As filed with the Securities and Exchange Commission on April 30, 1998
1933 Act File No. 33-19628
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. 12
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 24
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)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|X| immediately upon filing pursuant to paragraph (b)
|_| on [date] 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
================================================================================
<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)
<TABLE>
<CAPTION>
ITEM IN LOCATION IN
FORM N-3, PART A PROSPECTUS; CAPTION
---------------- -------------------
<S> <C>
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 during
Annuity Contracts 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>
<CAPTION>
ITEM IN LOCATION IN
FORM N-3, PART A PROSPECTUS; CAPTION
---------------- -------------------
<S> <C>
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 Additional
of Additional Information Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM IN LOCATION IN STATEMENT OF
FORM N-3, PART B ADDITIONAL INFORMATION; CAPTION
---------------- -------------------------------
<S> <C>
16 Cover Page Cover Page
17 Table of Contents Table of Contents
18 General Information and History General Information
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 during
being Offered 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
</TABLE>
<PAGE>
PROSPECTUS
May 1, 1998
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, 408 or 408A 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: Retirement Products and Services, P.O. Box 1024,
Boston, Massachusetts 02103.
The Owner of a Contract may elect to have Contract values accumulated on a
fixed basis in the Fixed Account (which is part of the Company's general
account and pays interest at a guaranteed fixed rate) or on a variable basis in
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 (the "SEC") in a Statement of
Additional Information dated May 1, 1998, 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 34 of this Prospectus.
THE CONTRACTS ARE NOT DEPOSITS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK,
AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Definitions 2
Synopsis 3
Expense Summary 4
Condensed Financial Information 6
Financial Statements 12
A Word About the Company and the Variable Accounts 12
Portfolio Transactions 21
Management of the Variable Accounts 21
Purchase Payments and Contract Values During Accumulation Period 22
Cash Withdrawals 24
Death Benefit 25
Contract Charges 26
Annuity Provisions 28
Other Contractual Provisions 30
Federal Tax Status 32
Distribution of the Contracts 34
Legal Proceedings 34
Contract Owner Inquiries 34
Table of Contents for Statement of Additional Information 34
Appendix A--Description of Commercial Paper and Bond Ratings 35
Appendix B--Certain Securities and Investment Techniques 39
Appendix C--Industry Sectors 52
Appendix D--Portfolio Composition Chart 54
</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.
2
<PAGE>
Fixed Annuity: An annuity with payments which do not vary as to dollar amount.
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, 408 or
408A 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 22). 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 23).
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 24 and 27, respectively).
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 (see "Cash Withdrawals" on page 24).
In addition, under certain circumstances, withdrawals may result in tax
penalties (see "Federal Tax Status" on page 32).
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 25).
3
<PAGE>
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 26).
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 27).
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 21 and 27, respectively).
Premium taxes payable to any governmental entity will be charged against
the Contracts (see "Premium Taxes" on page 28).
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 28).
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 or federal law so requires, the full
amount of any Purchase Payment(s) received by the Company will be refunded, the
"free look" period may be greater than ten days and alternative methods of
returning the Contract may be acceptable.
EXPENSE SUMMARY
The purpose of the following table is to help Owners and prospective
purchasers of the Contracts to understand the costs and expenses that are
borne, directly and indirectly, by Contract Owners. The information set forth
should be considered together with the narrative provided under the heading
"Contract Charges" in this Prospectus. In addition to the expenses listed
below, premium taxes may be applicable.
4
<PAGE>
<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
Annual Contract Fee --------------------- $30 per contract ---------------------
- -------------------
Annual Expenses
- ---------------
(as a percentage of average net
assets)
Management Fees ....................... 0.50% 0.75% 0.71% 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 ........................ 0.09% 0.11% 0.06% 0.11% 0.08% 0.30% 0.10%
Total Annual Expenses ................. 1.99% 2.26% 2.17% 2.06% 2.23% 2.45% 2.25%
</TABLE>
- ---------------------
(1) A portion of the Accumulation Account value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment
has been held by the Company for 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.
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 $220
High Yield Variable Account ..................... 77 116 157 249
Capital Appreciation Variable Account ........... 76 113 152 239
Government Securities Variable Account .......... 75 110 147 228
World Governments Variable Account .............. 79 121 167 268
Managed Sectors Variable Account ................ 77 115 156 247
Total Return Variable Account ................... 77 115 155 245
</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 $220
High Yield Variable Account ..................... 23 71 121 260
Capital Appreciation Variable Account ........... 22 68 116 239
Government Securities Variable Account .......... 21 65 111 239
World Governments Variable Account .............. 25 76 131 268
Managed Sectors Variable Account ................ 23 70 120 247
Total Return Variable Account ................... 23 70 119 245
</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--Level 2
--------------------------------------------------
Year Ended December 31, Period Ended
--------------------------------- December 31,
1997 1996 1995#
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............ $ 12.4143 $ 10.3053 $ 10.0000
--------- --------- ---------
Investment income ............. $ 0.0914 $ 0.0790 $ 0.0196
Expenses ...................... 0.2935 0.2370 0.0517
--------- --------- ---------
Net investment loss .......... $ (0.2021) $ (0.1580) $ (0.0321)
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ........ 2.9378 2.2670 0.3374
--------- --------- ---------
Net increase (decrease) in
unit value ................... $ 2.7357 $ 2.109 $ 0.3053
--------- --------- ---------
Unit value:
Net asset value -- end of
year ......................... $ 15.1500 $ 12.4143 $ 10.3053
========= ========= =========
Ratios (to average net assets):
Expenses+## ................... 0.77% 0.78% 0.80%
Net investment loss ........... (1.45)% (1.41)% (1.02)%
Portfolio turnover ............. 60% 66% 96%
Average commission rate### $ 0.0448 $ 0.0371 $ --
Number of units outstanding
at end of year (000
omitted) ...................... 3,971 2,494 955
<CAPTION>
Capital Appreciation Variable Account
------------------------------------------------------------------------------------
Compass 3
------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............ $ 30.1803 $ 25.0907 $ 18.6531 $ 21.9341 $ 19.5311
--------- --------- --------- --------- ---------
Investment income ............. $ 0.2107 $ 0.1893 $ 0.2402 $ 0.2870 $ 0.2617
Expenses ...................... 0.7383 0.6053 0.4847 0.4421 0.4498
--------- --------- --------- --------- ---------
Net investment loss .......... $ (0.5276) $ (0.4160) $ (0.2445) $ (0.1551) $ (0.1881)
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ........ 7.1237 5.5056 6.6821 ( 3.1259) 2.5911
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value ................... $ 6.5961 $ 5.0896 $ 6.4376 $ (3.2810) $ 2.4030
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
year ......................... $ 36.7764 $ 30.1803 $ 25.0907 $ 18.6531 $ 21.9341
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## ................... 0.77% 0.78% 0.80% 0.79% 0.78%
Net investment loss ........... (1.45)% (1.41)% (1.02)% (0.69)% (0.83)%
Portfolio turnover ............. 60% 66% 96% 95% 56%
Average commission rate### $ 0.0448 $ 0.0371 $ -- $ -- $ --
Number of units outstanding
at end of year (000
omitted) ...................... 2,953 3,721 4,272 4,686 4,899
</TABLE>
* Per unit data are 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) through
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 fiscal years beginning on or
after September 1, 1995.
6
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
Government Securities Variable Account
------------------------------------------
Compass 3--Level 2
------------------------------------------
Year Ended December 31, Period Ended
--------------------------- December 31,
1997 1996 1995#
------------- ------------- --------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 10.4604 $ 10.4172 $ 10.0000
---------- ---------- ----------
Investment income .............. $ 0.7931 $ 0.7931 $ 0.1868
Expenses ....................... 0.2102 0.1966 0.0478
---------- ---------- ----------
Net investment income ......... $ 0.5829 $ 0.5965 $ 0.1390
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 0.1825 (0.5533) 0.2782
---------- ---------- ----------
Net increase (decrease) in
unit value .................... $ 0.7654 $ 0.0432 $ 0.4172
---------- ---------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 11.2258 $ 10.4604 $ 10.4172
========== ========== ==========
Ratios (to average net assets):
Expenses+## .................... 0.66% 0.62% 0.63%
Net investment income .......... 5.31% 5.53% 5.51%
Portfolio turnover .............. 168% 39% 80%
Number of units
outstanding at end of
year (000 omitted) ............. 1,319 1,079 608
<CAPTION>
Government Securities Variable Account
---------------------------------------------------------------------
Compass 3
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 18.0755 $ 18.0278 $ 15.5227 $ 16.0387 $ 14.9267
---------- ---------- ---------- --------- ----------
Investment income .............. $ 1.3696 $ 1.3222 $ 1.2529 $ 1.1028 $ 1.1064
Expenses ....................... 0.3848 0.3586 0.3385 0.3146 0.3154
---------- ---------- ---------- --------- ----------
Net investment income ......... $ 0.9848 $ 0.9636 $ 0.9144 $ 0.7882 $ 0.7910
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 0.3090 (0.9159) 1.5907 (1.3042) 0.3210
---------- ---------- ---------- --------- ----------
Net increase (decrease) in
unit value .................... $ 1.2938 $ 0.0477 $ 2.5051 $ (0.5160) $ 1.1120
---------- ---------- ---------- --------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 19.3693 $ 18.0755 $ 18.0278 $ 15.5227 $ 16.0387
========== ========== ========== ========= ==========
Ratios (to average net assets):
Expenses+## .................... 0.66% 0.62% 0.63% 0.61% 0.61%
Net investment income .......... 5.31% 5.53% 5.51% 5.09% 5.11%
Portfolio turnover .............. 169% 39% 80% 41% 81%
Number of units
outstanding at end of
year (000 omitted) ............. 1,129 1,549 1,888 2,922 2,697
</TABLE>
* Per unit data are 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) through
December 31, 1995.
## For years ending on or after December 31, 1995, expenses are calculated
without reduction for fees paid indirectly.
7
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
High Yield Variable Account
------------------------------------------
Compass 3--Level 2
------------------------------------------
Year Ended December 31, Period Ended
--------------------------- December 31,
1997 1996 1995#
------------- ------------- --------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 11.3852 $ 10.2377 $ 10.0000
---------- ---------- ----------
Investment income .............. $ 1.1903 $ 0.9246 $ 0.3803
Expenses ....................... 0.2584 0.2033 0.0765
---------- ---------- ----------
Net investment income ......... $ 0.9319 $ 0.7213 $ 0.3038
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 0.4765 0.4262 (0.0661)
---------- ---------- ----------
Net increase (decrease) in
unit value .................... $ 1.4084 $ 1.1475 $ 0.2377
---------- ---------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 12.7936 $ 11.3852 $ 10.2377
========== ========== ==========
Ratios (to average net assets):
Expenses+## .................... 0.86% 0.88% 0.88%
Net investment income .......... 7.47% 7.59% 7.91%
Portfolio turnover .............. 164% 108% 88%
Number of units
outstanding at end of
year (000 omitted) ............. 2,042 1,819 1,368
<CAPTION>
High Yield Variable Account
---------------------------------------------------------------------
Compass 3
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 21.5259 $ 19.3854 $ 16.8283 $ 17.3543 $ 14.6589
---------- ---------- ---------- --------- ----------
Investment income .............. $ 2.2363 $ 1.9450 $ 1.8912 $ 1.5336 $ 1.5179
Expenses ....................... 0.5196 0.4432 0.4253 0.3711 0.3671
---------- ---------- ---------- --------- ----------
Net investment income ......... $ 1.7167 $ 1.5018 $ 1.4659 $ 1.1625 $ 1.1508
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 0.9103 0.6387 1.0912 (1.6885) 1.5446
---------- ---------- ---------- --------- ----------
Net increase (decrease) in
unit value .................... $ 2.6270 $ 2.1405 $ 2.5571 $ (0.5260) $ 2.6954
---------- ---------- ---------- --------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 24.1529 $ 21.5259 $ 19.3854 $ 16.8283 $ 17.3543
========== ========== ========== ========= ==========
Ratios (to average net assets):
Expenses+## .................... 0.86% 0.88% 0.88% 0.91% 0.86%
Net investment income .......... 7.47% 7.59% 7.91% 7.41% 6.97%
Portfolio turnover .............. 164% 108% 88% 77% 67%
Number of units
outstanding at end of
year (000 omitted) ............. 1,209 1,438 1,913 2,506 2,577
</TABLE>
* Per unit data are 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) through
December 31, 1995.
## For years ending on or after December 31, 1995, expenses are calculated
without reduction for fees paid indirectly.
