOREIGN BONDS -- 76.3%
AUSTRALIA -- 12.9%
Commonwealth of Australia,
8.75s, 2001.................. AUD 1,580 $ 1,336,355
Commonwealth of Australia,
9.75s, 2002.................. 1,750 1,548,902
Commonwealth of Australia,
9.5s, 2003................... 1,350 1,194,868
-----------
$ 4,080,125
-----------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
FOREIGN BONDS -- continued
BELGIUM -- 2.8%
Kingdom of Belgium, 9s, 1998..... BEF 10,000 $ 342,256
Kingdom of Belgium, 8.75s,
2002............................ 5,000 185,994
Kingdom of Belgium, 7.25s,
2004............................ 5,000 174,124
Kingdom of Belgium, 8.5s, 2007... 5,000 187,997
-----------
$ 890,371
-----------
CANADA -- 2.9%
Government of Canada, 7s, 2006... CAD 1,200 $ 913,377
-----------
DENMARK -- 5.6%
Kingdom of Denmark, 6s, 1999..... DKK 2,003 $ 353,591
Kingdom of Denmark, 8s, 2001..... 6,587 1,241,893
Kingdom of Denmark, 7s, 2007..... 973 168,046
-----------
$ 1,763,530
-----------
GERMANY -- 13.0%
Federal Republic of Germany,
6.875s, 1999.................... DEM 1,160 $ 804,121
Federal Republic of Germany,
7.125s, 2002.................... 1,330 948,765
German Unity Fund, 8.75s, 2000... 241 178,968
Treuhandanstalt Obligationen,
6.375s, 1999.................... 3,202 2,207,163
-----------
$ 4,139,017
-----------
IRELAND -- 2.3%
Republic of Ireland, 8s, 2000.... IEP 400 $ 722,281
-----------
ITALY -- 10.8%
Republic of Italy, 8.313s,
1999............................ ITL 2,475,000 1,728,954
Republic of Italy, 8.313s,
2006............................ 2,285,000 1,705,792
-----------
$ 3,434,746
-----------
JAPAN -- 9.8%
Export Import Bank of Japan,
4.375s, 2003.................... JPY 160,000 $ 1,558,514
International Bank of
Reconstruction & Development,
4.5s, 2000...................... 96,000 922,247
International Bank of
Reconstruction & Development,
5.25s, 2002..................... 62,000 627,234
-----------
$ 3,107,995
-----------
SPAIN -- 8.2%
Government of Spain, 8.4s,
2001............................ ESP 106,820 $ 899,420
Government of Spain, 10.1s,
2001............................ 4,600 40,765
Government of Spain, 7.9s,
2002............................ 201,850 1,660,246
-----------
$ 2,600,431
-----------
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
BONDS -- continued
Principal Amount
Issuer (000 Omitted) Value
FOREIGN BONDS -- continued
<S> <C> <C>
SWEDEN -- 3.1%
Kingdom of Sweden, 11s,
1999......................... SEK 2,300 $ 378,968
Kingdom of Sweden, 10.25s,
2000......................... 3,500 592,407
-----------
$ 971,375
-----------
UNITED KINGDOM -- 4.9%
United Kingdom Treasury, 9s,
2000......................... GBP 420 $ 757,320
United Kingdom Treasury, 9.75s, 2002.. 420 797,348
-----------
$ 1,554,668
-----------
Total Foreign Bonds.......................... $24,177,916
-----------
Total Bonds (Identified Cost, $30,676,134)... $30,868,120
-----------
<CAPTION>
CALL OPTIONS PURCHASED
Description/ Principal Amount
Expiration Month/ of Contracts
Strike Price (000 Omitted) Value
<S> <C> <C>
ITALIAN LIRE/DEUTSCHE MARKS
January/995 (Premium
Paid, $4,198)............... ITL 1,691,540 $8,458
-----------
PUT OPTIONS PURCHASED -- 2.1%
DEUTSCHE MARKS/BRITISH POUNDS
January/2.45.................. DEM 4,309 $ 207,248
DEUTSCHE MARKS/BRITISH POUNDS
January/2.51.................. 4,414 138,699
DEUTSCHE MARKS/BRITISH POUNDS
January/2.56.................. 4,502 85,744
SWISS FRANCS/DEUTSCHE MARKS
January/0.829................. CHF 1,704 61,087
SWISS FRANCS/DEUTSCHE MARKS
February/0.84................. 1,727 44,149
SWISS FRANCS/DEUTSCHE MARKS
February/0.84................. 2,981 76,176
SWISS FRANCS/DEUTSCHE MARKS
March/0.86.................... 4,820 52,306
-----------
Total Put Options Purchased (Premiums Paid,
$147,890).................................... $ 665,409
-----------
Total Investments (Identified Cost,
$30,828,222)................................. $31,541,987
-----------
<CAPTION>
CALL OPTIONS WRITTEN
Description/ Principal Amount
Expiration Month/ of Contracts
Strike Price (000 Omitted) Value
<S> <C> <C>
DEUTSCHE MARKS/BRITISH POUNDS
January/2.3682.................. DEM 4,165 $ --
SWISS FRANCS/DEUTSCHE MARKS
February/0.8265................. CHF 2,933 (18)
-----------
Total Call Options Written (Premiums Received,
$24,861)....................................... $ (18)
-----------
PUT OPTIONS WRITTEN -- (1.6)%
DEUTSCHE MARKS/BRITISH POUNDS
January/2.45.................... DEM 4,309 $ (206,395)
DEUTSCHE MARKS/BRITISH POUNDS
January/2.5105.................. 4,415 (138,144)
SWISS FRANCS/DEUTSCHE MARKS
January/0.829................... CHF 1,704 (61,130)
SWISS FRANCS/DEUTSCHE MARKS
February/0.84................... 4,708 (120,379)
-----------
Total Put Options Written (Premiums Received,
$214,566)...................................... $ (526,048)
-----------
OTHER ASSETS, LESS LIABILITIES -- 2.1%........... $ 668,975
-----------
Net Assets -- 100.0%........................... $31,684,896
===========
See portfolio footnotes and notes to financial statements
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
** Non-income producing security - in default.
# Payment-in-kind security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
<TABLE>
<S> <C> <C> <C> <C> <C>
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
CHF = Swiss Francs JPY = Japanese Yen
DEM = Deutsche Marks NZD = New Zealand Dollars
DKK = Danish Kroner NLG = Dutch Guilders
ESP = Spanish Pesetas SEK = Swedish Kronor
</TABLE>
27
<PAGE> 28
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 1996
(000 Omitted)
<TABLE>
<CAPTION>
Capital Government High Managed Money Total World
Appreciation Securities Yield Sectors Market Return Governments
Variable Variable Variable Variable Variable Variable Variable
ASSETS: Account Account Account Account Account Account Account
------------ ---------- -------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments --
Identified cost......................... $414,739 $218,266 $192,296 $89,008 $127,283 $243,673 $30,828
Unrealized appreciation................. 136,887 6,720 2,283 8,637 -- 40,003 714
-------- -------- -------- ------- -------- -------- -------
Total value........................... $551,626 $224,986 $194,579 $97,645 $127,283 $283,676 $31,542
Cash...................................... 4,361 67 13 4 96 16 102
Receivable for forward foreign currency
exchange contracts sold.................. -- -- -- -- -- -- 277
Receivable for investments sold........... 1,977 -- -- 892 -- 14 --
Receivable for units sold................. 109 52 13 5 267 48 1
Interest and dividends receivable......... 485 3,468 3,927 47 1,985 902
Receivable from sponsor................... -- -- 61 -- 12 265 --
Other assets.............................. 5 3 2 1 2 13 --
-------- -------- -------- ------- -------- -------- -------
Total assets.......................... $558,563 $228,576 $198,595 $98,594 $127,660 $286,017 $32,824
-------- -------- -------- ------- -------- -------- -------
LIABILITIES:
Payable for investments purchased......... $ 170 $ $ $1,198 $ $ 532 $ --
Payable for units surrendered............. 409 122 74 35 432 177 12
Written options outstanding, at value
(premiums received, $239)................ -- -- -- -- -- -- 526
Payable for forward foreign currency
exchange contracts sold.................. -- -- -- -- -- -- 272
Payable for closed forward foreign
currency exchange contracts.............. -- -- -- -- -- -- 257
Payable to affiliates --
Investment adviser...................... 33 10 12 6 5 18 2
Sponsor................................. 521 124 -- 46 278 -- 45
Accrued expenses and other liabilities.... 55 39 47 27 37 42 25
-------- -------- -------- ------- -------- -------- -------
Total liabilities..................... $ 1,188 $ 295 $ 133 $1,312 $ 752 $ 769 $ 1,139
-------- -------- -------- ------- -------- -------- -------
Net assets.......................... $557,375 $228,281 $198,462 $97,282 $126,908 $285,248 $31,685
======== ======== ======== ======= ======== ======== =======
</TABLE>
See notes to financial statements
28
<PAGE> 29
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 1996 -- continued
(000 Omitted except for unit values)
<TABLE>
<CAPTION>
Capital Government High Managed Money Total World
Appreciation Securities Yield Sectors Market Return Governments
Unit Variable Variable Variable Variable Variable Variable Variable
Units Value Account Account Account Account Account Account Account
----- -------- ------------ ---------- -------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets applicable to contract owners:
Capital Appreciation
Variable Account --
Compass 2........................ 9,004 $45.4107 $408,860
Compass 3........................ 3,721 30.1803 112,326
Compass 3 - Level 2.............. 2,493 12.4143 30,948
Government Securities
Variable Account --
Compass 2........................ 7,255 $25.6724 $186,230
Compass 3........................ 1,549 18.0755 27,993
Compass 3 - Level 2.............. 1,080 10.4604 11,283
High Yield
Variable Account --
Compass 2........................ 4,956 $29.0656 $144,051
Compass 3........................ 1,438 21.5259 30,940
Compass 3 - Level 2.............. 1,819 11.3852 20,711
Managed Sectors
Variable Account --
Compass 2........................ 731 $36.5900 $26,675
Compass 3........................ 1,552 36.3604 56,421
Compass 3 - Level 2.............. 1,203 11.6449 14,020
Money Market
Variable Account --
Compass 2........................ 5,209 $17.1109 $100,240
Compass 3........................ 1,930 14.1277 15,955
Compass 3 - Level 2.............. 898 10.4654 9,389
Total Return
Variable Account --
Compass 2........................ 4,414 $25.0444 $110,531
Compass 3........................ 5,177 24.7133 127,894
Compass 3 - Level 2.............. 3,717 11.8074 43,894
World Governments
Variable Account --
Compass 2........................ 587 $18.6786 $10,961
Compass 3........................ 789 18.4308 14,536
Compass 3 - Level 2.............. 563 10.6836 6,016
-------- -------- -------- ------- -------- -------- -------
Net assets applicable to owners of deferred
contracts........................................ $552,134 $225,506 $195,702 $97,116 $125,584 $282,319 $31,513
Reserve for variable annuities --
Compass 2 Contracts.............................. 4,778 2,550 2,745 125 1,316 2,544 71
Compass 3 Contracts.............................. 325 81 15 41 5 315 14
Compass 3 - Level 2 Contracts.................. 138 144 -- -- 3 70 87
-------- -------- -------- ------- -------- -------- -------
Net assets................................... $557,375 $228,281 $198,462 $97,282 $126,908 $285,248 $31,685
======== ======== ======== ======= ======== ======== =======
</TABLE>
See notes to financial statements
29
<PAGE> 30
STATEMENTS OF OPERATIONS -- Year Ended December 31, 1996
(000 Omitted)
<TABLE>
<CAPTION>
Capital Government High Managed Money Total World
Appreciation Securities Yield Sectors Market Return Governments
Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account
------------ ---------- -------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE):
Income --
Interest.......................................... $ 209 $ 18,443 $18,429 $ 121 $7,897 $ 8,237 $ 2,306
Dividends......................................... 3,438 -- -- 644 -- 4,783 --
Foreign taxes withheld............................ (29) -- -- (7) -- (67) --
-------- ------- ------- ------ ------- ------
Total investment income....................... $ 3,618 $ 18,443 $18,429 $ 758 $7,897 $12,953 $ 2,306
-------- ------- ------- ------ ------- ------
Expenses --
Mortality and expense risk charges................ $ 6,793 $ 3,165 $ 2,404 $1,124 $1,874 $ 3,404 $ 418
Management fees................................... 3,818 1,361 1,416 674 734 2,059 252
Custodian fees.................................... 260 115 163 42 62 118 35
Distribution expense charges...................... 170 49 45 85 56 205 25
Auditing fees..................................... 31 43 41 31 31 35 35
Legal fees........................................ 1 1 -- -- 1 1 1
Boards of Managers fees and expenses.............. 10 10 10 10 10 10 9
Printing.......................................... 23 13 18 8 8 13 3
Miscellaneous..................................... 5 2 10 2 5 5 1
-------- ------- ------- ------ ------- ------
Total expenses................................ $ 11,111 $ 4,759 $ 4,107 $1,976 $2,781 $ 5,850 $ 779
Fees paid indirectly.............................. -- (3) (5) -- (10) (7) --