8
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
Managed Sectors Variable Account
--------------------------------------------------
Compass 3--Level 2
--------------------------------------------------
Year Ended December 31, Period Ended
--------------------------------- December 31,
1997 1996 1995#
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 11.6449 $ 9.9892 $ 10.0000
--------- --------- ---------
Investment income .............. $ 0.0831 $ 0.0873 $ 0.0231
Expenses ....................... 0.3015 0.2287 0.0539
--------- --------- ---------
Net investment loss ........... $ (0.2184) $ (0.1414) $ (0.0308)
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 3.0387 1.7971 0.0200
--------- --------- ---------
Net increase (decrease) in
unit value .................... $ 2.8203 $ 1.6557 $ (0.0108)
--------- --------- ---------
Unit value:
Net asset value -- end of
year .......................... $ 14.4652 $ 11.6449 $ 9.9892
========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.85% 0.85% 0.87%
Net investment loss ............ (1.60)% (1.36)% (1.07)%
Portfolio turnover .............. 103% 64% 115%
Average commission rate### $ 0.0560 $ 0.0459 $ --
Number of units
outstanding at end of
year (000 omitted) ............. 2,156 1,204 418
<CAPTION>
Managed Sectors Variable Account
------------------------------------------------------------------------------------
Compass 3
------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 36.3604 $ 31.2371 $ 23.8258 $ 24.6849 $ 23.8007
--------- --------- --------- --------- ---------
Investment income .............. $ 0.2328 $ 0.2830 $ 0.3259 $ 0.3031 $ 0.1817
Expenses ....................... 0.9264 0.7511 0.6452 0.5452 0.5313
--------- --------- --------- --------- ---------
Net investment loss ........... $ (0.6936) $ (0.4681) $ (0.3193) $ (0.2421) $ (0.3496)
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 9.4327 5.5914 7.7306 (0.6170) 1.2338
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ 8.7391 $ 5.1233 $ 7.4113 $ (0.8591) $ 0.8842
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
year .......................... $ 45.0995 $ 36.3604 $ 31.2371 $ 23.8258 $ 24.6849
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.85% 0.85% 0.87% 0.90% 0.91%
Net investment loss ............ (1.60)% (1.36)% (1.07)% (0.97)% (1.49)%
Portfolio turnover .............. 103% 64% 115% 111% 122%
Average commission rate### $ 0.0560 $ 0.0459 $ -- $ -- $ --
Number of units
outstanding at end of
year (000 omitted) ............. 1,258 1,552 1,729 1,810 1,819
</TABLE>
* Per unit data are 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) through
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 fiscal years beginning on or
after September 1, 1995.
9
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
Money Market Variable Account
------------------------------------------
Compass 3--Level 2
------------------------------------------
Year Ended December 31, Period Ended
--------------------------- December 31,
1997 1996 1995#
------------- ------------- --------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year .............. $ 10.4654 $ 10.0997 $ 10.0000
---------- ---------- ----------
Investment income ............... $ 0.5838 $ 0.5993 $ 0.1358
Expenses ........................ 0.1905 0.2336 0.0361
---------- ---------- ----------
Net investment income .......... $ 0.3933 $ 0.3657 $ 0.0997
Net increase in unit value ...... $ 0.3933 $ 0.3657 $ 0.0997
---------- ---------- ----------
Unit value:
Net asset value -- end of
year ........................... $ 10.8587 $ 10.4654 $ 10.0997
========== ========== ==========
Ratios (to average net assets):
Expenses+## ..................... 0.59% 0.58% 0.58%
Net investment income ........... 3.56% 3.49% 4.00%
Number of units
outstanding at end of
year (000 omitted) .............. 1,104 897 561
<CAPTION>
Money Market Variable Account
---------------------------------------------------------------------
Compass 3
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year .............. $ 14.1277 $ 13.6545 $ 13.1291 $ 12.8359 $ 12.6806
---------- ---------- ---------- ---------- ----------
Investment income ............... $ 0.7782 $ 0.7437 $ 0.7885 $ 0.5688 $ 0.4065
Expenses ........................ 0.2690 0.2705 0.2631 0.2756 0.2512
---------- ---------- ---------- ---------- ----------
Net investment income .......... $ 0.5092 $ 0.4732 $ 0.5254 $ 0.2932 $ 0.1553
Net increase in unit value ...... $ 0.5092 $ 0.4732 $ 0.5254 $ 0.2932 $ 0.1553
---------- ---------- ---------- ---------- ----------
Unit value:
Net asset value -- end of
year ........................... $ 14.6369 $ 14.1277 $ 13.6545 $ 13.1291 $ 12.8359
========== ========== ========== ========== ==========
Ratios (to average net assets):
Expenses+## ..................... 0.59% 0.58% 0.58% 0.58% 0.36%
Net investment income ........... 3.56% 3.49% 4.00% 2.37% 1.30%
Number of units
outstanding at end of
year (000 omitted) .............. 1,160 1,930 3,929 4,599 3,823
</TABLE>
* Per unit data are 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) through
December 31, 1995.
## For years ending on or after December 31, 1995, expenses are calculated
without reduction for fees paid indirectly.
10
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
Total Return Variable Account
------------------------------------------
Compass 3--Level 2
------------------------------------------
Year Ended December 31, Period Ended
--------------------------- December 31,
1997 1996 1995#
------------- ------------- --------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 11.8074 $ 10.4938 $ 10.0000
---------- ---------- ----------
Investment income .............. $ 0.5718 $ 0.5280 $ 0.1247
Expenses ....................... 0.2715 0.2317 0.0525
---------- ---------- ----------
Net investment income ......... $ 0.3003 $ 0.2963 $ 0.0722
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 2.1096 1.0173 0.4216
---------- ---------- ----------
Net increase (decrease) in
unit value .................... $ 2.4099 $ 1.3136 $ 0.4938
---------- ---------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 14.2173 $ 11.8074 $ 10.4938
========== ========== ==========
Ratios (to average net assets):
Expenses+## .................... 0.83% 0.82% 0.83%
Net investment income .......... 2.32% 2.59% 2.99%
Portfolio turnover .............. 111% 140% 105%
Average commission rate### $ 0.0590 $ 0.0538 $ --
Number of units
outstanding at end of
year (000 omitted) ............. 5,260 3,717 1,637
<CAPTION>
Total Return Variable Account
---------------------------------------------------------------------
Compass 3
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 24.7133 $ 21.9966 $ 17.2937 $ 17.8462 $ 15.8723
---------- ---------- ---------- --------- ----------
Investment income .............. $ 1.1487 $ 1.0817 $ 1.0122 $ 0.8371 $ 0.8304
Expenses ....................... 0.5870 0.5068 0.4358 0.3904 0.3829
---------- ---------- ---------- --------- ----------
Net investment income ......... $ 0.5617 $ 0.5749 $ 0.5764 $ 0.4467 $ 0.4475
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... 4.4381 2.1418 4.1265 (0.9992) 1.5264
---------- ---------- ---------- --------- ----------
Net increase (decrease) in
unit value .................... $ 4.9998 $ 2.7167 $ 4.7029 $ (0.5525) $ 1.9739
---------- ---------- ---------- --------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 29.7131 $ 24.7133 $ 21.9966 $ 17.2937 $ 17.8462
========== ========== ========== ========= ==========
Ratios (to average net assets):
Expenses+## .................... 0.83% 0.82% 0.83% 0.82% 0.76%
Net investment income .......... 2.32% 2.59% 2.99% 2.60% 2.43%
Portfolio turnover .............. 111% 140% 105% 63% 89%
Average commission rate### $ 0.0590 $ 0.0538 $ -- $ -- $ --
Number of units
outstanding at end of
year (000 omitted) ............. 4,024 5,177 6,322 7,349 7,013
</TABLE>
* Per unit data are 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) through
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 fiscal years beginning on or
after September 1, 1995.
11
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
World Governments Variable Account
------------------------------------------
Compass 3--Level 2
------------------------------------------
Year Ended December 31, Period Ended
--------------------------- December 31,
1997 1996 1995#
------------- ------------- --------------
<S> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 10.6836 $ 10.3582 $ 10.0000
--------- ---------- ----------
Investment income .............. $ 0.6710 $ 0.7308 $ 0.1819
Expenses ....................... 0.2440 0.2391 0.0554
--------- ---------- ----------
Net investment income ......... $ 0.4270 $ 0.4917 $ 0.1265
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... (0.6553) (0.1663) 0.2317
--------- ---------- ----------
Net increase (decrease) in
unit value .................... $ (0.2283) $ 0.3254 $ 0.3582
--------- ---------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 10.4553 $ 10.6836 $ 10.3582
========= ========== ==========
Ratios (to average net assets):
Expenses+## .................... 1.05% 1.00% 1.00%
Net investment income .......... 3.95% 4.54% 5.25%
Portfolio turnover .............. 338% 397% 330%
Number of units
outstanding at end of
year (000 omitted) ............. 670 563 316
<CAPTION>
World Governments Variable Account
---------------------------------------------------------------------
Compass 3
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of year ............. $ 18.4308 $ 17.8962 $ 15.6705 $ 16.7563 $ 14.3365
--------- ---------- ---------- --------- ----------
Investment income .............. $ 1.1298 $ 1.2367 $ 1.3045 $ 1.0666 $ 1.1293
Expenses ....................... 0.4390 0.4322 0.4086 0.3760 0.3890
--------- ---------- ---------- --------- ----------
Net investment income ......... $ 0.6908 $ 0.8045 $ 0.8959 $ 0.6906 $ 0.7403
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions ......... (1.1113) (0.2699) 1.3298 (1.7764) 1.6795
--------- ---------- ---------- --------- ----------
Net increase (decrease) in
unit value .................... $ (0.4205) $ 0.5346 $ 2.2257 $ (1.0858) $ 2.4198
--------- ---------- ---------- --------- ----------
Unit value:
Net asset value -- end of
year .......................... $ 18.0103 $ 18.4308 $ 17.8962 $ 15.6705 $ 16.7563
========= ========== ========== ========= ==========
Ratios (to average net assets):
Expenses+## .................... 1.05% 1.00% 1.00% 1.00% 0.94%
Net investment income .......... 3.95% 4.54% 5.25% 4.45% 4.12%
Portfolio turnover .............. 338% 397% 330% 256% 202%
Number of units
outstanding at end of
year (000 omitted) ............. 500 789 1,021 1,321 1,363
</TABLE>
* Per unit data are 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) through
December 31, 1995.
## For years ending on or after December 31, 1995, expenses are calculated
without reduction for fees paid indirectly.
FINANCIAL STATEMENTS
Financial Statements of the Variable Accounts and the Company are included
in the SAI.
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. It has obtained authorization to do business in
forty-eight states, the District of Columbia and Puerto Rico, and it is
anticipated that the Company will be authorized to do business in all states
except New York. The Company issues life insurance policies and individual and
group annuities. The Company has formed a wholly-owned subsidiary, Sun Life
Insurance and Annuity Company of New York, which issues individual fixed and
combination fixed/variable annuity contracts and group life and long-term
disability insurance in New York and which offers in New York contracts similar
to the Contracts offered by this Prospectus. The Company's other active
subsidiaries are Sun Capital Advisers, Inc., a registered investment adviser,
Clarendon Insurance Agency, Inc., a registered broker-dealer that acts as the
general distributor of the Contracts and other annuity and life insurance
contracts issued by the Company and its affiliates, Sun Life of Canada (U.S.)
Distributors, Inc., a registered broker-dealer and investment adviser, New
London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
and Sun Life Financial Services Limited which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)").
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco") which, on December 18, 1997, became a
wholly-owned subsidiary of Sun Life Assurance Com-
12
<PAGE>
pany of Canada--U.S. Operations Holdings, Inc ("U.S. Holdco"). U.S. Holdco is a
wholly-owned subsidiary of Sun Life (Canada), 150 King Street West, Toronto,
Ontario, Canada. Sun Life (Canada) is a mutual life insurance company
incorporated pursuant to an Act of the Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
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 SEC as open-end,
diversified, management investment companies under the Investment Company Act
of 1940, as amended (the "1940 Act"). 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 SAI 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").
A description of the investment techniques in which the Accounts may
engage and their risks is contained in Appendix B to this Prospectus and
Appendix D in the SAI. Prospective investors should review these Appendices
carefully before allocating purchase payments to the Accounts.
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 Ratings Services or P-1 by Moody's Investors Service,
Inc. (see Appendix B for a description of the ratings).
(d) Repurchase agreements for the purchase of obligations which are
suitable for investment under paragraph (a) above.
13
<PAGE>
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"), Fitch's Investors Service, Inc. ("Fitch") or Duff & Phelps Credit
Rating Co. ("Duff & Phelps") 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 A for a description of the ratings). In particular, securities rated
BBB by S&P, Fitch or Duff & Phelps or Baa by Moody's (and comparable unrated
securities) are considered to have speculative characteristics, while
securities rated lower than BBB by S&P, Fitch or Duff & Phelps or Baa by
Moody's (and comparable unrated securities) (commonly known as "junk bonds")
are considered speculative (see Appendix D for a chart indicating the
composition of HYVA's portfolio for the year ended December 31, 1997, 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.
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"). 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 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. 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").
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 "Certain Securities and 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 cur-
14
<PAGE>
rencies 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.
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 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 is able to invest to a greater extent than a "diversified"
investment company. As a result of such non-diversified status, the Account may
be more susceptible to adverse changes in the value of securities of a
particular issuer than would be a diversified investment company.
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.
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. 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 ADRs, and may enter
into forward foreign currency exchange contracts ("Forward Contracts") for the
purchase or sale of foreign currency for hedging purposes.
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.
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.
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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. 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 A for a description of
the ratings).
GBTs are obligations of certain private trusts formed for the purpose of
refinancing certain foreign government loans. The assets of the trust typically
include (a) a foreign government loan (the "Note"), 90% of principal and
interest payments on which are backed by a full faith and credit guaranty of
the United States Government and (b) a beneficial interest in a trust holding
direct obligations of the United States Government, calculated to provide
amounts equal to at least 10% of all principal and interest payments on the
Note. Funds scheduled to be received from these assets are calculated to cover
all scheduled distributions on the GBTs.
GBTs and certain CMOs and other Government-related Securities are issued
by private entities, are not Government Securities and are not directly
guaranteed by any government agency. They are secured by the underlying
collateral held by the private issuer.
Government Securities and Government-related Securities do not generally
involve the credit risks associated with other types of interest bearing
securities, although, as a result, yields available from these securities are
generally lower than the yields available from corporate interest bearing
securities. Like other interest bearing securities, however, the values of
Government Securities and Government-related
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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 or BBB or better by S&P, Fitch or Duff & Phelps),
although TRVA may invest up to 20% of its net assets in lower rated securities
(see Appendix A for a description of these ratings; see Appendix D for a chart
indicating the composition of TRVA's portfolio for the year ended December 31,
1997, 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 securities that are not readily marketable. TRVA may enter into
mortgage "dollar roll" transactions and invest in corporate asset-backed
securities.
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 ADRs.
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.
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
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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.
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 Adviser. The
Adviser does not believe that the credit risk inherent in the obligations
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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
is able to invest to a greater extent in fewer issuers than a "diversified"
investment company. As a result of such non-diversified status, the Account may
be more susceptible to adverse changes in the value of securities of a
particular issuer than would be a diversified investment company. 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 primary U.S. Government securities
dealers, or institutions which WGVA's 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. 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.
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,
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confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods.
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 13 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 C 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 and may invest to a greater extent in
fewer issuers than a "diversified" investment company. As a result of such
non-diversified status, the Account may be more susceptible to adverse changes
in the value of securities of a particular issuer 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. MSVA may invest up to 20% of its total assets
in foreign securities, which may include emerging market securities, and may
invest in ADRs 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.
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.
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PORTFOLIO TRANSACTIONS
Each Account intends to manage its portfolio by buying and selling
securities, as well as holding securities to maturity, to help attain its
investment objective and policies.
Each Account will engage in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in attaining
its investment objective. In trading portfolio securities, an Account seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Accounts in trading portfolio securities, see the SAI. Because
GSVA, HYVA, MSVA, TRVA and WGVA each had a portfolio turnover rate of over 100%
during the fiscal year ended December 31, 1997, transaction costs incurred by
each such Account and the realized capital gains and losses of each such
Account may be greater than that of a fund with a lower portfolio turnover
rate.
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 Conduct
Rules 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.
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" or the "Adviser"), 500 Boylston Street, Boston, Massachusetts
02116 is the investment adviser for each of the Variable Accounts. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada. 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.
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. Some
simultaneous transactions are inevitable when several clients receive
investment advice from MFS, 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
financial, legal, compliance, shareholder communications and other
administrative services pursuant to a Master Administrative Services Agreement
dated March 1, 1997, as amended. Under this Agreement, each Variable Account
pays MFS an administrative fee up to 0.015% per annum of the Variable Account's
average daily net assets. This fee reimburses MFS for a portion of the costs it
incurs to provide such services.
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PURCHASE PAYMENTS AND CONTRACT VALUES
DURING ACCUMULATION PERIOD
Purchase Payments
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. Purchase Payments may be made annually, semi-annually,
quarterly, monthly or on any other frequency acceptable to the Company. Unless
the Contract has been surrendered, Purchase Payments may be made at any time
during the life of the Annuitant and before the Annuity Commencement Date (the
"Accumulation Period"). The amount of Purchase Payments may vary; however,
Purchase Payments must total at least $300 for the first Contract Year, and
each Purchase Payment must be at least $25. In addition, the prior approval of
the Company is required before it will accept a Purchase Payment which would
cause the value of a Contract's Accumulation Account to exceed $1,000,000. If
the value of a Contract's Accumulation Account exceeds $1,000,000, no
additional Purchase Payments will be accepted without prior approval.
Completed application forms, together with the initial Purchase Payment,
are forwarded to the Company. Upon acceptance, the Contract is issued to the
Owner and the initial Purchase Payment is credited to the Contract in the form
of Accumulation Units. The initial Purchase Payment must be applied within two
business days of receipt of a completed application. The Company may retain the
Purchase Payment for up to five business days while attempting to complete an
incomplete application. If the application cannot be made complete within five
business days, the applicant will be informed of the reasons for the delay and
the Purchase Payment will be returned immediately unless the applicant
specifically consents to the Company's retaining the Purchase Payment until the
application is made complete. Thereafter, the Purchase Payment must be applied
within two business days. All subsequent Purchase Payments will be applied
using the Accumulation Unit values for the Valuation Period during which the
Purchase Payment is received by the Company.
The Company will establish an Accumulation Account for each Contract. The
Contract's Accumulation Account value for any Valuation Period is equal to the
variable accumulation value, if any, plus the fixed accumulation value, if any,
for that Valuation Period. The variable accumulation value is equal to the sum
of the value of all Variable Accumulation Units credited to the Contract's
Accumulation Account.
Each net Purchase Payment will be allocated to either the Variable
Accounts or the Fixed Account (see Appendix A to the Statement of Additional
Information for a description of the Fixed Account) or to both the Variable
Accounts and the Fixed Account in accordance with the allocation factors
specified by the Owner in the application or as subsequently changed. Upon
receipt of a Purchase Payment, all or that portion, if any, of the net Purchase
Payment to be allocated to the Variable Accounts will be credited to the
Accumulation Account in the form of Variable Accumulation Units. The number of
particular Variable Accumulation Units to be credited is determined by dividing
the dollar amount allocated to the particular Variable Account by the Variable
Accumulation Unit value for the particular Variable Account for the Valuation
Period during which the Purchase Payment is received.
The Variable Accumulation Unit value for each Variable Account was
established at $10.00 for the first Valuation Period of the particular Variable
Account. The Variable Accumulation Unit value for any subsequent Valuation
Period is determined by methodology which is the mathematical equivalent of
multiplying the Variable Accumulation Unit value for the immediately preceding
Valuation Period by the appropriate Net Investment Factor for such subsequent
Valuation Period.
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:
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(a) is the value of the Variable Account's net assets attributable to the
Contracts at the end of the preceding Valuation Period;
(b) is the investment income and capital gains, realized or unrealized,
that are credited to such assets of the Variable Account during the
Valuation Period;
(c) is the capital losses, realized or unrealized, charged against such
assets of the Variable Account in the Valuation Period plus, with respect
to such assets, any amount charged against the Variable Account or set
aside as a reserve to maintain or operate the Variable Account for the
Valuation Period;
(d) is the expenses of the Variable Account attributable to the Contracts
incurred during the Valuation Period including the mortality and expense
risk charge, the distribution expense risk charge and the investment
management fee and the other expenses of the Variable Account, subject to
any applicable expense limitation.
The assets of the Variable Accounts will normally be composed chiefly of
investment securities. The assets of each Variable Account are valued as of the
close of trading on the New York Stock Exchange on each day the Exchange is
open for trading, and on such other days on which there was a sufficient degree
of trading in the Variable Account's portfolio securities so that the values of
the Variable Account's Accumulation Units and Annuity Units might be materially
affected. The assets of MMVA are valued at amortized cost in accordance with
Rule 2a-7 under the 1940 Act. 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 stock market
for unlisted national market issues or at the last quoted bid price for
unlisted securities not reported on the Nasdaq stock market 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
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<PAGE>
$1,000 unless all of the Fixed Accumulation Units or all of the Variable
Accumulation Units of a particular Variable Account credited to the
Accumulation Account are being converted. The conversion will be made using the
Accumulation Unit values for the Valuation Period during which the request for
conversion is received by the Company. Under current tax law a conversion will
not result in any tax liability to the Owner. Conversions may be made pursuant
to telephoned instructions.
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime
of the Annuitant, the Owner may elect to receive a cash withdrawal payment from
the Company. Any such election shall specify the amount of the withdrawal and
will be effective on the date that it is received by the Company. For
withdrawals in excess of $5,000 the Company may require a signature guarantee.
The withdrawal will result in the cancellation of Accumulation Units with an
aggregate value equal to the dollar amount of the cash withdrawal payment plus,
if applicable, the contract maintenance charge and any withdrawal charge.
Unless instructed to the contrary, the Company will cancel Fixed Accumulation
Units and Variable Accumulation Units on a pro rata basis reflecting the
existing composition of the Contract's Accumulation Account. If a partial
withdrawal is requested which would leave an Accumulation Account value of less
than the contract maintenance charge, then such partial withdrawal will be
treated as a full surrender.
Under certain conditions, the Company will assess a withdrawal charge if a
cash withdrawal payment is made. The amount of any withdrawal charge and the
conditions under which the charge will apply are discussed under "Withdrawal
Charges".
Any cash withdrawal payment will be paid within seven days from the date
the election becomes effective, except as the Company may be permitted to defer
such payment in accordance with the 1940 Act. 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 591/2,
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
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<PAGE>
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 certain circumstances, the 10% tax penalty
will not apply if the withdrawal is made to pay medical expenses.
Under the terms of a particular Section 403(b) plan, the Owner may be
entitled to transfer all or a portion of the Accumulation Account value to one
or more alternative funding options. Contract Owners should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
In imposing these restrictions on withdrawals, the Company is relying upon
a no-action letter dated November 28, 1988 from the staff of the Securities and
Exchange Commission to the American Council of Life Insurance, the requirements
for which have been complied with by the Company.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status."
Texas Optional Retirement Program
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution, the State of Texas will contribute a specified
amount to the participant's retirement account. If a participant does not
commence the second year of participation in the plan as a "faculty member" as
defined in Title 110B of the State of Texas Statutes, the Company will return
the State's contribution. If a participant does begin a second year of
participation, the employer's first year contributions will then be applied as
a Purchase Payment under the Qualified Contract, as will the employer's
subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise
the right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
DEATH BENEFIT
In the event of the death of the Annuitant prior to the Annuity
Commencement Date, the Company will pay a death benefit to the Beneficiary. If
the death of the Annuitant occurs on or after the Annuity Commencement Date, no
death benefit will be payable under the Contract except as may be provided
under the annuity option elected.
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Accumulation Account applied
under one or more annuity options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death
of the Annuitant. If no election of a method of settlement of the death benefit
by the Owner is in effect on the date of death of the Annuitant, the
Beneficiary may elect (a) to receive the death benefit in the form of a cash
payment; or (b) to have the value of the Accumulation Account applied under one
or more of the annuity options (on the Annuity Commencement Date described
under "Payment of Death Benefit") to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee. If an election
by the 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").