-------- ------- ------- ------ ------- ------
Net expenses.................................. $ 11,111 $ 4,756 $ 4,102 $1,976 $2,771 $ 5,843 $ 779
-------- ------- ------- ------ ------- ------
Net investment income (expense)........... $ (7,493) $ 13,687 $14,327 $(1,218) $5,126 $ 7,110 $ 1,527
======== ======= ======= ====== ======= ======
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)(identified cost basis) --
Investment transactions......................... $ 74,029 $ (151) $ 2,950 $13,680 $-- $27,964 $ 371
Written option transactions..................... -- -- -- -- -- -- 201
Foreign currency transactions................... (98) -- -- (5) -- (4) (837)
-------- ------- ------- ------ ------- ------
Net realized gains (losses) on investments and
foreign currency transactions............... $ 73,931 $ (151) $ 2,950 $13,675 $-- $27,960 $ (265)
-------- ------- ------- ------ ------- ------
Change in unrealized appreciation
(depreciation) --
Investments..................................... $ 32,320 $(12,741) $ 3,210 $1,098 $-- $(2,943) $ (29)
Written options................................. -- -- -- -- -- -- (317)
Translation of assets and liabilities in foreign
currencies.................................... 57 -- (1) 2 -- (1) 7
-------- ------- ------- ------ ------- ------
Net unrealized gains (losses) on
investments................................. $ 32,377 $(12,741) $ 3,209 $1,100 $-- $(2,944) $ (339)
-------- ------- ------- ------ ------- ------
Net realized and unrealized gains (losses)
on investments............................ $106,308 $(12,892) $ 6,159 $14,775 $-- $25,016 $ (604)
-------- ------- ------- ------ ------- ------
Increase in net assets from operations.... $ 98,815 $ 795 $20,486 $13,557 $5,126 $32,126 $ 923
======== ======= ======= ====== ======= ======
</TABLE>
See notes to financial statements
30
<PAGE> 31
STATEMENTS OF CHANGES IN NET ASSETS
(000 Omitted)
<TABLE>
<CAPTION>
Capital Appreciation Government Securities High Yield
Variable Account Variable Account Variable Account
-------------------------- -------------------------- --------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income (expense)......... $ (7,493) $ (4,739) $ 13,687 $ 15,090 $ 14,327 $ 15,430
Net realized gains (losses) on
investments and foreign currency
transactions........................... 73,931 70,307 (151) (1,546) 2,950 (8,850)
Net unrealized gains (losses) on
investments and foreign currency
transactions........................... 32,377 70,403 (12,741) 27,975 3,209 21,177
-------- -------- -------- -------- -------- --------
Increase in net assets from
operations........................... $ 98,815 $135,971 $ 795 $ 41,519 $ 20,486 $ 27,757
-------- -------- -------- -------- -------- --------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received.............. $ 21,404 $ 19,308 $ 6,200 $ 6,994 $ 4,765 $ 5,092
Net transfers between variable and fixed
accumulation accounts.................. 554 5,813 3,800 (42,552) (2,435) 4,042
Withdrawals, surrenders, annuitizations
and contract charges................... (62,268) (69,281) (39,464) (45,443) (25,541) (26,006)
-------- -------- -------- -------- -------- --------
Net accumulation activity............. $(40,310) $(44,160) $(29,464) $(81,001) $(23,211) $(16,872)
-------- -------- -------- -------- -------- --------
Annuitization activity:
Annuitizations.......................... $ 585 $ 375 $ 317 $ 538 $ 118 $ 584
Annuity payments and contract charges... (811) (622) (480) (466) (475) (406)
Net transfers among accounts for annuity
reserves............................... 18 12 (51) 6 13 --
Adjustments to annuity reserves......... (135) (139) (69) 87 6 49
-------- -------- -------- -------- -------- --------
Net annuitization activity............ $ (343) $ (374) $ (283) $ 165 $ (338) $ 227
-------- -------- -------- -------- -------- --------
Decrease in net assets from participant
transactions........................... $(40,653) $(44,534) $(29,747) $(80,836) $(23,549) $(16,645)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in net
assets.............................. $ 58,162 $ 91,437 $(28,952) $(39,317) $ (3,063) $ 11,112
NET ASSETS:
At beginning of year...................... 499,213 407,776 257,233 296,550 201,525 190,413
-------- -------- -------- -------- -------- --------
At end of year............................ $557,375 $499,213 $228,281 $257,233 $198,462 $201,525
======== ======== ======== ======== ======== ========
</TABLE>
See notes to financial statements
31
<PAGE> 32
STATEMENTS OF CHANGES IN NET ASSETS -- continued
(000 Omitted)
<TABLE>
<CAPTION>
Managed Sectors Money Market
Variable Account Variable Account
----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income (expense)........................ $ (1,218) $ (809) $ 5,126 $ 7,005
Net realized gains on investments and foreign currency
transactions.......................................... 13,675 15,458 -- --
Net unrealized gains on investments and foreign
currency transactions................................. 1,100 4,877 -- --
------- ------- -------- --------
Increase in net assets from operations............... $ 13,557 $ 19,526 $ 5,126 $ 7,005
------- ------- -------- --------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received............................. $ 8,975 $ 6,862 $ 5,979 $ 7,259
Net transfers between variable and fixed accumulation
accounts............................................. 3,625 3,581 (14,269) 22,474
Withdrawals, surrenders, annuitizations and contract
charges.............................................. (11,912) (9,312) (37,717) (39,085)
------- ------- -------- --------
Net accumulation activity............................ $ 688 $ 1,131 $(46,007) $ (9,352)
------- ------- -------- --------
Annuitization activity:
Annuitizations......................................... $ 72 $ -- $ 300 $ 91
Annuity payments and contract charges.................. (27) (9) (279) (230)
Net transfers among accounts for annuity reserves...... 65 -- -- (18)
Adjustments to annuity reserves........................ (19) (7) (208) (41)
------- ------- -------- --------
Net annuitization activity........................... $ 91 $ (16) $ (187) $ (198)
------- ------- -------- --------
Increase (decrease) in net assets from participant
transactions......................................... $ 779 $ 1,115 $(46,194) $ (9,550)
------- ------- -------- --------
Total increase (decrease) in net assets.............. $ 14,336 $ 20,641 $(41,068) $ (2,545)
NET ASSETS:
At beginning of year..................................... 82,946 62,305 167,976 170,521
------- ------- -------- --------
At end of year........................................... $ 97,282 $ 82,946 $126,908 $167,976
======= ======= ======== ========
</TABLE>
See notes to financial statements
32
<PAGE> 33
STATEMENTS OF CHANGES IN NET ASSETS -- continued
(000 Omitted)
<TABLE>
<CAPTION>
Total Return World Governments
Variable Account Variable Account
----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS:
Net investment income.................................. $ 7,110 $ 7,294 $ 1,527 $ 1,965
Net realized gains (losses) on investments and foreign
currency transactions................................. 27,960 26,520 (265) 1,672
Net unrealized gains (losses) on investments and
foreign currency transactions......................... (2,944) 24,712 (339) 1,327
-------- -------- ------- -------
Increase in net assets from operations............... $ 32,126 $ 58,526 $ 923 $ 4,964
-------- -------- ------- -------
PARTICIPANT TRANSACTIONS:
Accumulation activity:
Purchase payments received............................. $ 16,989 $ 15,564 $ 1,917 $ 2,063
Net transfers between variable and fixed accumulation
accounts............................................. 7,233 540 (3,193) (1,733)
Withdrawals, surrenders, annuitizations and contract
charges.............................................. (36,762) (32,616) (4,588) (5,080)
-------- -------- ------- -------
Net accumulation activity............................ $(12,540) $(16,512) $ (5,864) $ (4,750)
-------- -------- ------- -------
Annuitization activity:
Annuitizations......................................... $ 250 $ 270 $ -- $ 190
Annuity payments and contract charges.................. (436) (376) (52) (62)
Net transfers among accounts for annuity reserves...... (4) -- (3) --
Adjustments to annuity reserves........................ 12 183 (35) (5)
-------- -------- ------- -------
Net annuitization activity........................... $ (178) $ 77 $ (90) $ 123
-------- -------- ------- -------
Decrease in net assets from participant transactions... $(12,718) $(16,435) $ (5,954) $ (4,627)
-------- -------- ------- -------
Total increase (decrease) in net assets.............. $ 19,408 $ 42,091 $ (5,031) $ 337
NET ASSETS:
At beginning of year..................................... 265,840 223,749 36,716 36,379
-------- -------- ------- -------
At end of year........................................... $285,248 $265,840 $ 31,685 $ 36,716
======== ======== ======= =======
</TABLE>
See notes to financial statements
33
<PAGE> 34
PER UNIT AND OTHER DATA
<TABLE>
<CAPTION>
Capital Appreciation Variable Account
------------------------------------------------------------
Compass 2
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year............................ $37.7151 $28.0107 $32.9053 $29.2712 $26.6401
-------- -------- -------- -------- --------
Investment income............................................... $ 0.2861 $ 0.3624 $ 0.4277 $ 0.3914 $ 0.2670
Expenses........................................................ 0.8695 0.6989 0.6325 0.6436 0.5467
-------- -------- -------- -------- --------
Net investment loss........................................... $(0.5834) $(0.3365) $(0.2048) $(0.2522) $(0.2797)
Net realized and unrealized gains (losses) on investments and
foreign currency transactions.................................. 8.2790 10.0409 (4.6898) 3.8863 2.9108
-------- -------- -------- -------- --------
Net increase (decrease) in unit value........................... $ 7.6956 $ 9.7044 $(4.8946) $ 3.6341 $ 2.6311
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year.................................. $45.4107 $37.7151 $28.0107 $32.9053 $29.2712
========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #.................................................... 0.78% 0.80% 0.79% 0.78% 0.80%
Net investment loss............................................. (1.41)% (1.02)% (0.69)% (0.83)% (1.08)%
PORTFOLIO TURNOVER............................................... 66% 96% 95% 56% 34%
AVERAGE COMMISSION RATE# # #..................................... $ 0.0371 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED)......... 9,004 10,014 11,310 13,833 14,914
</TABLE>
<TABLE>
<CAPTION>
Capital Appreciation Variable Account
---------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- ------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, ------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year......................... $ 10.3053 $10.0000 $25.0907 $18.6531 $21.9341 $19.5311 $17.7928
----------- ------------ -------- -------- -------- -------- --------
Investment income.............. $ 0.0790 $ 0.0196 $ 0.1893 $ 0.2402 $ 0.2870 $ 0.2617 $ 0.1919
Expenses....................... 0.2370 0.0517 0.6053 0.4847 0.4421 0.4498 0.4131
----------- ------------ -------- -------- -------- -------- --------
Net investment loss.......... $ (0.1580) $(0.0321) $(0.4160) $(0.2445) $(0.1551) $(0.1881) $(0.2212)
Net realized and unrealized
gains
(losses) on investments and
foreign
currency transactions......... 2.2670 0.3374 5.5056 6.6821 (3.1259) 2.5911 1.9595
----------- ------------ -------- -------- -------- -------- --------
Net increase (decrease) in unit
value........................ $ 2.109 $ 0.3053 $ 5.0896 $ 6.4376 $(3.2810) $ 2.4030 $ 1.7383
----------- ------------ -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year......................... $ 12.4143 $10.3053 $30.1803 $25.0907 $18.6531 $21.9341 $19.5311
============== ============== ========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #................... 0.78% 0.80% 0.78% 0.80% 0.79% 0.78% 0.80%
Net investment loss............ (1.41)% (1.02)% (1.41)% (1.02)% (0.69)% (0.83)% (1.08)%
PORTFOLIO TURNOVER.............. 66% 96% 66% 96% 95% 56% 34%
AVERAGE COMMISSION RATE# # #.... $ 0.0371 -- $ 0.0371 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000 OMITTED)...... 2,494 955 3,721 4,272 4,686 4,899 4,401
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
# # # Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
See notes to financial statements
34
<PAGE> 35
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
Government Securities Variable Account
----------------------------------------------------------------
Compass 2
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year....................... $25.5791 $22.0031 $22.7120 $21.1172 $19.9842
-------- -------- -------- -------- --------
Investment income.......................................... $ 1.9022 $ 1.7836 $ 1.5648 $ 1.5732 $ 1.4340
Expenses................................................... 0.4873 0.4564 0.4229 0.4238 0.3672
-------- -------- -------- -------- --------
Net investment income.................................... $ 1.4149 $ 1.3272 $ 1.1419 $ 1.1494 $ 1.0668
Net realized and unrealized gains (losses) on investments
and foreign currency transactions......................... (1.3216) 2.2488 (1.8508) 0.4454 0.0662
-------- -------- -------- -------- --------
Net increase (decrease) in unit value...................... $ 0.0933 $ 3.5760 $(0.7089) $ 1.5948 $ 1.1330
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year............................. $25.6724 $25.5791 $22.0031 $22.7120 $21.1172
========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses + # #............................................. 0.62% 0.63% 0.61% 0.61% 0.62%
Net investment income...................................... 5.53% 5.51% 5.09% 5.11% 5.51%
PORTFOLIO TURNOVER.......................................... 39% 80% 41% 81% 175%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED).... 7,255 8,361 11,308 12,679 15,059
</TABLE>
<TABLE>
<CAPTION>
Government Securities Variable Account
---------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- ------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, ------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year......................... $ 10.4172 $10.0000 $18.0278 $15.5227 $16.0387 $14.9267 $14.1396
----------- ------------ -------- -------- -------- -------- --------
Investment income.............. $ 0.7931 $ 0.1868 $ 1.3222 $ 1.2529 $ 1.1028 $ 1.1064 $ 1.0851
Expenses....................... 0.1966 0.0478 0.3586 0.3385 0.3146 0.3154 0.2950
----------- ------------ -------- -------- -------- -------- --------
Net investment income........ $ 0.5965 $ 0.1390 $ 0.9636 $ 0.9144 $ 0.7882 $ 0.7910 $ 0.7901
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions.................. (0.5533) 0.2782 (0.9159) 1.5907 (1.3042) 0.3210 (0.0030)
----------- ------------ -------- -------- -------- -------- --------
Net increase (decrease) in unit
value........................ $ 0.0432 $ 0.4172 $ 0.0477 $ 2.5051 $(0.5160) $ 1.1120 $ 0.7871
----------- ------------ -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year......................... $ 10.4604 $10.4172 $18.0755 $18.0278 $15.5227 $16.0387 $14.9267
============== ============== ========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+##.................... 0.62% 0.63% 0.62% 0.63% 0.61% 0.61% 0.62%
Net investment income.......... 5.53% 5.51% 5.53% 5.51% 5.09% 5.11% 5.51%
PORTFOLIO TURNOVER.............. 39% 80% 39% 80% 41% 81% 175%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000 OMITTED)...... 1,079 608 1,549 1,888 2,922 2,697 2,722
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
35
<PAGE> 36
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
High Yield Variable Account
------------------------------------------------------------
Compass 2
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year............................ $26.1493 $22.6776 $23.3591 $19.7156 $17.3208
-------- -------- -------- -------- --------
Investment income............................................... $ 2.7199 $ 2.5137 $ 2.2324 $ 2.0867 $ 2.0657
Expenses........................................................ 0.6035 0.5356 0.5062 0.4797 0.4061
-------- -------- -------- -------- --------
Net investment income......................................... $ 2.1164 $ 1.9781 $ 1.7262 $ 1.6070 $ 1.6596
Net realized and unrealized gains (losses) on investments and
foreign currency transactions.................................. 0.7999 1.4936 (2.4077) 2.0365 0.7352
-------- -------- -------- -------- --------
Net increase (decrease) in unit value........................... $ 2.9163 $ 3.4717 $(0.6815) $ 3.6435 $ 2.3948
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year.................................. $29.0656 $26.1493 $22.6776 $23.3591 $19.7156
========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses + # #.................................................. 0.88% 0.88% 0.91% 0.86% 0.93%
Net investment income........................................... 7.59% 7.91% 7.41% 6.97% 9.03%
PORTFOLIO TURNOVER............................................... 108% 88% 77% 67% 61%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED)......... 4,956 5,649 6,433 7,564 8,218
</TABLE>
<TABLE>
<CAPTION>
High Yield Variable Account
---------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- ------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, ------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year......................... $ 10.2377 $10.0000 $19.3854 $16.8283 $17.3543 $14.6589 $12.8923
----------- ------------ -------- -------- -------- -------- --------
Investment income.............. $ 0.9246 $ 0.3803 $ 1.9450 $ 1.8912 $ 1.5336 $ 1.5179 $ 1.5969
Expenses....................... 0.2033 0.0765 0.4432 0.4253 0.3711 0.3671 0.3340
----------- ------------ -------- -------- -------- -------- --------
Net investment income........ $ 0.7213 $ 0.3038 $ 1.5018 $ 1.4659 $ 1.1625 $ 1.1508 $ 1.2629
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions.................. 0.4262 (0.0661) 0.6387 1.0912 (1.6885) 1.5446 0.5037
----------- ------------ -------- -------- -------- -------- --------
Net increase (decrease) in unit
value........................ $ 1.1475 $ 0.2377 $ 2.1405 $ 2.5571 $(0.5260) $ 2.6954 $ 1.7666
----------- ------------ -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year......................... $ 11.3852 $10.2377 $21.5259 $19.3854 $16.8283 $17.3543 $14.6589
============== ============== ========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses + # #................. 0.88% 0.88% 0.88% 0.88% 0.91% 0.86% 0.93%
Net investment income.......... 7.59% 7.91% 7.59% 7.91% 7.41% 6.97% 9.03%
PORTFOLIO TURNOVER.............. 108% 88% 108% 88% 77% 67% 61%
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000 OMITTED)...... 1,819 1,368 1,438 1,913 2,506 2,577 2,345
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
36
<PAGE> 37
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
Managed Sectors Variable Account
----------------------------------------------------------------
Compass 2
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year....................... $31.3870 $23.9044 $24.7295 $23.8070 $22.6652
-------- -------- -------- -------- --------
Investment income.......................................... $ 0.2838 $ 0.3277 $ 0.3066 $ 0.1822 $ 0.1121
Expenses................................................... 0.7089 0.6066 0.5155 0.4994 0.4782
-------- -------- -------- -------- --------
Net investment loss...................................... $(0.4251) $(0.2789) $(0.2089) $(0.3172) $(0.3661)
Net realized and unrealized gains (losses) on investments
and foreign currency transactions......................... 5.6281 7.7615 (0.6162) 1.2397 1.5079
-------- -------- -------- -------- --------
Net increase (decrease) in unit value...................... $ 5.2030 $ 7.4826 $(0.8251) $ 0.9225 $ 1.1418
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year............................. $36.5900 $31.3870 $23.9044 $24.7295 $23.8070
========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #............................................... 0.85% 0.87% 0.90% 0.91% 0.92%
Net investment loss........................................ (1.36)% (1.07)% (0.97)% (1.49)% (1.75)%
PORTFOLIO TURNOVER.......................................... 64% 115% 111% 122% 34%
AVERAGE COMMISSION RATE# # #................................ $ 0.0459 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED).... 729 788 800 878 1,041
</TABLE>
<TABLE>
<CAPTION>
Managed Sectors Variable Account
---------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- ------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, ------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year......................... $ 9.9892 $10.0000 $31.2371 $23.8258 $24.6849 $23.8007 $22.6927
----------- ------------ -------- -------- -------- -------- --------
Investment income.............. $ 0.0873 $ 0.0231 $ 0.2830 $ 0.3259 $ 0.3031 $ 0.1817 $ 0.1156
Expenses....................... 0.2287 0.0539 0.7511 0.6452 0.5452 0.5313 0.5325
----------- ------------ -------- -------- -------- -------- --------
Net investment loss.......... $ (0.1414) $(0.0308) $(0.4681) $(0.3193) $(0.2421) $(0.3496) $(0.4169)
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions.................. 1.7971 0.0200 5.5914 7.7306 (0.6170) 1.2338 1.5249
----------- ------------ -------- -------- -------- -------- --------
Net increase (decrease) in unit
value........................ $ 1.6557 $(0.0108) $ 5.1233 $ 7.4113 $(0.8591) $ 0.8842 $ 1.1080
----------- ------------ -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year......................... $ 11.6449 $ 9.9892 $36.3604 $31.2371 $23.8258 $24.6849 $23.8007
============== ============== ========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #................... 0.85% 0.87% 0.85% 0.87% 0.90% 0.91% 0.92%
Net investment loss............ (1.36)% (1.07)% (1.36)% (1.07)% (0.97)% (1.49)% (1.75)%
PORTFOLIO TURNOVER.............. 64% 115% 64% 115% 111% 122% 34%
AVERAGE COMMISSION RATE# # #.... $ 0.0459 -- $ 0.0459 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000 OMITTED)...... 1,204 418 1,552 1,729 1,810 1,819 1,728
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
# # # Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
See notes to financial statements
37
<PAGE> 38
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
Money Market Variable Account
----------------------------------------------------------------
Compass 2
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year....................... $16.5213 $15.8699 $15.5003 $15.2976 $14.9945
-------- -------- -------- -------- --------
Investment income.......................................... $ 0.9058 $ 0.9560 $ 0.6615 $ 0.4864 $ 0.5772
Expenses................................................... 0.3162 0.3046 0.2919 0.2837 0.2741
-------- -------- -------- -------- --------
Net investment income.................................... $ 0.5896 $ 0.6514 $ 0.3696 $ 0.2027 $ 0.3031
-------- -------- -------- -------- --------
Net increase in unit value................................. $ 0.5896 $ 0.6514 $ 0.3696 $ 0.2027 $ 0.3031
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year............................. $17.1109 $16.5213 $15.8699 $15.5003 $15.2976
========== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #............................................... 0.58% 0.58% 0.58% 0.36% 0.59%
Net investment income...................................... 3.49% 4.00% 2.37% 1.30% 2.03%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED).... 5,208 6,501 6,851 6,418 8,026
</TABLE>
<TABLE>
<CAPTION>
Money Market Variable Account
--------------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- -----------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, -----------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset
value -- beginning of
year..................... $ 10.0997 $10.0000 $ 13.6545 $13.1291 $12.8359 $12.6806 $12.4415
----------- ------------ ------------- -------- -------- -------- --------
Investment income......... $ 0.5993 $ 0.1358 $ 0.7437 $ 0.7885 $ 0.5688 $ 0.4065 $ 0.4888
Expenses.................. 0.2336 0.0361 0.2705 0.2631 0.2756 0.2512 0.2497
----------- ------------ ------------- -------- -------- -------- --------
Net investment income... $ 0.3657 $ 0.0997 $ 0.4732 $ 0.5254 $ 0.2932 $ 0.1553 $ 0.2391
----------- ------------ ------------- -------- -------- -------- --------
Net increase in unit
value................... $ 0.3657 $ 0.0997 $ 0.4732 $ 0.5254 $ 0.2932 $ 0.1553 $ 0.2391