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<PAGE>
Payment of Death Benefit
If the death benefit is to be paid in cash to the Beneficiary, payment
will be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer
such payment in accordance with the Investment Company Act of 1940 under the
circumstances described under "Cash Withdrawals". If the death benefit is to be
paid in one sum to the Owner, or to the estate of the deceased Owner/Annuitant,
payment will be made within seven days of the date Due Proof of Death of the
Annuitant, the Owner, and/or the Beneficiary, as applicable, is received. If
settlement under one or more of the annuity options is elected by the Owner,
the Annuity Commencement Date will be the first day of the second calendar
month following receipt of Due Proof of Death of the Annuitant and the
Beneficiary, if any. In the case of an election by the Beneficiary, the Annuity
Commencement Date will be the first day of the second calendar month following
the effective date of the election. An Annuity Commencement Date later than
that described above may be elected by an Owner or Beneficiary provided that
such date is (a) the first day of a calendar month, and (b) not later than the
first day of the first month following the 85th birthday of the Owner or
Beneficiary, as the case may be, unless otherwise restricted, in the case of a
Qualified Contract, by the applicable retirement plan or by applicable law (see
"Annuity Commencement Date").
Amount of Death Benefit
The death benefit is equal to the greatest of: (1) the value of the
Contract's Accumulation Account; (2) the total Purchase Payments made under the
Contract reduced by all withdrawals; or (unless prohibited by applicable state
law) (3) the value of the Contract's Accumulation Account on the Seven Year
Anniversary immediately preceding the date of death of the Annuitant, adjusted
for any Purchase Payments or cash withdrawal payments made and contract charges
assessed subsequent to such Seven Year Anniversary. The Accumulation Unit
values used in determining the amount of the death benefit under (1) above will
be the values for the Valuation Period during which Due Proof of Death of the
Annuitant is received by the Company if settlement is elected by the Owner
under one or more of the annuity options or, if no election by the Owner is in
effect, either the values for the Valuation Period during which an election by
the Beneficiary is effective or the values for the Valuation Period during
which Due Proof of Death of both the Annuitant and the designated Beneficiary
is received by the Company if the amount of the death benefit is to be paid in
one sum to the deceased Owner/Annuitant's estate.
CONTRACT CHARGES
Contract charges may be assessed under the Contracts as follows:
Contract Maintenance Charge
On each Contract Anniversary and on surrender of the Contract for full
value on other than the Contract Anniversary the Company deducts from the
Accumulation Account a contract maintenance charge of $30 to reimburse it for
administrative expenses relating to the issuance and maintenance of the
Contract. The contract maintenance charge will be deducted in equal amounts
from the Fixed Account and each Variable Account in which the Owner has
Accumulation Units at the time of such deduction. On the Annuity Commencement
Date the value of the Contract's Accumulation Account will be reduced by a
proportionate amount of the contract maintenance charge to reflect the time
elapsed between the last Contract Anniversary and the day before the Annuity
Commencement Date. After the Annuity Commencement Date, the contract
maintenance charge will be deducted pro rata from each annuity payment made
during the year.
The amount of the contract maintenance charge may not be increased by the
Company. The Company reserves the right to reduce the amount of the contract
maintenance charge for groups of participants with 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.
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<PAGE>
Mortality and Expense Risk Charge
The mortality and expense risks assumed by the Company are the risks that
Annuitants may live for a longer period of time than estimated by the Company
in establishing the guaranteed annuity rates incorporated into the Contract,
and the risk that administrative charges assessed under the Contracts may be
insufficient to cover actual administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Accounts with respect to the Contracts at the end of each Valuation Period
during both the accumulation period and after annuity payments begin at an
effective annual rate of 1.25%. The rate of this deduction may be changed
annually but in no event may it exceed 1.25% on an annual basis. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including, among other things,
payment of distribution expenses. If the distribution expense risk charge and
withdrawal charges described below prove insufficient to cover expenses
associated with the distribution of the Contracts, the deficiency will be met
from the Company's general corporate funds, which may include amounts derived
from the mortality and expense risk charges.
Distribution Expense Risk Charge
The distribution expense risk assumed by the Company is the risk that
withdrawal charges assessed under the Contracts may be insufficient to
compensate the Company for the costs of distributing the Contracts. For
assuming such risk the Company makes a deduction from the Variable Accounts
with respect to the Contracts at the end of each Valuation Period for the first
seven Contract Years (during both the accumulation period and, if applicable,
after annuity payments begin) at an effective annual rate of 0.15% of the
assets of the Variable Accounts attributable to the Contracts. No deduction is
made after the seventh Contract Anniversary. If the distribution expense risk
charge is insufficient to cover the actual risk assumed, the Company will bear
the loss; however, if the charge is more than sufficient, any excess will be
profit to the Company and would be available for any proper corporate purpose.
In no event will the distribution expense risk charges and any withdrawal
charges assessed under a Contract exceed 9% of the Purchase Payments made under
the Contract.
Investment Management Fees
The Company makes a deduction from the Variable Accounts at the end of
each Valuation Period for the investment management fees payable to MFS. For
the year ended December 31, 1997 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,
0.71%; 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
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<PAGE>
"accumulated value" is the value of the Accumulation Account less the sum
of old and new Payments.
(2) Order of liquidation: To effect a full surrender or partial
withdrawal, the oldest previously unliquidated Payment will be deemed to
have been liquidated first, then the next oldest, and so forth. Once all
old and new Payments have been withdrawn, additional amounts withdrawn will
be attributed to accumulated value.
(3) Maximum free withdrawal amount: The maximum amount that can be
withdrawn without a withdrawal charge in a Contract Year is equal to the
sum of (a) any old Payments not already liquidated; and (b) 10% of any new
Payments, irrespective of whether these new Payments have been liquidated.
(4) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge will be the excess, if any, of (a) amounts liquidated
from old and new Payments over (b) the remaining maximum free withdrawal
amount at the time of the withdrawal.
The amount of the withdrawal charge varies according to the number of
complete Contract Years between the Contract Year in which a Purchase Payment
was credited to a Contract's Accumulation Account and the Contract Year in
which it was withdrawn, in accordance with the following table:
<TABLE>
<CAPTION>
Number of
Contract Years Withdrawal Charge
- ---------------- -------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
The withdrawal charge is not assessed with respect to a Contract
established for the personal account of an employee of the Company or of any of
its affiliates, or of a licensed insurance agent engaged in distributing the
Contracts.
In no event shall the aggregate withdrawal charges (including the
distribution expense risk charge described above) assessed against a Contract
exceed 9% of the aggregate Purchase Payments made under the Contract (see
Appendix C in the Statement of Additional Information for examples of
withdrawals and withdrawal charges).
Premium Taxes
A deduction, when applicable, is made for premium or similar state or
local taxes, which vary depending on the jurisdiction and, as of February 27,
1998, The Company believes range from 0% to 3.5%. For more current information,
a tax adviser should be consulted. It is currently the Company's policy to
deduct the tax from the amount applied to provide an annuity at the time
annuity payments commence; however, the Company reserves the right to deduct
such taxes on or after the date 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 (or for Qualified Contracts other than IRAs, no later than April 1
following the year the Annuitant retires, if later than the year the Annuitant
reaches age 70-1/2), and the terms of the particular retirement plan may impose
additional limitations. The
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<PAGE>
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, 408 or
408A of the Internal Revenue Code, as well as certain non-qualified plans,
reference should be made to the terms of the particular plan for any
limitations or restrictions on the Annuity Commencement Date.
Annuity Options
Unless restricted by the particular retirement plan or any applicable
legislation, during the lifetime of the Annuitant and prior to the Annuity
Commencement Date the Owner may elect one or more of the annuity options
described below or such other settlement option as may be agreed to by the
Company for the Annuitant as Payee. Annuity options may also be elected by the
Owner or the Beneficiary as provided under "Death Benefit." The Owner may not
change any election after 30 days prior to the Annuity Commencement Date, and
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT DATE.
If no election is in effect on the 30th day prior to the Annuity Commencement
Date, Annuity Option B, for a Life Annuity with 120 monthly payments certain,
will be deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Contract's Accumulation Account to be applied to the Fixed Account and the
Variable Accounts. In the event the election does not so specify, then the
portion of the adjusted value of the Accumulation Account to be applied to the
Fixed Account and the Variable Accounts will be determined on a pro rata basis
from the composition of the Accumulation Account on the Annuity Commencement
Date.
Annuity options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than options B
or C because no further payments are payable after the death of the Payee and
there is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and
during the lifetime of the survivor. During the lifetime of the survivor,
variable monthly payments, if any, will be determined using the percentage
chosen at the time of the election of this option of the number of each type of
Annuity Unit credited to the Contract and each fixed monthly payment, if any,
will be equal to the same percentage of the fixed monthly payment payable
during the joint lifetime of the Payee and the designated second person.
*Annuity Option D. Fixed Payments for a Specified Period Certain: Fixed
monthly payments for a specified period of time (at least five years, but not
exceeding 30 years), as elected.
*Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at
interest. Fixed payments will be made in such amounts
- ---------------------
*The election of this annuity option may result in the imposition of a penalty
tax.
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<PAGE>
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.
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,
- ---------------------
*The election of this annuity option may result in the imposition of a penalty
tax.
30
<PAGE>
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
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.
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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.
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 591/2 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.
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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.
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), and Roth IRAs permitted by Section 408A of the
Code;
(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.
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DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where the Contracts may be lawfully sold. Such agents will be registered
representatives of broker-dealers registered under the Securities Exchange Act
of 1934 who are members of the National Association of Securities Dealers, Inc.
The Contracts will be distributed by Clarendon Insurance Agency, Inc., One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181, a wholly-owned
subsidiary of the Company. Commissions and other distribution compensation will
be paid by the Company and will not be more than 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.
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
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APPENDIX A
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.
Description of Bond Ratings
The ratings of Moody's, S&P, Fitch and Duff & Phelps 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.
S&P:
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the higher rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions to meet
its financial commitment on the obliga-
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tion. In the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial commitment on
the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation 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 or the taking of similar actions of
payments on an obligation are jeopardized.
Plus(+) or Minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risks--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Fitch:
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB: Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD and D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e., below 50%.
Duff & Phelps:
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vul-
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nerability to economic cycles as well as risks related to such factors as
competition, government action, regulation, technological obsolescence, demand
shifts, cost structure, and management depth and expertise. The projected
viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. From time to time, Duff & Phelps places issuers
or security classes on Rating Watch. The Rating Watch status results from a
need to notify investors and the issuer that there are conditions present
leading us to re-evaluate the current rating(s).
A listing on Rating Watch, however, does not mean a rating change is
inevitable. The Rating Watch status can either be resolved quickly or over a
longer period of time, depending on the reasons surrounding the placement on
Rating Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded; and the "uncertain" designation
means a rating may be raised or lowered.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of BBB- and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, used this same rating scale. Duff
& Phelps claims paying ability ratings of insurance companies use the same
scale with minor modification in the definitions. Thus, an investor can compare
the credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, A-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuers failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
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
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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.
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.
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APPENDIX B
Certain Securities and 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; HYVA, CAVA, TRVA, WGVA and MSVA may invest in foreign securities; HYVA
and TRVA may invest in lower rated bonds; 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. HYVA, WGVA and MSVA are
"non-diversified" as that term is defined in the 1940 Act. These various
techniques are described below.
Non-diversification: Although more than 5% of an Account's total assets
may be invested in the securities of one issuer (including a foreign
government), at the close of each quarter of its taxable year, the aggregate
amount of such holdings may not exceed 50% of the value of its total assets,
and no more than 25% of the value of its total assets may be invested in the
securities of a single issuer. To the extent that a non-diversified Account at
times may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Account will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater
fluctuations in the Account's total return and the net asset value of its
shares.
Lower Rated Bonds: Fixed income securities rated Baa by Moody's or BBB by
S&P, Fitch or Duff & Phelps and comparable unrated securities, while normally
exhibiting adequate protection parameters, have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than in the case
of higher grade securities.
Securities rated Ba or lower by Moody's or BB or lower by S&P, Fitch or
Duff & Phelps and comparable unrated securities (commonly known as "junk
bonds") are considered speculative and, while generally providing greater
income than investments in higher rated securities, will involve 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 securities
in the higher rating categories. However, since yields vary over time, no
specific level of income can ever be assured. These lower rated 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 fixed income securities are also
affected by changes in interest rates, the market's perception of their credit
quality, 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 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 an 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, an Account may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Account's yield despite the
actual loss of principal. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities, and judgment
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may at times play a greater role in valuing these securities than in the case
of investment grade fixed income securities. Changes in the value of securities
subsequent to their acquisition will not affect cash income or yield to
maturity to an Account but will be reflected in the net asset value of shares
of the Account.
Foreign Securities: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, securities settlement practices, governmental administration or
economic or monetary policy (in the United States or abroad) or circumstances
in dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Special considerations may also include
more limited information about foreign issuers, higher brokerage costs,
different accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign countries could
be affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be
subject to extended settlement periods. An Account may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. An Account may also hold foreign currency in anticipation of
purchasing foreign securities.
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 SEC. 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.
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.
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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 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
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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.
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.
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.
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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 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.
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
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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.
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 SEC. Such
loans may be made to member banks of the Federal Reserve System and to member
firms (and subsidiaries thereof) of the New York Stock Exchange, 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
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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. While awaiting delivery of
securities purchased on such bases, an Account will segregate liquid assets
sufficient to cover its commitments. Although an Account does not intend to
make such purchases for speculative purposes, purchases of securities on such
bases may involve more risk than other types of purchases.
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 Adviser will carefully consider the
creditworthiness of the seller and will follow guidelines regarding the
determination of creditworthiness established by the Board of Managers of the
Account. If the member bank or securities dealer that is the party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
the U.S. Bankruptcy Code, the law regarding the rights of the Account is
unsettled. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the underlying securities,
including accrued interest, is at least equal to the repurchase price.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds
Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide that
the issuer thereof may, at its option, pay interest on such bonds in cash or in
the form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates and/or credit quality than debt obligations which
make regular payments of interest. An Account will accrue income on such
investments for accounting purposes.
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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, the source of its revenues and the location of its 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 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.
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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 Argentina, Brazil, Bulgaria, Costa Rica, Croatia,
Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru,
the Philippines, Poland, Slovenia, Uruguay and Venezuela. 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 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 con-
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tinuing 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 of the
liquidity determinations, 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.
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.
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<PAGE>
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 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.
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<PAGE>
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 notional 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-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 could be used 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,
50
<PAGE>
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 the value of 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 and could involve the loss of all or a portion of
the principal amount of, or interest on, the instrument.
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.
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<PAGE>
APPENDIX C
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 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, con-
52
<PAGE>
tainers, 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.
(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.
53
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHART
For the Fiscal Year Ended December 31, 1997
The tables below shows the percentages of each of HYVA's and TRVA's assets
at December 31, 1997 invested in bonds assigned to the various rating
categories by Moody's, S&P, Fitch and Duff & Phelps and in unrated bonds
determined by the Adviser to be of comparable quality. The highest of the four
rating services is used with respect to each rating.
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 -- 0.58% 0.58%
BB/Ba 11.90% 0.05% 11.95%
B/B 67.78% 4.30% 72.08%
CCC/Caa 4.03% 2.41% 6.44%
CC/Ca -- -- --
C/C 0.02% -- 0.02%
Default -- 0.09% 0.09%
----- ---- -----
Total 83.73% 7.44% 91.17%
</TABLE>
TOTAL RETURN VARIABLE ACCOUNT
<TABLE>
<CAPTION>
UNRATED
BONDS OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ---------- ---------- ----------- -----------
<S> <C> <C> <C>
AAA/Aaa 12.48% -- 12.48%
AA/Aa 0.03% -- 0.03%
A/A 4.21% -- 4.21%
BBB/Baa 10.93% -- 10.93%
BB/Ba 5.10% 0.13% 5.23%
B/B 0.08% -- 0.09%
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- 0.02% 0.02%
Default -- -- --
----- ---- -----
Total 32.84% 0.18% 32.99%
</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.
54
<PAGE>
This Prospectus sets forth information about the Contracts and the Variable
Accounts that a prospective purchaser should know before investing. Additional
information about the Contracts and the Variable Accounts has been filed with
the SEC in a SAI dated May 1, 1998 which is incorporated herein by reference.
The SAI 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.)
Retirement Products and Services
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
------------------
55
<PAGE>
PROSPECTUS
May 1, 1998
Combination Fixed/Variable
Annuity for Personal and
Qualified Retirement Plans
[COMPASS 3 LOGO]
Issued in connection with
[bullet] Money Market Variable Account
[bullet] High Yield Variable Account
[bullet] Capital Appreciation Variable Account
[bullet] Government Securities Variable Account
[bullet] World Governments Variable Account
[bullet] Total Return Variable Account
[bullet] Managed Sectors Variable Account
CO3US-1-5/98/60M
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.
One Sun Life Executive Park
Wellesley, Massachusetts 02181
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
<PAGE>
May 1, 1998
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 3
Management of the Variable Accounts .................................... 6
Annuity Provisions ..................................................... 10
Other Contractual Provisions ........................................... 11
Federal Tax Status ..................................................... 12
Administration of the Contracts ........................................ 15
Distribution of the Contracts .......................................... 15
Legal Matters .......................................................... 15
Accountants and Financial Statements ................................... 16
</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, 1998. This SAI should be read in
conjunction with the Prospectuses, copies of which may be obtained without
charge from the Company at its Retirement Products and Services, 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. It has obtained authorization to do business in
forty-eight states, the District of Columbia and Puerto Rico, and it is
anticipated that the Company will be authorized to do business in all states
except New York. The Company issues life insurance policies and individual and
group annuities. The Company has formed a wholly-owned subsidiary, Sun Life
Insurance and Annuity Company of New York, which issues individual fixed and
combination fixed/variable annuity contracts and group life and long-term
disability insurance in New York and which offers in New York contracts similar
to the Contracts offered by this Prospectus. The Company's other active
subsidiaries are Sun Capital Advisers, Inc., a registered investment adviser,
Clarendon Insurance Agency, Inc., a registered broker-dealer that acts as the
general distributor of the Contracts and other annuity and life insurance
contracts issued by the Company and its affiliates, Sun Life of Canada (U.S.)
Distributors, Inc., a registered broker-dealer and investment adviser, New
London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
and Sun Life Financial Services Limited which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)").
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco") which, on December 18, 1997, became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada--U.S.
Operations Holdings, Inc ("U.S. Holdco"). U.S. Holdco is a wholly-owned
subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario,
Canada. Sun Life (Canada) is a mutual life insurance company incorporated
pursuant to an Act of the Parliament of Canada in 1865 and currently transacts
business in all of the Canadian provinces and territories, all U.S. states
(except New York), the District of Columbia, Puerto Rico, the Virgin Islands,
Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
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 (the "SEC") as an
open-end management investment company under the Investment Company Act of
1940, as amended (the "1940 Act").
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 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 SEC has not
reviewed the disclosures in this SAI 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).
2
<PAGE>
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) 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.
3
<PAGE>
(6) Purchase or retain the securities of any issuer if any of the members
of the Board of Managers of the Variable Account or the directors and
officers of the Company or MFS own beneficially more than one-half of one
percent (.50%) of the securities of such issuer and together own more than
5% of the securities of such issuer.
(7) Invest for the purpose of exercising control or management of another
issuer.
(8) Invest in commodities or commodity futures contracts or in real
estate; except that this shall not prevent CAVA, GSVA, WGVA or MSVA from
writing, selling or purchasing Futures Contracts, Options on Futures
Contracts, Forward Contracts or options on foreign currencies, or from
holding or selling real estate or mineral leases, commodities or commodity
contracts acquired as a result of the ownership of securities in accordance
with their investment objectives and policies.
(9) Invest in oil, gas or other mineral exploration or development
programs.
(10) Purchase securities of other investment companies; except that GSVA
may purchase Government-related Securities in accordance with its
investment objectives and policies; and except, as regards TRVA, WGVA and
MSVA, by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's 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).
4
<PAGE>
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.
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 secu-
5
<PAGE>
rities 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.
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>
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.
75 State Street
Boston, Massachusetts 02106
J. Kermit Birchfield He is a consultant; Chairman of Display Tech, Inc.
(born 1/8/40) (manufacturer of liquid crystal display technology);
33 Way Road Managing Director of Century Partners, Inc.
Gloucester, Massachusetts 01930 (investments); Director of HPSC, Inc. (medical financing);
Director of Dairy Mart Convenience Stores, Inc.; Director
of Intermountain Gas Company, Inc.; former Senior Vice
President and General Counsel for M/A Com, Inc.
(manufacturer of microwave communications equipment)
(prior to December 1995).
William R. Gutow He is a private investor; real estate consultant; Vice
(born 9/27/41) Chairman of Capital Entertainment (Blockbuster Video
3102 Maple Avenue, #100 Franchise).
Dallas, Texas 75201
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Members and Officers During Past Five Years
- ------------------------------------- ---------------------------------------------------------
<S> <C>
David D. Horn*, Member He is a former Senior Vice President and General
(born 6/7/41) Manager of Sun Life Assurance Company of Canada
56 Pickney Street (U.S.).
Boston, Massachusetts 02114
Derwyn F. Phillips, Member He is retired. Formerly Vice Chairman of The Gillette
(born 8/31/30) Company.
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.
90 Beacon Street
Boston, Massachusetts 02108
John D. McNeil*, Chairman and He is Chairman and a Director of Sun Life Assurance
Member Company of Canada, Sun Life Assurance Company of
(born 2/17/34) Canada (U.S.) and Sun Life Insurance and Annuity
150 King Street West Company of New York.
Toronto, Ontario, Canada M5H 1J9
Stephen E. Cavan*, Secretary He is a Senior Vice President, General Counsel and
(born 11/6/53) Assistant Secretary of Massachusetts Financial Services
500 Boylston Street Company.
Boston, Massachusetts 02116
James R. Bordewick, Jr.*, Assistant He is a Senior Vice President and Associate General
Secretary Counsel of Massachusetts Financial Services Company.
(born 3/6/59)
500 Boylston Street
Boston, Massachusetts 02116
</TABLE>
- ---------------------
* Interested persons as defined in the Investment Company Act of 1940.
All Members of the Boards of Managers and officers of the Variable
Accounts who are associated with Sun Life (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 (Canada) or its affiliates. The Members who are not
affiliated with Sun Life Assurance Company of Canada, received from $716 to
$1,430 annually from each Variable Account depending on attendance at meetings.
7
<PAGE>
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 ................. $1,286 $36,000
J. Kermit Birchfield ......... 929 26,000
William Gutow ................ 929 54,683
David D. Horn ................ 0** 0**
John D. McNeil ............... 0** 0**
Garth Marston ................ 1,286 36,000
Derwyn F. Phillips ........... 1,179 33,000
</TABLE>
- ---------------------
(1) For the year ended December 31, 1997.
(2) Information provided for calendar year 1997. 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,
1997 of $9.1 billion, except Mr. Gutow, who served as Trustee of 46 funds
within the MFS complex (having aggregate net assets at December 31, 1997,
of approximately $10.7 billion).
** Messrs. Horn and McNeil were affiliated with MFS and received no
compensation from the Variable Accounts. Beginning in each Account's
current fiscal year, Mr. Horn receives compensation from the Account for
his services as a member of the Board of Managers.
Investment Adviser
Massachusetts Financial Services Company ("MFS" or the "Adviser") 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 Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun
Life (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>
MMVA 0.50%
GSVA 0.55% of first $300 million in ADNA and 0.495% of ADNA in
excess of $300 million
HYVA 0.75% of first $300 million in ADNA and 0.675% of ADNA in
CAVA excess of $300 million
WGVA
TRVA
MSVA
</TABLE>
8
<PAGE>
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
1995, 1996 or 1997. The investment management fees paid by the Variable
Accounts during 1995, 1996 and 1997, 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 1997 % ADNA ended 1996 % ADNA ended 1995 % ADNA
- ------------------ --------------- ---------- --------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
MMVA ............. $ 639,020 0.50% $ 734,295 0.50% $ 878,426 0.50%
GSVA ............. 1,159,662 0.55 1,360,942 0.55 1,510,782 0.55
HYVA ............. 1,428,572 0.75 1,416,024 0.75 1,467,065 0.75
CAVA ............. 4,299,068 0.71 3,818,062 0.75 3,366,566 0.75
WGVA ............. 200,641 0.75 252,025 0.75 281,714 0.75
TRVA ............. 2,247,413 0.75 2,058,627 0.75 1,834,114 0.75
MSVA ............. 836,134 0.75 674,276 0.75 569,227 0.75
</TABLE>
(2) Administrator
MFS provides the Variable Accounts with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, each Variable Account pays MFS an administrative
fee up to 0.015% per annum of the Variable Account's average daily net assets.
This fee reimburses MFS for a portion of the costs it incurs to provide such
services. For the period March 1, 1997 to December 31, 1997, MFS received fees
under this Agreement as follows:
<TABLE>
<S> <C>
CAVA ......... $71,615
GSVA ......... 24,486
HYVA ......... 22,104
MSVA ......... 13,312
MMVA ......... 15,246
TRVA ......... 35,404
WGVA ......... 3,075
</TABLE>
(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
affiliates. Any research benefits provided by broker-dealers may be available
for all clients of MFS or its affiliates, which may include the Company, Sun
Life (Canada) and Sun Life Insurance and Annuity Company of New York.