----------- ------------ ------------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year..................... $ 10.4654 $10.0997 $ 14.1277 $13.6545 $13.1291 $12.8359 $12.6806
============== ============== =============== ========== ========== ========== ==========
RATIOS (TO AVERAGE NET
ASSETS):
Expenses+# #.............. 0.58% 0.58% 0.58% 0.58% 0.58% 0.36% 0.59%
Net investment income..... 3.49% 4.00% 3.49% 4.00% 2.37% 1.30% 2.03%
NUMBER OF UNITS OUTSTANDING
AT END OF YEAR (000
OMITTED).................. 897 561 1,930 3,929 4,599 3,823 3,704
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
38
<PAGE> 39
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
Total Return Variable Account
----------------------------------------------------------------
Compass 2
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year....................... $22.2577 $17.4729 $18.0043 $15.9891 $14.6451
-------- -------- -------- -------- --------
Investment income.......................................... $ 1.1203 $ 1.0394 $ 0.8583 $ 0.8513 $ 0.9191
Expenses................................................... 0.4844 0.4118 0.3704 0.3616 0.3303
-------- -------- -------- -------- --------
Net investment income.................................... $ 0.6359 $ 0.6276 $ 0.4879 $ 0.4897 $ 0.5888
Net realized and unrealized gains (losses) on investments
and foreign currency transactions......................... 2.1508 4.1572 (1.0193) 1.5255 0.7552
-------- -------- -------- -------- --------
Net increase (decrease) in unit value...................... $ 2.7867 $ 4.7848 $(0.5314) $ 2.0152 $ 1.3440
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year............................. $25.0444 $22.2577 $17.4729 $18.0043 $15.9891
======== ======== ======== ======== ========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #............................................... 0.82% 0.83% 0.82% 0.76% 0.86%
Net investment income...................................... 2.59% 2.99% 2.60% 2.43% 3.63%
PORTFOLIO TURNOVER.......................................... 140% 105% 63% 89% 94%
AVERAGE COMMISSION RATE# # #................................ $ 0.0538 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED).... 4,414 4,801 5,410 5,889 5,732
</TABLE>
<TABLE>
<CAPTION>
Total Return Variable Account
---------------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
---------------------------- ------------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, ------------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year.......................... $ 10.4938 $10.0000 $21.9966 $17.2937 $17.8462 $15.8723 $14.5600
-------- -------- -------- -------- -------- -------- --------
Investment income.............. $ 0.5280 $ 0.1247 $ 1.0817 $ 1.0122 $ 0.8371 $ 0.8304 $ 0.9284
Expenses....................... 0.2317 0.0525 0.5068 0.4358 0.3904 0.3829 0.3607
-------- -------- -------- -------- -------- -------- --------
Net investment income........ $ 0.2963 $ 0.0722 $ 0.5749 $ 0.5764 $ 0.4467 $ 0.4475 $ 0.5677
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions.................. 1.0173 0.4216 2.1418 4.1265 (0.9992) 1.5264 0.7446
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in unit
value......................... $ 1.3136 $ 0.4938 $ 2.7167 $ 4.7029 $(0.5525) $ 1.9739 $ 1.3123
-------- -------- -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of
year.......................... $ 11.8074 $10.4938 $24.7133 $21.9966 $17.2937 $17.8462 $15.8723
======== ======== ======== ======== ======== ======== ========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #................... 0.82% 0.83% 0.82% 0.83% 0.82% 0.76% 0.86%
Net investment income.......... 2.59% 2.99% 2.59% 2.99% 2.60% 2.43% 3.63%
PORTFOLIO TURNOVER.............. 140% 105% 140% 105% 63% 89% 94%
AVERAGE COMMISSION RATE# # #.... $ 0.0538 -- $ 0.0538 -- -- -- --
NUMBER OF UNITS OUTSTANDING AT
END OF YEAR (000 OMITTED)...... 3,717 1,637 5,177 6,322 7,349 7,013 5,721
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
# # # Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
See notes to financial statements
39
<PAGE> 40
PER UNIT AND OTHER DATA -- continued
<TABLE>
<CAPTION>
World Governments Variable Account
----------------------------------------------------------------
Compass 2
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of year....................... $18.1095 $15.8337 $16.9056 $14.4420 $14.5806
-------- -------- -------- -------- --------
Investment income.......................................... $ 1.2469 $ 1.3112 $ 1.0805 $ 1.1460 $ 1.2892
Expenses................................................... 0.4084 0.3863 0.3565 0.3704 0.3624
-------- -------- -------- -------- --------
Net investment income.................................... $ 0.8385 $ 0.9249 $ 0.7240 $ 0.7756 $ 0.9268
Net realized and unrealized gains (losses) on investments
and foreign currency transactions......................... (0.2694) 1.3509 (1.7959) 1.6880 (1.0654)
-------- -------- -------- -------- --------
Net increase (decrease) in unit value...................... $ 0.5691 $ 2.2758 $(1.0719) $ 2.4636 $(0.1386)
-------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year............................. $18.6786 $18.1095 $15.8337 $16.9056 $14.4420
======== ======== ======== ======== ========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #............................................... 1.00% 1.00% 1.00% 0.94% 1.15%
Net investment income...................................... 4.54% 5.25% 4.45% 4.12% 6.03%
PORTFOLIO TURNOVER.......................................... 397% 330% 256% 202% 133%
NUMBER OF UNITS OUTSTANDING AT END OF YEAR (000 OMITTED).... 588 824 983 1,092 949
</TABLE>
<TABLE>
<CAPTION>
World Governments Variable Account
---------------------------------------------------------------------------------------
Compass 3 - Level 2 Compass 3
--------------------------- --------------------------------------------------------
Year Ended
December Period Ended Year Ended December 31,
31, December 31, --------------------------------------------------------
1996 1995# 1996 1995 1994 1993 1992
----------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER UNIT DATA:*
Net asset value -- beginning of
year................................ $ 10.3582 $10.0000 $17.8962 $15.6705 $16.7563 $14.3365 $14.4961
-------- -------- -------- -------- -------- -------- --------
Investment income..................... $ 0.7308 $ 0.1819 $ 1.2367 $ 1.3045 $ 1.0666 $ 1.1293 $ 1.2979
Expenses.............................. 0.2391 0.0554 0.4322 0.4086 0.3760 0.3890 0.3876
-------- -------- -------- -------- -------- -------- --------
Net investment income............... $ 0.4917 $ 0.1265 $ 0.8045 $ 0.8959 $ 0.6906 $ 0.7403 $ 0.9103
Net realized and unrealized gains
(losses) on investments and foreign
currency transactions................ (0.1663) 0.2317 (0.2699) 1.3298 (1.7764) 1.6795 (1.0699)
-------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in unit
value............................... $ 0.3254 $ 0.3582 $ 0.5346 $ 2.2257 $(1.0858) $ 2.4198 $(0.1596)
-------- -------- -------- -------- -------- -------- --------
Unit value:
Net asset value -- end of year........ $ 10.6836 $10.3582 $18.4308 $17.8962 $15.6705 $16.7563 $14.3365
======== ======== ======== ======== ======== ======== ========
RATIOS (TO AVERAGE NET ASSETS):
Expenses+# #.......................... 1.00% 1.00% 1.00% 1.00% 1.00% 0.94% 1.15%
Net investment income................. 4.54% 5.25% 4.54% 5.25% 4.45% 4.12% 6.03%
PORTFOLIO TURNOVER..................... 397% 330% 397% 330% 256% 202% 133%
NUMBER OF UNITS OUTSTANDING AT END OF
YEAR (000 OMITTED).................... 563 316 789 1,021 1,321 1,363 1,176
* Per unit data is based on the average number of units outstanding during each year.
+ Excluding mortality and expense risk charges and distribution expense charges.
# For the period from May 1, 1995 (commencement of Level 2 Units) to December 31, 1995.
# # For years ending on or after December 31, 1995, expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
40
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Capital Appreciation Variable Account, Government Securities Variable Account,
High Yield Variable Account, Managed Sectors Variable Account, Money Market
Variable Account, Total Return Variable Account and World Governments Variable
Account are separate accounts established by Sun Life Assurance Company of
Canada (U.S.), the Sponsor, in connection with the issuance of Compass 2 and
Compass 3 combination fixed/variable annuity contracts. Capital Appreciation
Variable Account, Government Securities Variable Account, Money Market Variable
Account and Total Return Variable Account operate as open-end, diversified
management investment companies and High Yield Variable Account, Managed Sectors
Variable Account and World Governments Variable Account operate as open-end,
non-diversified management investment companies as those terms are defined in
the Investment Company Act of 1940, as amended.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Investments in foreign
securities are vulnerable to the effects of changes in the relative values of
the local currency and the U.S. dollar and to the effects of changes in each
country's legal, political and economic environment.
INVESTMENT VALUATIONS
Equity securities listed on securities exchanges or reported through the NASDAQ
system are valued at last sale prices. Unlisted equity securities or listed
equity securities for which last sale prices are not available are valued at
last quoted bid prices. Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options, and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility, and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Boards of Managers.
41
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS -- continued
REPURCHASE AGREEMENTS
Certain Variable Accounts may enter into repurchase agreements with institutions
that the Variable Account's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. Such Variable Accounts require
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Account to obtain those
securities in the event of a default under the repurchase agreement. The
investment adviser monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is greater than the amount owed to
the Variable Account under each such repurchase agreement.
FOREIGN CURRENCY TRANSLATION
Investment valuations, other assets, and liabilities initially expressed in
foreign currencies are converted each business day into U.S. dollars based upon
current exchange rates. Purchases and sales of foreign investments, income and
expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
WRITTEN OPTIONS
Certain Variable Accounts may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security or currency purchased. The writer of an option may have no control over
whether the underlying securities may be sold (call) or purchased (put) and, as
a result, bears the market risk of an unfavorable change in the price of the
securities underlying the written option. In general, written call options may
serve as a partial hedge against decreases in value of the underlying securities
or exchange rates to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Variable Account's management on the direction of interest and exchange rates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Certain Variable Accounts may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific foreign currency at a fixed
price on a future date. Risks may arise upon entering
42
<PAGE> 43
into these contracts from the potential inability of counterparties to meet the
terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. Forward contracts will be entered
into for hedging purposes as well as for non-hedging purposes. For hedging
purposes, certain Variable Accounts may enter into contracts to deliver or
receive foreign currency they will receive from or require for their normal
investment activities. They may also use contracts in a manner intended to
protect foreign currency denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, certain Variable
Accounts may enter into contracts with the intent of changing the relative
exposure of the Accounts' portfolio of securities to different currencies to
take advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded for financial statement purposes as unrealized
until the contract settlement date.
FEDERAL INCOME TAXES
The Variable Accounts are funding vehicles for individual variable annuities.
The operations of the Variable Accounts are part of the operations of Sun Life
Assurance Company of Canada (U.S.), the Sponsor, and are not taxed separately;
the Variable Accounts are not taxed as regulated investment companies. The
Sponsor qualifies for the federal income tax treatment granted to life insurance
companies under Subchapter L of the Internal Revenue Code. Accordingly, no
provision for federal income or excise tax is necessary. Foreign taxes have been
provided for on interest and dividend income earned on foreign investments in
accordance with the applicable country's tax rates and to the extent
unrecoverable are recorded as a reduction of investment income.
INVESTMENT TRANSACTIONS AND INCOME
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All premium and original issue discount are
amortized or accreted for financial statement and tax reporting purposes as
required by federal income tax regulations. Dividend income is recorded on the
ex-dividend date for dividends received in cash. Dividend and interest payments
received in additional securities are recorded on the ex-dividend or ex-interest
date in an amount equal to the value of the security on such date.
As appropriate, based on its investments, certain of the Variable Accounts use
the effective interest method for reporting interest income on payment-in-kind
(PIK) bonds, whereby interest income on PIK bonds is recorded ratably by the
Variable Account at a constant yield to maturity. Legal fees and other related
expenses incurred to preserve and protect the value of a security owned are
added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses.
43
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS -- continued
Ongoing costs incurred to protect or enhance an investment, or costs incurred to
pursue other claims or legal actions, are reported as operating expenses.
FEES PAID INDIRECTLY
The Variable Accounts' custodian bank calculates its fees based on the Accounts'
average daily net assets. A fee arrangement provides for custody fees to be
reduced based on a formula developed to measure the value of cash deposited with
the custodian by the Accounts. This amount is shown as a reduction of expenses
on the Statement of Operations.
(3) CONTRACT CHARGES
The Sponsor makes a deduction from the Variable Accounts at the end of each
valuation period, during both the accumulation period and after annuity payments
begin, for assuming the mortality and expense risks under the contracts. The
rate of the deduction may be changed annually but in no event may it exceed
1.25% of the average net assets of each Variable Account attributable to Compass
3 contracts, or, with respect to Compass 2 contracts, 1.30% of the assets of
Capital Appreciation Variable Account, Government Securities Variable Account,
High Yield Variable Account and Money Market Variable Account, or 1.25% of the
assets of Managed Sectors Variable Account, Total Return Variable Account and
World Governments Variable Account attributable to such contracts.
For assuming the distribution expense risk under Compass 3 contracts, the
Sponsor makes a deduction from the Variable Accounts at the end of each
valuation period for the first seven contract years at an effective annual rate
of 0.15% of the net assets of the Variable Accounts attributable to such
contracts. Contracts are transferred from Compass 3 to Compass 3--Level 2 in the
month following the seventh contract anniversary. No deduction is made after the
seventh contract anniversary. No deduction is made with respect to assets
attributable to Compass 2 contracts.
Each year, on the contract anniversary, a contract maintenance charge of $25
with respect to Compass 2 contracts and $30 with respect to Compass 3 contracts
is deducted from each contract's accumulation account and paid the Sponsor to
cover administrative expenses relating to the contract. After the annuity
commencement date, the annual contract maintenance charge is deducted pro rata
from each annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges (including the distribution expense charge
described above applicable to Compass 3 contracts) exceed 5% of the purchase
payments made under a Compass 2 contract or 9% of the purchase payments made
under a Compass 3 contract.
44
<PAGE> 45
(4) ANNUITY RESERVES
Annuity reserves for contracts with annuity commencement dates prior to February
1, 1987 have been calculated using the 1971 Individual Annuitant Mortality
Table. Annuity reserves for contracts with annuity commencement dates on or
after February 1, 1987 are calculated using the 1983 Individual Annuitant
Mortality Table. Annuity reserves for contracts in payment period are calculated
using an assumed interest rate of 4%. Required adjustments are accomplished by
transfers to or from the Sponsor.
(5) MANAGEMENT AGREEMENTS
The Management Agreements provide that the Variable Accounts will pay the
Investment Adviser, Massachusetts Financial Services Company, a wholly-owned
subsidiary of the Sponsor, a fee computed daily and paid monthly at an effective
annual rate based on a percentage of each Variable Account's average daily net
assets as follows:
<TABLE>
<CAPTION>
Annual Rate of Management Fee Annual Rate of Management Fee
Based on Average Based on Average
Daily Net Assets Daily Net Assets
Not Exceeding $300 Million in Excess of $300 Million
------------------------------ ------------------------------
<S> <C> <C>
Capital Appreciation Variable Account.................... 0.75% 0.675%
Government Securities Variable Account................... 0.55% 0.495%
High Yield Variable Account.............................. 0.75% 0.675%
Managed Sectors Variable Account......................... 0.75% 0.675%
Money Market Variable Account............................ 0.50% 0.500%
Total Return Variable Account............................ 0.75% 0.675%
World Governments Variable Account....................... 0.75% 0.675%
</TABLE>
The agreements also provide that the Investment Adviser will pay certain
Variable Account expenses in excess of 1.25% of the average daily net assets of
each Variable Account for any calendar year. The Variable Accounts pay no
compensation directly to their officers or members of the Boards of Managers who
are affiliated with the Investment Adviser or the Sponsor.
(6) PORTFOLIO SECURITIES
For the year ended December 31, 1996, purchases and sales of investments, other
than U.S. government securities, purchased option transactions and short-term
obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
Capital Appreciation Variable Account............................................... $ 351,265,580 $ 399,121,584
High Yield Variable Account......................................................... 194,831,049 202,891,027
Managed Sectors Variable Account.................................................... 108,583,124 95,281,867
Money Market Variable Account*...................................................... 1,247,284,805 1,254,889,000
Total Return Variable Account....................................................... 216,264,210 218,126,392
World Governments Variable Account.................................................. 55,485,700 53,742,852
</TABLE>
45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS -- continued
For the year ended December 31, 1996, purchases and sales of U.S. government
securities, other than purchased option transactions and short-term obligations,
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
Government Securities Variable Account.............................................. $ 93,253,551 $ 114,500,502
Money Market Variable Account*...................................................... 2,344,082,351 2,377,531,444
Total Return Variable Account....................................................... 128,150,534 128,084,504
World Governments Variable Account.................................................. 71,227,011 71,511,844
</TABLE>
* Purchases and sales of investments for Money Market Variable Account consist
solely of short-term obligations.
(7) HIGH-YIELD SECURITIES AND FINANCIAL INSTRUMENTS
Although the High Yield Variable Account has a diversified portfolio, its
portfolio is invested in high-yield securities rated below investment grade or
which are unrated. Investments in high-yield securities involve greater degrees
of credit and market risk than investments in higher-rated securities and tend
to be more sensitive to economic conditions.
Certain Variable Accounts trade financial instruments with off-balance sheet
risk in the normal course of their investing activities in order to manage
exposure to market risks such as interest rates and foreign currency exchange
rates. These financial instruments include written options and forward foreign
currency exchange contracts. The notional or contractual amounts of these
instruments represent the investment the Variable Accounts have in particular
classes of financial instruments and do not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered. A summary of obligations under these financial instruments at
December 31, 1996, is as follows:
WRITTEN OPTION TRANSACTIONS
World Governments Variable Account
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------- -------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
----------------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year --
Australian Dollars...................................... -- $ -- 981 $ 12,572
Deutsche Marks/British Pounds........................... 3,415 15,181 -- --
Italian Lire/Deutsche Marks............................. 5,191,550 86,037 5,191,550 191,159
Japanese Yen............................................ -- $ -- 152,500 $ 19,888
---------- --------- ---------- ---------
</TABLE>
46
<PAGE> 47
WRITTEN OPTION TRANSACTIONS -- continued
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------- -------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
----------------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
Options written --
Australian Dollars...................................... 919 $ 4,978 -- $ --
Canadian Dollars........................................ 3,131 3,214 4,526 13,654
Deutsche Marks.......................................... 28,351 148,857 3,118 8,559
Deutsche Marks/British Pounds........................... 16,071 58,944 8,724 135,374
Italian Lire/Deutsche Marks............................. 4,140,601 32,517 -- --
Japanese Yen............................................ 447,306 21,553 432,282 28,163
New Zealand Dollars..................................... -- -- 2,497 3,713
Spanish Pesetas/Deutsche Marks.......................... -- -- 345,239 8,535
Swiss Francs/Deutsche Marks............................. 2,933 8,902 6,412 79,193
Options terminated in closing transactions --
Australian Dollars...................................... (919) (4,978) -- --
Canadian Dollars........................................ -- -- -- --
Deutsche Marks.......................................... (28,351) (148,857) (3,118) (8,559)
Deutsche Marks/British Pounds........................... (6,798) (23,046) -- --
Italian Lire/Deutsche Marks............................. (9,332,151) (118,554) (5,191,550) (191,159)
Japanese Yen............................................ (447,306) (21,553) (398,500) (36,993)
New Zealand Dollars..................................... -- -- (2,497) (3,713)
Options expired --
Australian Dollars...................................... -- -- (981) (12,572)
Canadian Dollars........................................ (3,131) (3,214) (4,526) (13,654)
Deutsche Marks/British Pounds........................... (8,523) (35,120) -- --
Japanese Yen............................................ -- -- (186,282) (11,058)
Spanish Pesetas/Deutsche Marks.......................... -- -- (345,239) (8,535)
---------- --------- ---------- ---------
Outstanding, end of period................................ 7,098 $ 24,861 15,136 $ 214,567
========== ========= ========== =========
Options outstanding at end of period consist of:
Deutsche Marks/British Pounds........................... 4,165 $ 15,959 8,724 $ 135,374
Swiss Francs/Deutsche Marks............................. 2,933 8,902 6,412 79,193
---------- --------- ---------- ---------
Outstanding, end of period................................ 7,098 $ 24,861 15,136 $ 214,567
========== ========= ========== =========
</TABLE>
At December 31, 1996, the World Governments Variable Account had sufficient cash
and/or securities at least equal to the value of the written options.
47
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS -- continued
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Contracts to In Exchange
Account Transaction Settlement Date Deliver/Receive for
- ----------------------------------- ------------ ------------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
World Governments Variable Account Sales 2/07/97 CHF 3,536,316 $ 2,893,512
1/10/97 - 4/21/97 DEM 5,888,295 3,850,840
4/21/97 GBP 1,141,824 1,894,782
2/24/97 IEP 554,470 888,592
2/07/97 ITL 5,004,102,505 3,286,421
1/29/97 JPY 176,314,139 1,594,160
2/03/97 NLG 1,158,670 707,628
4/21/97 NZD 1,293,374 912,061
2/03/97 - 2/07/97 SEK 6,752,151 1,019,052
-----------
$ 17,047,048
===========
Purchases
4/21/97 AUD 1,054,000 $ 837,686
2/07/97 - 4/21/97 CHF 2,381,456 1,852,668
1/21/97 - 4/21/97 DEM 10,868,536 7,182,627
2/07/97 DKK 2,679,600 452,169
1/10/97 - 2/07/97 ITL 1,586,253,785 1,032,059
1/21/97 - 1/29/97 JPY 385,211,191 3,462,945
2/03/97 NLG 1,224,066 719,055
2/03/97 SEK 2,237,576 338,737
-----------
$ 15,877,946
===========
<CAPTION>
Net Unrealized
Contracts at Appreciation
Account Value (Depreciation)
- ----------------------------------- --------------- --------------
<S> <C> <C>
World Governments Variable Account $ 2,652,598 $ 240,914
3,837,306 13,534
1,950,715 (55,933)
939,258 (50,666)
3,287,695 (1,274)
1,529,525 64,635
672,457 35,171
908,148 3,913
992,222 26,830
----------- ---------
$16,769,924 $ 277,124
=========== =========
$ 835,742 $ (1,944)
1,791,944 (60,724)
7,100,838 (81,789)
455,923 3,754
1,042,578 10,519
3,340,097 (122,848)
710,411 (8,644)
328,774 (9,963)
----------- ---------
$15,606,307 $ (271,639)
=========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts for the World Governments
Variable Account, excluded above, amounted to a net payable of $256,676 at
December 31, 1996.