Consistent with the foregoing primary consideration and the Conduct Rules 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 1995, 1996 and 1997 were as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Brokerage Commissions Paid
-----------------------------------------
Variable Account 1995 1996 1997
- ------------------ ------------- ----------- -----------
<S> <C> <C> <C>
CAVA ............. $1,372,000 $765,000 $857,057
HYVA ............. 0 0 2,824
TRVA ............. 183,000 236,000 86,763
MSVA ............. 291,000 264,000 233,940
</TABLE>
No commissions were paid by MMVA, GSVA or WGVA in 1995, 1996 and 1997.
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 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 the
Company, may enter into other types of business transactions with broker-dealers
relating to the distribution of the Contracts. These other transactions will be
unrelated to the allocation of the Variable Accounts' portfolio securities
transactions.
ANNUITY PROVISIONS
Determination of Annuity Payments
On the Annuity Commencement Date the Contract's Accumulation Account will
be 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.
10
<PAGE>
Annuity Unit Value
The Annuity Unit value for each Variable Account was established at $10.00
for the first Valuation Period of the particular Variable Account. The Annuity
Unit value for any subsequent Valuation Period is determined by multiplying the
Annuity Unit value for the immediately preceding Valuation Period by the
appropriate Net Investment Factor (See "Net Investment Factor" in the
Prospectus) for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of 4% per year used to
establish the annuity payment rates found in the Contract. This factor is
0.99989255 for a one day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix B.
OTHER CONTRACTUAL PROVISIONS
Owner and Change of Ownership
The Contract shall belong to the Owner. All Contract rights and privileges
may be exercised by the Owner without the consent of the Beneficiary (other
than an irrevocably designated beneficiary) or any other person. Such rights
and privileges may be exercised only during the lifetime of the Annuitant and
prior to the Annuity Commencement Date, except as otherwise provided in the
Contract. In some qualified plans the Owner of the Contract is a Trustee and
the Trust authorizes the Annuitant/Participant to exercise certain contract
rights and privileges.
Ownership of a Qualified Contract may not be transferred except to: (1)
the Annuitant; (2) a trustee or successor trustee of a pension or profit
sharing trust which is qualified under Section 401 of the Internal Revenue
Code; (3) the employer of the Annuitant provided that the Qualified Contract
after transfer is maintained under the terms of a retirement plan qualified
under Section 403(a) of the Internal Revenue Code for the benefit of the
Annuitant; (4) the trustee of an individual retirement account plan qualified
under Section 408 of the Internal Revenue Code for the benefit of the Owner; or
(5) as otherwise permitted from time to time by laws and regulations governing
the retirement or deferred compensation plans for which a Qualified Contract
may be issued. Subject to the foregoing, a Qualified Contract may not be sold,
assigned, transferred, discounted or pledged as collateral for a loan or as
security for the performance of an obligation or for any other purpose to any
person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, although such change may result in the imposition of tax
(see "Federal Tax Status Taxation of Annuities in General"). A change of
ownership will not be binding upon the Company until written notification is
received by the Company. Once received by the Company the change will be
effective as of the date on which the request for change was signed by the
Owner but the change will be without prejudice to the Company on account of any
payment made or any action taken by the Company prior to receiving the change.
The Company may require that the signature of the Owner be guaranteed by a
member firm of the New York, American, Boston, Midwest, Philadelphia or Pacific
Stock Exchange, or by a commercial bank (not a savings bank) 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.
11
<PAGE>
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, 408 or 408A or, in the case of Compass 2 Contracts, Section
457 of the Internal Revenue Code (the "Code"). The ultimate effect of federal
income taxes on the Contract's Accumulation Account, on annuity payments and on
the economic benefit to the Owner, the Annuitant, the Payee or the Beneficiary
depends on the Company's tax status, upon the type of retirement plan for which
the Contract is purchased, and upon the tax and employment status of the
individual concerned. The discussion contained herein is general in nature, is
based upon the Company's understanding of current federal income tax laws
(including recently enacted amendments), and is not intended as tax advice.
Congress has the power to enact legislation affecting the tax treatment of
annuity contracts, and such legislation could be applied retroactively to
Contracts purchased before the date of enactment. Any person contemplating the
purchase of a Contract should consult a qualified tax adviser. THE COMPANY DOES
NOT MAKE ANY GUARANTEE REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF
ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
Tax Treatment of the Company and the Variable Accounts
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Accounts are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Accounts are not separately taxable as regulated investment companies or
otherwise as taxable entities separate from the Company. Under existing federal
income tax laws, the income (consisting primarily of interest, dividends, and
net capital gains) of the Variable Accounts, to the extent that it is applied
to increase reserves under the Contracts, is not taxable to the Company.
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.
12
<PAGE>
For example, non-taxable principal may be withdrawn before taxable earnings and
the 10% penalty tax for early withdrawal is not applicable.
In the case of a Non-Qualified Contract (other than a Contract issued in
exchange for a contract issued prior to August 14, 1982, as discussed above), a
partial cash withdrawal (that is, a withdrawal of less than the entire value of
the Contract's Accumulation Account), must be treated first as a withdrawal
from the excess of the Accumulation Account's value over the Contract's cost
basis. The amount of the withdrawal so allocable will be includible in the
Owner's income. Similarly, if an individual receives a loan under a Contract or
if the Contract is assigned or pledged as collateral for a loan, the amount of
the loan or the amount assigned or pledged must be treated as if withdrawn from
the Contract. (For Non-Qualified Contracts entered into after October 21, 1988
(or any annuity contract entered into on or before such date that is exchanged
for a Non-Qualified Contract issued after such date), any withdrawal or loan
amount that is includible in the Owner's income will increase the Contract's
cost basis. Repayment of a loan or payment of interest on a loan will not
affect the Contract's cost basis. For these purposes the Contract's
Accumulation Account value will not be reduced by the amount of any loan,
assignment, or pledge of the Contract. In addition, all non-qualified deferred
annuity contracts that are issued by the Company to the same Owner during any
calendar year will be treated as a single annuity contract. Therefore, the
proceeds of a withdrawal or loan from, or assignment or pledge of, one or more
such contracts will be fully includible in the Owner's income to the extent of
the aggregate excess of the accumulation account values over the cost bases of
all such contracts entered into during the calendar year).
The taxable portion of a cash withdrawal or a lump-sum payment prior to
the Annuity Commencement Date is subject to tax at ordinary income rates. In
the case of payments after the Annuity Commencement Date under the annuity
option elected, a portion of each payment generally is taxable at ordinary
income rates. The nontaxable portion is determined by applying to each payment
an "exclusion ratio" which is the ratio that the cost basis of the Contract
bears to the expected return under the Contract. The remainder of the payment
is taxable.
The total amount that a Payee may exclude from income through application
of the "exclusion ratio" is limited to the cost basis in the Contract. If an
Annuitant survives for his full life expectancy so that the Payee recovers the
entire basis in the Contract, any subsequent annuity payment after basis
recovery will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire basis, the Payee will be allowed a
deduction for the amount of the unrecovered basis. This limitation applies to
distributions made under a Contract with an Annuity Commencement Date after
December 31, 1986.
In the case of Non-Qualified Contracts, taxable cash withdrawals and
lump-sum payments will be subject to a 10% penalty, except in the circumstances
described below. This 10% penalty also affects certain annuity payments. In a
situation where this penalty applies, the recipient's tax for the tax year in
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.
13
<PAGE>
For this purpose, a "first in, first out" rule is used, so that the earliest
Purchase Payment with respect to which amounts have not been previously fully
allocated will be deemed to be the source of the amount.
If the Owner of a Non-Qualified Contract dies before the Annuity
Commencement Date, the entire value of the Contract's Accumulation Account must
be either (1) distributed within five years after the date of death of the
Owner, or (2) distributed over some period not greater than the expected life
of the designated Payee, with annuity payments beginning within one year after
the date of death of the Owner. These distribution requirements will not apply
where the spouse of the Owner is the designated Beneficiary; rather, in such a
case, the Contract may be continued in the name of the spouse as Owner. If the
Owner/Annuitant dies on or after the Annuity Commencement Date and before the
entire accumulation under the Contract has been distributed, the remaining
portion of such accumulation, if any, must be distributed at least as rapidly
as the method of distribution then in effect. In the case of Contracts issued
prior to January 18, 1985, these rules regarding distributions upon the death
of the Owner or the Annuitant will not apply. In the case of Contracts issued
after April 22, 1987, where the Owner of a Contract is not an individual, the
rules requiring distributions upon the death of the Owner will be applied with
respect to the Annuitant, resulting in income to the Payee. In such a case, a
change in the Annuitant would be treated as the death of the Owner.
Distributions required due to the death of the Owner (or, where the Owner is
not an individual, to the death of the Annuitant) will not be subject to the
10% penalty on premature distributions. A purchaser of a Qualified Contract
should refer to the terms of the applicable retirement plan and consult a tax
adviser regarding distribution requirements upon death.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis. This
provision applies to Contracts issued after April 22, 1987.
In the case of Qualified Contracts, distributions made prior to age 59-1/2
generally are subject to a 10% penalty tax, although this tax will not apply in
certain circumstances. Certain distributions, known as "eligible rollover
distributions," if rolled over to certain other qualified retirement plans
(either directly or after being distributed to the Owner or Payee), are not
taxable until distributed from the plan to which they are rolled over. In
general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more. Owners, Annuitants, Payees and
Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans
in connection with which the Contracts are purchased.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Owner or Payee provides his or her taxpayer identification number to
the Company and notifies the Company (in the manner prescribed) before the time
of the distribution that he or she chooses not to have any amounts withheld.
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
Vari-
14
<PAGE>
able Accounts) will be adequately diversified if (1) not more than 55% of its
total assets are invested in the securities of one issuer, (2) not more than
70% of its total assets are invested in the securities of two issuers, (3) not
more than 80% of its total assets are invested in the securities of three
issuers, and (4) not more than 90% of its total assets are invested in the
securities of four issuers. In the case of "government securities," each United
States government agency or instrumentality is treated as a separate issuer.
"Government securities" include any security that is issued or guaranteed by
the United States or an instrumentality of the United States and related
options, Futures Contracts and Options on Futures Contracts. The Company
believes the Variable Accounts comply with the Regulations.
The preamble to the Regulations states that the Internal Revenue Service
may promulgate guidelines under which a variable contract will not be treated
as an annuity for tax purposes if the owner has excessive control over the
investments underlying the contract. It is not known whether such guidelines,
if in fact promulgated, would have retroactive effect. If guidelines are
promulgated, the Company will take any action (including modification of the
Contract or the Variable Accounts) necessary to comply with the guidelines.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
contracts participating in the Variable Accounts and the Variable Accounts.
These functions include, among other things, maintaining the books and records
of the Variable Accounts and maintaining records of the name, address, taxpayer
identification number, contract number, type of contract issued to each owner,
the status of the accumulation account under each contract and other pertinent
information necessary to the administration and operation of the contracts.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. The Contracts will be
distributed by Clarendon Insurance Agency, Inc. ("Clarendon"), One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02181, a wholly-owned subsidiary
of the Company. Commissions and other distribution compensation will be paid by
the Company and will not be more than 5.11% of the Purchase Payments 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 1995, 1996,
and 1997, 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>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Compass 2 .......... $244,000 $208,000 $168,000
Compass 3 .......... 542,000 576,000 560,000
</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 Margaret
Sears Meade, Assistant Vice President and Secretary 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.
15
<PAGE>
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 SAI.
The financial statements of the Variable Accounts are incorporated in this
SAI by reference from the Variable Accounts' Annual Report to contract owners
for the year ended December 31, 1997. 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).
16
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Statutory Statements of Admitted Assets, Liabilities and
Capital Stock and Surplus
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
(in 000's)
<S> <C> <C>
Admitted Assets
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
----------- -----------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
----------- -----------
Total Admitted Assets $15,927,045 $13,621,952
=========== ===========
Liabilities
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
----------- -----------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
----------- -----------
Total liabilities 15,094,350 13,054,809
----------- -----------
Capital Stock and Surplus
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
----------- -----------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
----------- -----------
Surplus 826,795 561,243
----------- -----------
Total capital stock and surplus 832,695 567,143
----------- -----------
Total Liabilities, Capital Stock and Surplus $15,927,045 $13,621,952
=========== ===========
</TABLE>
See notes to statutory financial statements.