At December 31, 1996, the World Governments Variable Account had sufficient cash
and/or securities to cover any commitments under these contracts.
See page 27 for an explanation of abbreviations used to indicate amounts shown
in currencies other than the U.S. dollar.
48
<PAGE> 49
(8) RESTRICTED SECURITIES
Certain of the Variable Accounts may invest in securities which are subject to
legal or contractual restrictions on resale. At December 31, 1996, High Yield
Variable Account owned the following restricted securities (consisting of 1.2%
of the Account's net assets) which may not be publicly sold without registration
under the Securities Act of 1933. The Variable Account does not have the right
to demand that such securities be registered. The value of these securities is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Boards of Managers.
<TABLE>
<CAPTION>
Date of Share/Par
Account Description Acquisition Amount
- -------------------------------------- --------------------------------------------- ------------------ ---------
<S> <C> <C> <C>
High Yield Variable Account Atlantic Gulf Communities Corp. 9/25/95 150
Envirosource, Inc. 5/15/94 1.666
Gillett Holdings, Inc. 10/08/92 23.535
Merrill Lynch Mortgage Investors, Inc.,
8.083s, 2023 6/22/94 1,000,000
Renaissance Cosmetics, Inc. 8/15/96 600
<CAPTION>
Account Cost Value
- -------------------------------------- ---------- ----------
<S> <C> <C>
High Yield Variable Account $ -- $ 647
7,288 4,477
224,000 894,330
693,125 840,625
600,000 606,000
-------- ----------
$1,524,413 $2,346,079
======== ==========
</TABLE>
49
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS -- continued
(9) PARTICIPANT TRANSACTIONS
The changes in net assets from changes in numbers of outstanding units were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 (000 Omitted)
------------------------------------------------------------------------------------------------------
Transfers Between Withdrawals,
Variable Accounts Surrenders,
Purchase and Fixed Annuitizations, Net Net Net
Payments Accumulation and Contract Accumulation Annuitization Increase
Received Account Charges Activity Activity (Decrease)
--------------- ----------------- ----------------- ----------------- ------------- ----------
Units Dollars Units Dollars Units Dollars Units Dollars Dollars Dollars
----- ------- ------ -------- ------ -------- ------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Variable Account
Compass 2 Contracts.... 180 $ 7,455 (91) $ (4,061) (1,099) $(45,738) (1,010) $(42,344) $(349) $(42,693)
Compass 3 Contracts.... 538 13,949 1,300 4,615 (851) (16,530) 987 2,034 6 2,040
-------- -------- -------- -------- ----- --------
$21,404 $ 554 $(62,268) $(40,310) $(343) $(40,653)
======== ======== ======== ======== ===== ========
Government Securities
Variable Account
Compass 2 Contracts.... 111 $ 2,777 88 $ 1,771 (1,305) $(32,747) (1,106) $(28,199) $(190) $(28,389)
Compass 3 Contracts.... 204 3,423 407 2,029 (478) (6,717) 133 (1,265) (93) (1,358)
-------- -------- -------- -------- ----- --------
$ 6,200 $ 3,800 $(39,464) $(29,464) $(283) $(29,747)
======== ======== ======== ======== ===== ========
High Yield Variable
Account
Compass 2 Contracts.... 84 $ 2,279 (68) $ (1,706) (709) $(19,329) (693) $(18,756) $(335) $(19,091)
Compass 3 Contracts.... 126 2,486 253 (729) (403) (6,212) (24) (4,455) (3) (4,458)
-------- -------- -------- -------- ----- --------
$ 4,765 $ (2,435) $(25,541) $(23,211) $(338) $(23,549)
======== ======== ======== ======== ===== ========
Managed Sectors Variable
Account
Compass 2 Contracts.... 27 $ 890 11 $ 569 (95) $ (3,210) (57) $ (1,751) $ 51 $ (1,700)
Compass 3 Contracts.... 265 8,085 731 3,056 (388) (8,702) 608 2,439 40 2,479
-------- -------- -------- -------- ----- --------
$ 8,975 $ 3,625 $(11,912) $ 688 $ 91 $ 779
======== ======== ======== ======== ===== ========
Money Market Variable
Account
Compass 2 Contracts.... 89 $ 1,495 (32) $ (491) (1,350) $(22,684) (1,292) $(21,680) $(175) $(21,855)
Compass 3 Contracts.... 326 4,484 (748) (13,778) (1,241) (15,033) (1,662) (24,327) (12) (24,339)
-------- -------- -------- -------- ----- --------
$ 5,979 $(14,269) $(37,717) $(46,007) $(187) $(46,194)
======== ======== ======== ======== ===== ========
Total Return Variable
Account
Compass 2 Contracts.... 96 $ 2,226 145 $ 3,421 (628) $(14,638) (387) $ (8,991) $(241) $ (9,232)
Compass 3 Contracts.... 691 14,763 1,496 3,812 (1,252) (22,124) 935 (3,549) 63 (3,486)
-------- -------- -------- -------- ----- --------
$16,989 $ 7,233 $(36,762) $(12,540) $(178) $(12,718)
======== ======== ======== ======== ===== ========
World Governments
Variable Account
Compass 2 Contracts.... 14 $ 246 (144) $ (2,559) (107) $ (1,946) (237) $ (4,259) $ (9) $ (4,268)
Compass 3 Contracts.... 98 1,671 99 (634) (182) (2,642) 15 (1,605) (81) (1,686)
-------- -------- -------- -------- ----- --------
$ 1,917 $ (3,193) $ (4,588) $ (5,864) $ (90) $ (5,954)
======== ======== ======== ======== ===== ========
</TABLE>
50
<PAGE> 51
PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Year Ended December 31, 1995 (000 Omitted)
------------------------------------------------------------------------------------------------------
Transfers Between Withdrawals,
Variable Accounts Surrenders,
Purchase and Fixed Annuitizations, Net Net Net
Payments Accumulation and Contract Accumulation Annuitization Increase
Received Account Charges Activity Activity (Decrease)
--------------- ----------------- ----------------- ----------------- ------------- ----------
Units Dollars Units Dollars Units Dollars Units Dollars Dollars Dollars
----- ------- ------ -------- ------ -------- ------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Variable Account
Compass 2 Contracts.... 237 $ 7,828 84 $ 3,030 (1,617) $(53,462) (1,296) $(42,604) $(459) $(43,063)
Compass 3 Contracts.... 523 11,480 797 2,783 (779) (15,819) 541 (1,556) 85 (1,471)
-------- -------- -------- -------- ----- --------
$19,308 $ 5,813 $(69,281) $(44,160) $(374) $(44,534)
======== ======== ======== ======== ===== ========
Government Securities
Variable Account
Compass 2 Contracts.... 141 $ 3,360 (1,455) $(34,220) (1,633) $(38,734) (2,947) $(69,594) $ 9 $(69,585)
Compass 3 Contracts.... 217 3,634 (223) (8,332) (420) (6,709) (426) (11,407) 156 (11,251)
-------- -------- -------- -------- ----- --------
$ 6,994 $(42,552) $(45,443) $(81,001) $ 165 $(80,836)
======== ======== ======== ======== ===== ========
High Yield Variable
Account
Compass 2 Contracts.... 106 $ 2,618 (3) $ (225) (897) $(22,116) (794) $(19,723) $ 226 $(19,497)
Compass 3 Contracts.... 136 2,474 865 4,267 (226) (3,890) 775 2,851 1 2,852
-------- -------- -------- -------- ----- --------
$ 5,092 $ 4,042 $(26,006) $(16,872) $ 227 $(16,645)
======== ======== ======== ======== ===== ========
Managed Sectors Variable
Account
Compass 2 Contracts.... 28 $ 795 101 $ 2,867 (141) $ (4,009) (12) $ (347) $ (16) $ (363)
Compass 3 Contracts.... 215 6,067 316 714 (194) (5,303) 337 1,478 -- 1,478
-------- -------- -------- -------- ----- --------
$ 6,862 $ 3,581 $ (9,312) $ 1,131 $ (16) $ 1,115
======== ======== ======== ======== ===== ========
Money Market Variable
Account
Compass 2 Contracts.... 113 $ 1,833 1,275 $ 20,487 (1,738) $(28,147) (350) $ (5,827) $(165) $ (5,992)
Compass 3 Contracts.... 408 5,426 325 1,987 (842) (10,938) (109) (3,525) (33) (3,558)
-------- -------- -------- -------- ----- --------
$ 7,259 $ 22,474 $(39,085) $ (9,352) $(198) $ (9,550)
======== ======== ======== ======== ===== ========
Total Return Variable
Account
Compass 2 Contracts.... 127 $ 2,491 153 $ 3,187 (889) $(17,489) (609) $(11,811) $ 153 $(11,658)
Compass 3 Contracts.... 698 13,073 760 (2,647) (848) (15,127) 610 (4,701) (76) (4,777)
-------- -------- -------- -------- ----- --------
$15,564 $ 540 $(32,616) $(16,512) $ 77 $(16,435)
======== ======== ======== ======== ===== ========
World Governments
Variable Account
Compass 2 Contracts.... 20 $ 341 (41) $ (720) (138) $ (2,396) (159) $ (2,775) $ (8) $ (2,783)
Compass 3 Contracts.... 102 1,722 80 (1,013) (166) (2,684) 16 (1,975) 131 (1,844)
-------- -------- -------- -------- ----- --------
$ 2,063 $ (1,733) $ (5,080) $ (4,750) $ 123 $ (4,627)
======== ======== ======== ======== ===== ========
</TABLE>
51
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS -- continued
(10) DETAILED STATEMENTS OF OPERATIONS -- Year Ended December 31, 1996 (000
Omitted)
<TABLE>
<CAPTION>
Capital Appreciation Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 156 $ 2 $ 45 $ -- $ 6 $ -- $ 209
Dividends.............. 2,524 31 726 3 125 -- 3,409
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 2,680 $ 33 $ 771 $ 3 $ 131 $ -- $ 3,618
Expenses................. 8,206 38 2,471 3 393 -- 11,111
------------ ----- ------------ ----- ------------ ----- ---------
Net investment loss.... $ (5,526) $ (5) $ (1,700) $ -- $ (262) $ -- $ (7,493)
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains (losses) on
investments:
Net realized gains..... $ 54,788 $ 671 $ 15,914 $ 58 $ 2,496 $ 4 $ 73,931
Net unrealized gains
(losses)............. 24,305 287 6,627 26 1,134 (2) 32,377
------------ ----- ------------ ----- ------------ ----- ---------
Net realized and
unrealized gains on
investments............. $ 79,093 $ 958 $ 22,541 $ 84 $ 3,630 $ 2 $106,308
------------ ----- ------------ ----- ------------ ----- ---------
Increase in net assets
from operations........ $ 73,567 $ 953 $ 20,841 $ 84 $ 3,368 $ 2 $ 98,815
=========== ========== =========== ========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Government Securities Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 15,101 $ 196 $ 2,452 $ 9 $ 676 $ 9 $ 18,443
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 15,101 $ 196 $ 2,452 $ 9 $ 676 $ 9 $ 18,443
Expenses................. 3,902 16 667 1 169 1 4,756
------------ ----- ------------ ----- ------------ ----- ---------
Net investment
income............... $ 11,199 $ 180 $ 1,785 $ 8 $ 507 $ 8 $ 13,687
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains (losses) on
investments:
Net realized losses.... $ (121) $ (1) $ (20) $ -- $ (9) $ -- $ (151)
Net unrealized gains
(losses)............. (10,552) (138) (1,779) 34 (302) (4) (12,741)
------------ ----- ------------ ----- ------------ ----- ---------
Net realized and
unrealized gains
(losses) on
investments............. $(10,673) $(139) $ (1,799) $ 34 $ (311) $ (4) $(12,892)
------------ ----- ------------ ----- ------------ ----- ---------
Increase (decrease) in
net assets from
operations............. $ 526 $ 41 $ (14) $ 42 $ 196 $ 4 $ 795
=========== ========== =========== ========== =========== ========== ========
</TABLE>
52
<PAGE> 53
DETAILED STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
High Yield Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 13,924 $ 258 $ 2,885 $ 2 $ 1,360 $ -- $ 18,429
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 13,924 $ 258 $ 2,885 $ 2 $ 1,360 $ -- $ 18,429
Expenses................. 3,123 23 657 -- 299 -- 4,102
------------ ----- ------------ ----- ------------ ----- ---------
Net investment
income............... $ 10,801 $ 235 $ 2,228 $ 2 $ 1,061 $ -- $ 14,327
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains on investments:
Net realized gains..... $ 2,283 $ 42 $ 445 $ -- $ 180 $ -- $ 2,950
Net unrealized gains... 2,027 63 677 -- 442 -- 3,209
------------ ----- ------------ ----- ------------ ----- ---------
Net realized and
unrealized gains on
investments............. $ 4,310 $ 105 $ 1,122 $ -- $ 622 $ -- $ 6,159
------------ ----- ------------ ----- ------------ ----- ---------
Increase in net assets
from operations........ $ 15,111 $ 340 $ 3,350 $ 2 $ 1,683 $ -- $ 20,486
=========== ========== =========== ========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Managed Sectors Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 33 $ -- $ 77 $ -- $ 10 $ -- $ 120
Dividends.............. 176 1 405 -- 55 -- 637
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 209 $ 1 $ 482 $ -- $ 65 $ -- $ 757
Expenses................. 524 1 1,279 -- 172 -- 1,976
------------ ----- ------------ ----- ------------ ----- ---------
Net investment loss.... $ (315) $ -- $ (797) $ -- $ (107) $ -- $ (1,219)
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains on investments:
Net realized gains..... $ 3,813 $ 20 $ 8,605 $ 1 $ 1,237 $ -- $ 13,676
Net unrealized gains... 207 2 725 -- 166 -- 1,100
------------ ----- ------------ ----- ------------ ----- ---------
Net realized and
unrealized gains on
investments............. $ 4,020 $ 22 $ 9,330 $ 1 $ 1,403 $ -- $ 14,776
------------ ----- ------------ ----- ------------ ----- ---------
Increase in net assets
from operations........ $ 3,705 $ 22 $ 8,533 $ 1 $ 1,296 $ -- $ 13,557
=========== ========== =========== ========== =========== ========== ========
</TABLE>
53
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS -- continued
DETAILED STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
Money Market Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 5,208 $ 72 $ 2,044 $ 1 $ 572 $ -- $ 7,897
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 5,208 $ 72 $ 2,044 $ 1 $ 572 $ $ 7,897
Expenses................. 1,819 7 752 -- 193 -- 2,771
------------ ----- ------------ ----- ------------ ----- ---------
Net investment
income............... $ 3,389 $ 65 $ 1,292 $ 1 $ 379 $ -- $ 5,126
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains (losses) on
investments............. $ 11,154 $ 141 $(11,296) $ 1 $ -- $ -- $ --
------------ ----- ------------ ----- ------------ ----- ---------
Increase (decrease) in
net assets from
operations............. $ 14,543 $ 206 $(10,004) $ 2 $ 379 $ -- $ 5,126
=========== ========== =========== ========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Total Return Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 3,219 $ 65 $ 4,087 $ 9 $ 856 $ 1 $ 8,237
Dividends.............. 1,841 37 2,341 5 491 1 4,716
------------ ----- ------------ ----- ------------ ----- ---------
Total investment
income............. $ 5,060 $ 102 $ 6,428 $ 14 $ 1,347 $ 2 $ 12,953
Expenses................. 2,215 18 3,016 2 592 -- 5,843
------------ ----- ------------ ----- ------------ ----- ---------
Net investment
income............... $ 2,845 $ 84 $ 3,412 $ 12 $ 755 $ 2 $ 7,110
------------ ----- ------------ ----- ------------ ----- ---------
Realized and unrealized
gains (losses) on
investments:
Net realized gains..... $ 10,955 $ 221 $ 13,789 $ 31 $ 2,961 $ 3 $ 27,960
Net unrealized gains
(losses)............. (1,118) (24) (1,763) (3) (37) 1 (2,944)
------------ ----- ------------ ----- ------------ ----- ---------
Net realized and
unrealized gains on
investments............. $ 9,837 $ 197 $ 12,026 $ 28 $ 2,924 $ 4 $ 25,016
------------ ----- ------------ ----- ------------ ----- ---------
Increase in net assets
from operations........ $ 12,682 $ 281 $ 15,438 $ 40 $ 3,679 $ 6 $ 32,126
=========== ========== =========== ========== =========== ========== ========
</TABLE>
54
<PAGE> 55
DETAILED STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
World Governments Variable Account
------------------------------------------------------------------------------------------------------
Compass 2 Compass 3 Compass 3 - Level 2
---------------------------- ---------------------------- ----------------------------
Accumulation Annuitization Accumulation Annuitization Accumulation Annuitization Total
------------ ------------- ------------ ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Interest............... $ 838 $ 5 $1,144 $ 7 $308 $ 4 $ 2,306
----- ----- ------ --- ----- --- ---------
Total investment
income............. $ 838 $ 5 $1,144 $ 7 $308 $ 4 $ 2,306
Expenses................. 275 1 401 1 101 -- 779
----- ----- ------ --- ----- --- ---------
Net investment
income............... $ 563 $ 4 $ 743 $ 6 $207 $ 4 $ 1,527
----- ----- ------ --- ----- --- ---------
Realized and unrealized
gains (losses) on
investments:
Net realized losses.... $ (82) $ -- $ (162) $ (1) $(19) $ (1) $ (265)
Net unrealized gains
(losses)............. (184) (1) (144) (5) (9) 4 (339)
----- ----- ------ --- ----- --- ---------
Net realized and
unrealized gains
(losses) on
investments............. $ (266) $ (1) $ (306) $ (6) $(28) $ 3 $ (604)
----- ----- ------ --- ----- --- ---------
Increase in net assets
from operations........ $ 297 $ 3 $ 437 $ -- $179 $ 7 $ 923
=========== ========== =========== ========== =========== ========== ========
</TABLE>
55
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Participants in and the Board of Managers of Capital Appreciation
Variable Account, Government Securities Variable Account, High Yield Variable
Account, Managed Sectors Variable Account, Money Market Variable Account,
Total Return Variable Account and World Governments Variable Account and the
Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Capital Appreciation Variable Account,
Government Securities Variable Account, High Yield Variable Account, Managed
Sectors Variable Account, Money Market Variable Account, Total Return Variable
Account and World Governments Variable Account (the "Variable Accounts") as of
December 31, 1996, the related statements of operations for the year then ended,
the statements of changes in net assets for the years ended December 31, 1996
and 1995 and the per unit and other data for each of the years in the five-year
period ended December 31, 1996. These financial statements and the per unit and
other data are the responsibility of the Variable Accounts' 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 and the per unit and
other data are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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 and per unit and other data present
fairly, in all material respects, the financial position of the Variable
Accounts at December 31, 1996, the results of their operations, the changes in
their net assets, and their per unit and other data for each of the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
------------------------------------------------
This Compass annual report is prepared for the general information of contract
owners. It is authorized for distribution to prospective purchasers only when
preceded by an effective prospectus.
56
<PAGE> 57
MEMBERS OF BOARDS OF MANAGERS
AND OFFICERS
JOHN D. McNEIL*, Chairman and Member
Chairman, Sun Life Assurance Company of Canada,
Toronto, Ontario, Canada
BONNIE S. ANGUS, Secretary
Secretary, Sun Life Assurance Company of Canada (U.S.),
Wellesley Hills, Massachusetts
SAMUEL ADAMS, Member
Partner, Warner & Stackpole,
Boston, Massachusetts
GEOFFREY CROFTS, Member
Professor Emeritus, University of Hartford,
Hartford, Connecticut
DAVID D. HORN*, Member
Senior Vice President and General Manager,
Sun Life Assurance Company of Canada,
Wellesley Hills, Massachusetts
GARTH MARSTON, Member
Former Chairman, The Provident Institution for Savings,
Boston, Massachusetts
DERWYN F. PHILLIPS, Member
Former Vice Chairman, The Gillette Company,
Boston, Massachusetts
SUN LIFE ASSURANCE COMPANY
OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS
c/o Sun Life Annuity Service Center
P.O. Box 1024, Boston, MA 02103-9986
INVESTMENT MANAGER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741
DISTRIBUTOR
Clarendon Insurance Agency, Inc.
500 Boylston Street, Boston, MA 02116-3741
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110-2875
AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110-1616
*Affiliated with the Investment Adviser
- -------------------------------------------------------
ACCOUNT INFORMATION
For account information, please call toll free:
1-800-752-7218 anytime from a touch-tone
telephone.
To speak with a customer service representative,
please call toll free: 1-800-752-7215 any
business day from 8 a.m. to 6 p.m. Eastern time.
- -------------------------------------------------------
COUS-2 2/97 72M
[COMPASS LOGO]
PROFESSIONALLY MANAGED COMBINATION
FIXED/VARIABLE ANNUITIES
FOR PERSONAL INVESTMENTS AND
QUALIFIED RETIREMENT PLANS
ANNUAL REPORT - DECEMBER 31, 1996
Capital Appreciation Variable Account
Government Securities Variable Account
High Yield Variable Account
Managed Sectors Variable Account
Money Market Variable Account
Total Return Variable Account
World Governments Variable Account
Issued by
Sun Life Assurance Company of Canada (U.S.),
A Wholly-Owned Subsidiary of
Sun Life Assurance Company of Canada
<PAGE>
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 - Accumulation Unit Values.
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. Statement of Conidition, December 31, 1996;
2. Statements of Operations, Year Ended December 31, 1996;
3. Statements of Changes in Net Assets, Years Ended December
31, 1995 and 1996;
4. Notes to Financial Statements; and
5. Independent Auditors' Report.
B. Financial Statements of Sun Life Assurance Company of Canada
(U.S.):
1. Statutory Statements of Admitted Assets, Liabilities and
Capital Stock and Surplus, December 31, 1996 and 1995.
2. Statutory Statements of Operations, Years Ended December 31,
1996, 1995 and 1994.
3. Statutory Statements of Changes in Capital Stock and
Surplus, Years Ended December 31, 1996, 1995 and 1994.
4. Statutory Statements of Cash Flow, Years Ended December 31,
1996, 1995 and 1994.
5. Notes to Statutory Financial Statements.
6. Independent Auditors' Report.
- ---------------------
* Incorporated herein by reference to the Registrants' Annual Report to
contract owners for the year ended December 31, 1996.
<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 (GGVA), 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 Statement of GMVA on Form N-3.
(c) Rules and Regulations of TRVA (Filed as Exhibit 2(c) to the
Registration Statement of TRVA on Form N-3.
(d) Rules and Regulations of MSVA (Filed as Exhibit 2(d) to the
Registration Statement of MSVA on Form N-3.
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.
(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.
(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.