17
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Statutory Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
(in 000's)
<S> <C> <C> <C>
Income:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary contracts without
life contingencies and dividend accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance reserve 1,166 1,557 1,025
Net gain from operations from Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
Benefits and Expenses:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts without life
contingencies and of dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for life and accident
and health policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for premium and other
deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for supplementary
contracts without life contingencies and for
dividend and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business only) 132,700 109,894 88,037
Commissions and expense allowances on
reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees, excluding federal
income taxes 7,790 8,431 7,685
Increase (decrease) in loading on and cost of
collection in excess of loading on deferred and
uncollected premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before dividends to
policyholders and federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after dividends to
policyholders and before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit) (excluding tax
on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after dividends to
policyholders and federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less capital gains tax and
transfers to the interest maintenance reserve
30,109 7,560 2,069
---------- ---------- ----------
Net income $ 129,242 $ 123,024 $ 35,915
========== ========== ==========
</TABLE>
See notes to statutory financial statements.
18
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Statutory Statements of Changes in Capital Stock and Surplus
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -----------
(in 000's)
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $455,489
---------- ---------- --------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in
valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts
Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- --------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- --------
Capital and surplus, end of year $ 832,695 $ 567,143 $792,452
========== ========== ========
</TABLE>
See notes to statutory financial statements.
19
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Statutory Statements of Cash Flow
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
(in 000's)
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and deposit funds
received $2,427,554 $2,059,577 $1,826,456
Considerations for supplementary contracts and
dividend accumulations received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
---------- ---------- ----------
Total receipts 2,834,069 2,475,126 2,227,290
---------- ---------- ----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid (other than
federal income and capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries) payments (excluding
tax on capital gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
---------- ---------- ----------
Total payments 3,040,385 2,608,634 1,948,393
---------- ---------- ----------
Net cash from operations (206,316) (133,508) 278,897
---------- ---------- ----------
Proceeds from long-term investments sold, matured
or repaid (after deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
---------- ---------- ----------
Total cash provided 1,711,100 1,581,103 2,393,101
---------- ---------- ----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
---------- ---------- ----------
Total cash applied 1,108,425 1,496,862 2,545,921
---------- ---------- ----------
Net change in cash and short-term investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
---------- ---------- ----------
End of year $ 544,418 $ 148,059 $ 197,326
========== ========== ==========
</TABLE>
See notes to statutory financial statements.
20
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements
Years Ended December 31, 1997, 1996 and 1995
1. Description of Business and Summary of Significant Accounting Policies
General
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as
a life insurance company and is engaged in the sale of individual variable life
insurance, individual fixed and variable annuities, group fixed and variable
annuities and group pension contracts. The Company also underwrites a block of
individual life insurance business through a reinsurance contract with the
Company's ultimate parent, Sun Life Assurance Company of Canada ("SLOC"). SLOC
is a mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the
newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada--U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its
financial statements in accordance with statutory accounting practices
prescribed or permitted by the State of Delaware Insurance Department.
Prescribed accounting practices include practices described in a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations and general administrative rules. Permitted
accounting practices encompass all accounting practices not so prescribed. The
permitted accounting practices adopted by the Company are not material to the
financial statements. Prior to 1996, statutory accounting practices were
recognized by the insurance industry and the accounting profession as generally
accepted accounting principles for mutual life insurance companies and stock
life insurance companies wholly-owned by mutual life insurance companies. In
April 1993, the Financial Accounting Standards Board ("FASB") issued an
interpretation (the "Interpretation"), that became effective in 1996, which
changed the previous practice of mutual life insurance companies (and stock
life insurance companies that are wholly-owned subsidiaries of mutual life
insurance companies) with respect to utilizing statutory basis financial
statements for general purposes, in that it will no longer allow such financial
statements to be described as having been prepared in conformity with generally
accepted accounting principles ("GAAP"). Consequently, these financial
statements prepared in conformity with statutory accounting practices as
described above, vary from and are not intended to present the Company's
financial position, results of operations or cash flow in conformity with
generally accepted accounting principles. (See Note 19 for further discussion
relative to the Company's basis of financial statement presentation.) The
effects on the financial statements of the variances between the statutory
basis of accounting and GAAP, although not reasonably determinable, are
presumed to be material.
Invested Assets and Related Reserves
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
21
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Policy and Contract Reserves
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
Income and Expenses
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
Separate Accounts
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and
individual and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit
of contract holders, are shown as separate captions in the financial
statements. Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
Changes in Accounting Principles and Reporting
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
22
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Other
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. Investments in Subsidiaries
The Company owns all of the outstanding shares of Sun Life Insurance and
Annuity Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty
Insurance Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc.
(formerly Sun Investment Services Company) ("Sundisco"), New London Trust,
F.S.B. ("NLT"), Sun Life Financial Services Limited, ("SLFSL"), Sun Benefit
Services Company, Inc. ("Sunbesco"), Sun Capital Advisers, Inc. ("Sun
Capital"), and Sun Life Finance Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares
of Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the
mutual funds in the MFS family of funds as well as certain mutual funds and
separate accounts established by the Company. The MFS Asset Management Group
provides investment advice to substantial private clients.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC issues only individual disability income policies. Sundisco is a
registered investment adviser and broker-dealer. NLT is a federally chartered
savings bank. SLFSL serves as the marketing administrator for the distribution
of the offshore products of SLOC, an affiliate. Sun Capital is a registered
investment adviser. Sunfinco and Sunbesco are currently inactive. Clarendon is
a registered broker-dealer that acts as the general distributor of certain
annuity and life insurance contracts issued by the Company and its affiliates.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1997 and 1996 the Company had an additional $20,000,000 in notes issued by
MFS, scheduled to mature in 2000.
23
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
2. Investments in Subsidiaries (continued)
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
MCIC $2,000,000 $10,000,000 $6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(in 000's)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------ ------------ ------------
Total net assets $ 116,985 $ 144,043 $ 138,282
============ ============ ============
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------ ------------ ------------
Net income $ 59,481 $ 50,261 $ 35,531
============ ============ ============
</TABLE>
3. Bonds
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
------------- ------------ ------------ -------------
(in 000's)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
---------- -------- -------- ----------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
---------- -------- -------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances
and commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
---------- -------- -------- ----------
Total short-term bonds 541,032 -- -- 541,032
---------- -------- -------- ----------
Total bonds $2,451,731 $123,525 $ (6,057) $2,569,199
========== ======== ======== ==========
</TABLE>
24
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
3. Bonds (continued)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------ ------------ ------------
(in 000's)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
---------- -------- --------- ----------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
---------- -------- --------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances
and commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
---------- -------- --------- ----------
Total short-term bonds 146,754 -- -- 146,754
---------- -------- --------- ----------
Total bonds $2,316,857 $102,730 $ (27,361) $2,392,226
========== ======== ========= ==========
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
(in 000's)
<S> <C> <C>
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
---------- ----------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
---------- ----------
Total bonds $2,451,731 $2,569,199
========== ==========
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses
were $2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
25
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
4. Securities Lending
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $0 and $51,537,000 at December 31, 1997 and
1996 respectively. Income resulting from this program was $200,000, $137,000
and $2,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
5. Mortgage Loans
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
(in 000's)
<S> <C> <C>
California $119,122 $154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
-------- --------
$684,035 $938,932
======== ========
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and
$29,261,000 at December 31, 1997 and 1996, respectively, against which there
are allowances for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
26
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
6. Investment Gains and Losses
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
(in 000's)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
-------- -------- --------
$ 30,109 $ 7,560 $ 2,069
======== ======== ========
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
-------- -------- --------
$ 1,153 $ (1,715) $ 2,009
======== ======== ========
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to
changes in levels of interest rates are charged or credited to an interest
maintenance reserve ("IMR") and amortized into income over the remaining
contractual life of the security sold. The net realized capital gains credited
to the interest maintenance reserve were $6,321,000 in 1997, $7,710,000 in
1996, and $12,714,000 in 1995. All gains and losses are transferred net of
applicable income taxes.
7. Net Investment Income
Net investment income consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(in 000's)
<S> <C> <C> <C>
Interest income from bonds $188,924 $178,695 $205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
-------- -------- --------
Gross investment income 326,728 342,443 361,042
-------- -------- --------
Interest on surplus notes and notes payable (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
-------- -------- --------
Net investment income $270,249 $303,753 $312,872
======== ======== ========
</TABLE>
27
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
8. Derivatives
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1997 and 1996 there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential
to be paid or received on interest rate swaps is recorded monthly as interest
rates change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
Swaps Outstanding
At December 31, 1997
-----------------------------------
Notional Market Value
Principal Amounts of Positions
------------------- -------------
(in 000's)
<S> <C> <C>
Conventional interest rate swaps $80,000 $(2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
Swaps Outstanding
At December 31, 1996
-----------------------------------
Notional Market Value
Principal Amounts of Positions
------------------- -------------
(in 000's)
<S> <C> <C>
Conventional interest rate swaps $429,000 $(2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would
receive or pay on termination or sale, taking into account current interest
rates and the current credit worthiness of the counterparties. The Company is
exposed to potential credit loss in the event of non-performance by
counterparties. The counterparties are major financial institutions and
management believes that the risk of incurring losses related to credit risk is
remote.
28
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
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.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996
------------ -------------
(in 000's)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
--------- ----------
16 17
--------- ----------
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
Investment in leveraged leases 30,842 29,666
--------- ----------
Less fees (163) (188)
--------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
========= ==========
</TABLE>
The net investment is included as an other invested asset.
10. Reinsurance
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed
certain assumptions used in determining the gross and the ceded reserve
balance. The Company reflected the effect of the changes in assumptions to its
assumed reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
29
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
10. Reinsurance (continued)
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
(in 000's)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $2,230,980 $1,858,145 $1,619,337
Net investment income and realized gains 300,669 312,870 315,967
---------- ---------- ----------
Subtotal 2,531,649 2,171,015 1,935,304
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
---------- ---------- ----------
Subtotal 2,428,188 2,084,251 1,891,219
---------- ---------- ----------
Income from operations $ 103,461 $ 86,764 $ 44,085
========== ========== ==========
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. Withdrawal Characteristics of Annuity Actuarial Reserves and Deposit
Liabilities
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Amount % of Total
------------- -----------
(in 000's)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
--With market value adjustment $ 3,415,394 25%
--At book value less surrender charges (surrender charge - 5%) 7,672,211 57
--At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
----------- --
Total annuity actuarial reserves and deposit liabilities $13,511,954 100%
=========== ===
</TABLE>
30
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
11. Withdrawal Characteristics of Annuity Actuarial Reserves and Deposit
Liabilities (continued)
<TABLE>
<CAPTION>
December 31, 1996
---------------------------
Amount % of Total
------------- -----------
(in 000's)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
--With market value adjustment $ 3,547,683 31%
--At book value less surrender charges (surrender charge - 5%) 5,626,117 48
--At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
----------- --
Total annuity actuarial reserves and deposit liabilities $11,656,543 100%
=========== ===
</TABLE>
12. Retirement Plans
The Company participates with SLOC in a non-contributory defined benefit
pension plan covering essentially all employees. The benefits are based on
years of service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
Other Post-Retirement Benefit Plans
In addition to pension benefits, the Company provides certain health, dental,
and life insurance benefits ("post-retirement benefits") for retired employees
and dependents. Substantially all employees may become eligible for these
benefits if they reach normal retirement age while working for the Company, or
retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
31
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
13. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
Carrying Amount Estimated Fair Value
----------------- ---------------------
(in 000's)
<S> <C> <C>
Assets
Bonds $2,451,731 $2,569,199
Mortgages 684,035 706,975
Liabilities
Insurance reserves 123,128 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Carrying Amount Estimated Fair Value
----------------- ---------------------
(in 000's)
<S> <C> <C>
Assets
Bonds $2,316,857 $2,392,226
Mortgages 938,932 958,909
Liabilities
Insurance reserves 122,606 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
32
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
------------------------- -----------------------
AVR IMR AVR IMR
------------ ---------- ---------- ----------
(in 000's) (in 000's)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- -------- ------- --------
Balance, end of year $ 47,605 $ 33,830 $53,911 $ 28,675
========= ======== ======= ========
</TABLE>
15. Federal Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. Surplus Notes and Notes Receivable (Payable)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after
November 6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest
33
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
16. Surplus Notes and Notes Receivable (Payable) (continued)
payments required the consent of the Delaware Insurance Commissioner. Payment
of principal and interest on the notes issued in 1995 and in 1997 also requires
the consents of the Delaware Insurance Commissioner and Canadian Office of the
Superintendent of Financial Institutions.