(ii) Specimen Broker-Dealer Supervisory and Service Agreement.
(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 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).
<PAGE>
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).
9 Not Applicable.
10 Not Applicable.
11 (a) 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).
(b) Master Administrative Services Agreement dated March 1, 1997
(incorporated by reference to MFS/Sun Life Series Trust
(file nos. 2-83616 and 811-3732) Post-Effective Amendment
No. 19 filed with the SEC via EDGAR on March 18, 1997).
12 Opinion of David D. Horn, Esq. and Consent to its use as to
the legality of the securities being registered (Files as
Exhibit No. 12 to Pre-effective Amendment No. 1 to the
Registration Statements of GMVA, TRVA and MSVA,
Post-effective Amendment No. 12 to the Registration
Statements of MMVA, HYVA and CAVA and Post-effective
Amendment No. 7 to the Registration Statement of GGVA on
Form N-3);
13 Consent of Deloitte & Touche, LLP; FILED HEREWITH.
14 None.
15 Not Applicable.
16 Not Applicable.
17 Financial Data Schedule meeting the requirements of Rule 483
under the Securities Act of 1933; FILED HEREWITH.
Power of Attorney; filed herewith.
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
NAME & PRINCIPAL POSITIONS & OFFICES POSITIONS & 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
Donal A. Stewart President and Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
<PAGE>
NAME & PRINCIPAL POSITIONS & OFFICES POSITIONS & OFFICES
BUSINESS ADDRESS WITH INSURANCE COMPANY WITH REGISTRANTS
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
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
104 West Cliff Street
Weston, MA 02193
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
<PAGE>
NAME & PRINCIPAL POSITIONS & OFFICES POSITIONS & OFFICES
BUSINESS ADDRESS WITH INSURANCE COMPANY WITH REGISTRANTS
S. Caesar Raboy Senior Vice President, None
One Sun Life Executive Deputy General Manager
Park and Director
Wellesley Hills, MA 02181
C. James Prieur Vice President, None
One Sun Life Executive Investments
Park
Wellesley Hills, MA 02181
L. Brock Thomson Vice President None
One Sun Life Executive and Treasurer
Park
Wellesley Hills, MA 02181
Margaret Seals Mead Assistant Vice President None
One Sun Life Executive and Secretary
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 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 Delaware 100%
(U.S.)
<PAGE>
PERCENT OF
STATE OR COUNTRY OWNERSHIP
OR JURISDICTION OF VOTING
OF INCORPORATION SECURITIES
Sun Life Assurance Company of Canada United Kingdom 100%
(U.K.) Limited
Sun Life of Canada Investment Management Canada 100%
Limited
Sun Life of Canada Benefit Management Canada 100%
Limited
Spectrum United Holdings, Inc. Canada 100%
Sun Canada Financial Co. Delaware 100%
Sun Life Insurance and Annuity Company New York 0%**
of New York
Sun Investment Services Company Delaware 0%**
Sun Benefit Services Company, Inc. Delaware 0%**
Massachusetts Financial Services Company Delaware 0%+
New London Trust, F.S.B. Federal 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 Institutional Advisors, Inc. Delaware 0%***
MFS Fund Distributors, Inc. Delaware 0%***
MFS Retirement Services, Inc. Delaware 0%***
Sun Life Financial Services Limited Bermuda 0%**
- ----------------------
** 100% of the issued and outstanding voting securities of 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., Sun Life Financial Service Limited 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 Institutional
Advisors, 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 Assurance Company of Canada (U.S.) and Sun
Life Insurance and Annuity Company of New York.
+ 93.5% of the issued and outstanding voting securities of Massachusetts
Financial Services Company are owned by Sun Life Assurance Company of
Canada (U.S.).
<PAGE>
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.
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, 1997)
NUMBER OF
CONTRACT OWNERS*
-------------------
QUALIFIED NON-QUALIFIED
REGISTRANT CONTRACTS CONTRACTS
--------- -------------
Money Market Variable Account 4,214 2,115
High Yield Variable Account 4,135 1,612
Capital Appreciation Variable Account 13,190 4,441
Government Securities Variable Account 5,172 1,789
World Governments Variable Account 3,320 1,279
Total Return Variable Account 20,760 3,987
Managed Sectors Variable Account 8,109 2,766
______________________
* 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 to the 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 applications 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 full
force and effect. The 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."
<PAGE>
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.
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
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 Limited Maturity Fund, MFS Series Trust I (which has
thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
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 Series Trust IX (which has three series: MFS
Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund),
MFS Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 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
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 Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
<PAGE>
MFS also serves as investment adviser of the following no-load, open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS Variable
Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust
("UST"). 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 MFS Closed-End Funds is 500 Boylston Street,
Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), 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 principal business address of each of the aforementioned
funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of Bermuda and a subsidiary of MFS, whose principal business address is
Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
adviser to and distributor for MFS American Fund (which has six portfolios: MFS
American Funds-U.S. Equity Fund, MFS American Funds-U.S. Emerging Growth Fund,
MFS American Funds-U.S. High Yield Bond Fund, MFS American Funds - U.S. Dollar
Reserve Fund, MFS American Funds-Charter Income Fund and MFS American Funds-U.S.
Research 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, MFS Meridian World Total Return Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS Emerging Markets
Debt 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 International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
<PAGE>
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,
MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), 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, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
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 the Assistant Treasurer, James R. Bordewick, Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
<PAGE>
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 the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
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 the 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, Assistant Vice
President of MFS, and Daniel E. McManus, Vice President of MFS, are Assistant
Vice Presidents, 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 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 the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
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
the Assistant Treasurer and James R. Bordewick, Jr., is the 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 the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE>
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, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice 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 Variable Insurance Trust
MFS Union Standard 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 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 the Assistant Treasurer and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and James
T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Vice President of MFS, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Special Value Trust
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and
Robert J. Manning are Vice Presidents, 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/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, 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.
<PAGE>
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo,
Senior Vice President and Chief Financial Officer of MFS, is the Treasurer and
Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott, Jeffrey
L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan is a
Director and the Secretary, Ziad Malek is the President, James E. Russell is the
Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters 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, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the
<PAGE>
President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott is
the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
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, 67 Broad Street,
New York, New York
<PAGE>
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also
an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
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**
Jeffrey L. Shames Director None
Arnold D. Scott Director None
Cynthia M. Orcutt President None
Bruce C. Avery Vice President None
Joseph W. Dello Russo Treasurer None
Stephen E. Cavan Secretary and Clerk None
Robert T. Burns Assistant Secretary None
Thomas B. Hastings Assistant Treasurer 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.
(c) Inapplicable.
<PAGE>
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) Inapplicable.
(b) Inapplicable.
(c) Inapplicable.
(d) Inapplicable.
(e) The Insurance Company represents that the fees and charges deducted
under the variable insurance contracts, in the aggregate, are reasonable in
relation to services rendered, the expenses expected to be incurred, and the
risks assumed by the Insurance Company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrants certify that they meet all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and have caused this Amendment to the
Registration Statement to be signed on their behalf in the City of Boston and
The Commonwealth of Massachusetts on the 25th day of April, 1997.
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: JAMES R. BORDEWICK, JR.
-------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
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 City of Boston and
The Commonwealth of Massachusetts on the 25th day of April, 1997.
SUN LIFE ASSURANCE COMPANY OF
CANADA (U.S.)
By: JOHN D. MCNEIL*
-------------------------
Name: John D. McNeil
Title: Chairman
*Executed by By Bonnie S. Angus on
behalf of those indicated pursuant to
Power of Attorney filed with
Post-Effective Amendment No. 7 to the
Registration Statement on Form N-3 of
the 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 April 25, 1997.
SIGNATURE TITLE
JOHN D. MCNEIL* Chairman and Member of the Boards of Managers
- ---------------------
John D. McNeil
SAMUEL ADAMS* Member of the Boards of Managers
- ---------------------
Samuel Adams
GEOFFREY CROFTS* Member of the Boards of Managers
- ---------------------
Geoffrey Crofts
DAVID D. HORN* Member of the Boards of Managers
- ---------------------
David D. Horn
GARTH MARSTON* Member of the Boards of Managers
- ---------------------
Garth Marston
DERWYN F. PHILLIPS* Member of the Boards of Managers
- ---------------------
Derwyn F. Phillips
*By: JAMES R. BORDEWICK, JR.
----------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on behalf of those
indicated pursuant to Power of Attorney filed herewith.
<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 on April 29, 1997.
SIGNATURE TITLE
JOHN D. MCNEIL* Chairman and Director (Principal Executive Officer)
- ---------------------
John D. McNeil
ROBERT P. VROLYK* Vice President and Actuary (Principal Financial &
- --------------------- Accounting Officer)
Robert P. Vrolyk
- --------------------- President and Director
Donald A. Stewart
RICHARD B. BAILEY* Director
- ---------------------
Richard B. Bailey
A. KEITH BRODKIN* Director
- ---------------------
A. Keith Brodkin
DAVID D. HORN* Senior Vice President and General Manager and
- --------------------- Director
David D. Horn
JOHN S. LANE* Director
- ---------------------
John S. Lane
ANGUS A. MACNAUGHTON* Director
- ---------------------
Angus A. MacNaughton
M. COLYER CRUM* Director
- ---------------------
M. Colyer Crum
Senior Vice President and Deputy General Manager and
- --------------------- Director
S. Ceasar Raboy
*By: BONNIE S. ANGUS
----------------------------
Name: Bonnie S. Angus
Executed by Bonnie S. Angus on behalf of those
indicated pursuant to Power of Attorney filed with
Post-Effective Amendment No. 7 to the Registration
Statement on Form N-3 of the Capital Appreciation
Variable Account (File No. 33-19632).
<PAGE>
POWER OF ATTORNEY
Capital Appreciation Variable Account
Government Securities Variable Account
High Yield Variable Account
Managed Sectors Variable Account
Money Market Variable Account
Total Return Variable Account
World Governments Variable Account
The undersigned, Managers and officers of each of Capital Appreciation
Variable Account, Government Securities Variable Account, High Yield Variable
Account, Managed Sectors Variable Account, Money Market Variable Account, Total
Return Variable Account and World Governments Variable Account (each, the
"Registrant"), hereby severally constitute and appoint Bonnie S. Angus, James R.
Bordewick, Jr., Stephen E. Cavan, David D. Horn, W. Thomas London and John D.
McNeil, and each of them singly, as true and lawful attorneys, with full power
to them and each of them to sign for each of the undersigned, in the names of,
and in the capacities indicated below, any Registration Statement and any and
all amendments thereto and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
for the purpose of registering the Registrant as an investment company under the
Investment Company Act of 1940 and/or the securities issued by the Registrant
under the Securities Act of 1933, granting unto our said attorneys, and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary or desirable to be done in the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully do
or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand on this
6th day of February, 1997.
SIGNATURES TITLE(S)
SAMUEL ADAMS
- ------------------------
Samuel Adams Manager
GEOFFREY CROFTS
- ------------------------
Geoffrey Crofts Manager
<PAGE>
DAVID D. HORN
- ------------------------
David D. Horn Manager
GARTH MARSTON
- ------------------------
Garth Marston Manager
JOHN D. MCNEIL
- ------------------------
John D. McNeil Chairman of the Board; Manager; and
Principal Executive Officer
DERWYN PHILLIPS
- ------------------------
Derwyn Phillips Manager
W. THOMAS LONDON
- ------------------------
W. Thomas London Principal Financial and Accounting Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
13 Consent of Deloitte & Touche, LLP.
17 Financial Data Schedules meeting the
requirements of Rule 483 under the
Securities Act of 1933.
<PAGE>
EXHIBIT NO. 99.13
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 7, 1997 appearing in the annual report to contract owners for the year
ended December 31, 1996, and to the use of our report dated February 3, 1997
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 24, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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