The Company obtained the required consents and expensed $42,481,000,
$23,061,000 and $31,813,000 for interest on surplus notes and notes payable for
the years ended December 31, 1997, 1996 and 1995, respectively.
17. Management and Service Contracts
The Company has an agreement with SLOC which provides that SLOC will furnish,
as requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in
1995.
18. Risk-Based Capital
Effective December 31, 1993 the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1997 and 1996.
19. Accounting Policies and Principles
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock
of the Company's United States life insurance subsidiaries are directly
reflected in the Company's surplus. Changes in the net equity value of the
common stock of all other subsidiaries are directly reflected in the Company's
Asset Valuation Reserve. Dividends paid by subsidiaries to the Company are
included in the Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP--deferred policy acquisition
costs, deferred federal income taxes and statutory non- admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
34
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1997, 1996 and 1995
19. Accounting Policies and Principles (continued)
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the
normal course of business, the management of Sun Life Assurance Company of
Canada (U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts" 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.
35
<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, 1997 and 1996, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory
basis of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of December 31, 1997
and 1996, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1997 on the basis of accounting
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles,
the financial position of Sun Life Assurance Company of Canada (U.S.) as of
December 31, 1997 and 1996 or the results of its operations or its cash flow
for each of the three years in the period ended December 31, 1997.
As management has stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management
of Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
Deloitte & Touche LLP
Boston, Massachusetts
February 5, 1998
36
<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).
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
37
<PAGE>
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.
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
38
<PAGE>
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.
39
<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>
40
<PAGE>
Explanation of Columns in Table
Columns 1 and 2:
Represent Purchase Payments ("Payments") and amounts of Payments. Each
Payment was made on the first day of each Contract Year.
Column 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.
APPENDIX D
Certain Securities and Investment Techniques
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 of liquid assets in an
41
<PAGE>
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 liquid assets. 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 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
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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 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
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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 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 cur-
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rency. 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 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 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 segregated account by WGVA)
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 liquid
assets representing the difference is segregated by WGVA. 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 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
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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 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.
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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, 24-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.
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 SEC, 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.
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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--In order to assure that
the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts, Options on Futures Contracts and
Options on Foreign Currencies traded on a CFTC-regulated exchange only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-bona fide hedging purposes, provided that the aggregate initial margin and
premiums required to establish such non-bona fide hedging positions does not
exceed 5% of the liquidation value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts the Fund
has entered into, and excluding, in computing such 5%, the in-the-money amount
with respect to an option that is in-the-money at the time of purchase.
When an Account purchases a Futures Contract, an amount of liquid assets
will be segregated by the Account so that the amount so segregated, together
with the margin account, will at all times equal the Account obligation under
the Futures Contract.
The staff of the 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
Adviser disagrees with this position, the 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 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
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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 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.
49
<PAGE>
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 segregate cash
or liquid assets 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.
50
<PAGE>
APPENDIX E
Transactions in Securities of Regular
Broker-Dealers and Their Affiliates
During the year ended December 31, 1997 each of the Capital Appreciation
Variable Account ("CAVA"), Money Market Variable Account ("MMVA"), High Yield
Variable Account ("HYVA") and Total Return Variable Account ("TRVA") 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, 1997
- --------- ------------------------------------------------- ------------------
<S> <C> <C>
CAVA Merrill Lynch, Pierce, Fenner & Smith, Inc. $1,604,625
HYVA Goldman Sachs & Co. 9,088,000
MMVA Goldman Sachs & Co. 1,989,158
MMVA Bank of America 996,992
MMVA Nationsbank Corp. 4,967,333
MMVA Merrill Lynch, Pierce, Fenner & Smith, Inc. 3,870,273
TRVA Ford Motor Co. 2,429,506
TRVA Ford Motor Credit Co. 418,548
TRVA Chase Manhattan 1,057,770
TRVA Nationsbank 1,897,350
TRVA General Electric Co. 3,206,487
TRVA Lehman Bros. 1,729,617
TRVA Salomon Bros. 186,759
TRVA Bear Stearns 503,930
</TABLE>
51
<PAGE>
COUS-13-5/98/.5M
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
General Distributor
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
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
<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 Condition, December 31, 1997;
2. Statements of Operations, Year Ended December 31, 1997;
3. Statements of Changes in Net Assets, Years Ended December
31, 1996 and 1997;
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 1997.
2. Statutory Statements of Operations, Years Ended December 31,
1997, 1996 and 1995.
3. Statutory Statements of Changes in Capital Stock and
Surplus, Years Ended December 31, 1997, 1996 and 1995.
4. Statutory Statements of Cash Flow, Years Ended December 31,
1997, 1996 and 1995.
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, 1997.
<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"). MMVA, HYVA, CAVA and GGVA are referred to herein
collectively as the "Previous Registrants." (1)
2 (a) Rules and Regulations of the Previous Registrants. (1)
(b) Rules and Regulations of GMVA. (1)
(c) Rules and Regulations of TRVA. (1)
(d) Rules and Regulations of MSVA. (1)
3 (a) Custodian Agreement between State Street Bank and Trust
Company and the Previous Registrants. (1)
(b) Custodian Agreement between State Street Bank and Trust
Company and GMVA. (1)
(c) Custodian Agreement between State Street Bank and Trust
Company and TRVA. (1)
(d) Custodian Agreement between State Street Bank and Trust
Company and MSVA. (1)
4 (a) Investment Management Agreements between Massachusetts
Financial Services Company and the Previous Registrants. (1)
(b) Investment Management Agreement between Massachusetts
Financial Services Company and GMVA. (1)
(c) Investment Management Agreement between Massachusetts
Financial Services Company and TRVA. (1)
(d) Investment Management Agreement between Massachusetts
Financial Services Company and MSVA. (1)
5 Marketing Coordination and Administrative Services Agreement
between the Insurance Company, Massachusetts Financial Services
Company and Clarendon Insurance Agency, Inc. dated July 22, 1982.
(1)
<PAGE>
6 Compass 3 Flexible Payment Deferred Combination Variable and
Fixed Annuity Contract. (1)
7 Form of Application used with the Compass 3 Variable Annuity
Contract filed as Exhibit 6. (1)
8 Certificate of Incorporation and By-Laws of the Insurance
Company. (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. (1)
(b) Master Administrative Services Agreement, dated March 1,
1997, as amended (incorporated by reference to Massachusetts
Investors Growth Stock Fund (File Nos. 2-14677 and 811-859)
Post-Effective Amendment No. 65 filed with the SEC via EDGAR
on March 30, 1998.
12 Consent and Opinion of Counsel for each of Capital
Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, High
Yield Variable Account, Managed Sectors Variable Account,
Money Market Variable Account and Total Return Variable
Account; filed herewith.
13 Consent of Deloitte & Touche, LLP; filed herewith.
14 None.
15 Not Applicable.
16 Not Applicable.
17 Financial Data Schedules; filed herewith.
Powers of Attorney dated July 24, 1997 and April 17, 1998; filed
herewith.
- ---------------
(1) Incorporated by reference to matching exhibit numbers in Post-Effective
Amendment No. 23 to the Registrant's Registration Statement filed with the
SEC via EDGAR on March 6, 1998.
<PAGE>
Item 29. Directors and Officers of the Insurance Company
<TABLE>
<CAPTION>
Name & Principal Positions & Offices Positions & Offices
Business Address with Insurance Company with Registrants
---------------- ---------------------- ----------------
<S> <C> <C>
John D. McNeil Chairman and Director Chairman and Member,
150 King Street West Boards of Managers
Toronto, Ontario
Canada M5H 1J9
Donald A. Stewart President and Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
David D. Horn Director Member, Boards of
One Sun Life Executive Park Managers
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
M. Colyer Crum Director None
104 Westcliff 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 Park and Actuary
Wellesley Hills, MA 02181
Robert A. Bonner Vice President, None
One Sun Life Executive Park Individual Insurance
Wellesley Hills, MA 02181
<PAGE>
<CAPTION>
Name & Principal Positions & Offices Positions & Offices
Business Address with Insurance Company with Registrants
---------------- ---------------------- ----------------
<S> <C> <C>
S. Caesar Raboy Senior Vice President, None
One Sun Life Executive Park Deputy General Manager
Wellesley Hills, MA 02181 and Director
C. James Prieur Senior Vice President, None
One Sun Life Executive Park General Manager and
Wellesley Hills, MA 02181 Director
L. Brock Thomson Vice President None
One Sun Life Executive Park and Treasurer
Wellesley Hills, MA 02181
Margaret Sears Mead Assistant Vice President None
One Sun Life Executive Park and Secretary
Wellesley Hills, MA 02181
</TABLE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company
Registrants are separate accounts of Sun Life Assurance Company of Canada
(U.S.), a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.
Massachusetts Financial Services Company, a subsidiary of Sun Life Assurance
Company of Canada (U.S.) Financial Services Holdings, Inc., is the investment
adviser to the Registrants and Clarendon Insurance Agency, Inc., a wholly-owned
subsidiary of Sun Life Assurance Company of Canada (U.S.) 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:
<TABLE>
<CAPTION>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
<S> <C> <C>
Sun Life Assurance Company of Canada Canada 100%
Sun Life Assurance Company of Canada Delaware 100%
(U.S.) Operations Holdings, Inc.
<PAGE>
<CAPTION>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
<S> <C> <C>
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 of Canada (U.S.) Delaware 0%*
Holdings, Inc.
Sun Life of Canada (U.S.) Financial Delaware 0%*
Services Holdings, Inc.
Sun Life Assurance Company of Delaware 0%**
Canada (U.S.)
Sun Life Insurance and Annuity Company New York 0%****
of New York
Sun Life of Canada (U.S.) Delaware 0%****
Distributors, Inc.
Sun Benefit Services Company, Inc. Delaware 0%****
Sun Life of Canada (U.S.) Delaware 0%****
SPE 97-1, Inc.
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%******
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 Service Limited Bermuda 0%****
</TABLE>
- -----------------
* 100% of the issued and outstanding voting securities of Sun Life of
Canada (U.S.) Holdings, Inc. and Sun Life of Canada (U.S.) Financial
Services Holdings, Inc. is owned by Sun Life Assurance Company of
Canada - U.S. Operations Holdings, Inc.
** 100% of the issued and outstanding voting securities of Sun Life
Assurance Company of Canada (U.S.) is owned by Sun Life of Canada
(U.S.) Holdings, Inc.
*** 93.6% of the issued and outstanding voting securities of Massachusetts
Financial Services Company is owned by Sun Life of Canada (U.S.)
Financial Services Holdings, Inc.
<PAGE>
**** 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
Life of Canada (U.S.) Distributors, Inc., Sun Benefit Services Company,
Inc., Sun Capital Advisers, Inc., Sun Life Financial Services Limited,
Sun Life of Canada (U.S.) SPE 97-1, Inc., Clarendon Insurance Agency,
Inc., and Massachusetts Casualty Insurance Company is owned by Sun Life
Assurance Company of Canada (U.S.).
***** 100% of the issued and outstanding voting securities of MFS Service
Center, Inc., MFS International, Ltd., MFS Institutional Advisors,
Inc., MFS Fund Distributors, Inc., and MFS Retirement Services, Inc. is
owned by Massachusetts Financial Services Company.
****** 100% of the issued and outstanding voting securities of MFS/Sun Life
Series Trust is owned by separate accounts of Sun Life Assurance
Company of Canada (U.S.) and Sun Life Insurance and Annuity Company of
New York.
Omitted from the list are subsidiaries of Sun Life Assurance Company of
Canada which, considered in the aggregate, would not constitute a "significant
subsidiary" (as that term is defined in Rule 8b-2 under Section 8 of the
Investment Company Act of 1940) of Sun Life Assurance Company of Canada.
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)
------------------------------------------------
<TABLE>
<CAPTION>
Number of
Contract Owners*
--------------------------------
Qualified Non-Qualifiedu
Registrant Contracts Contracts
------------ --------- --------------
<S> <C> <C>
Money Market Variable Account 3,947 1,930
High Yield Variable Account 4,253 1,571
Capital Appreciation Variable Account 13,691 4,360
Government Securities Variable Account 4,792 1,648
World Governments Variable Account 3,062 1,169
Total Return Variable Account 12,639 3,858
Managed Sectors Variable Account 8,614 2,792
</TABLE>
- ----------------------
* 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
<PAGE>
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.
(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.
<PAGE>
(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."
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 (except the Vertex Funds mentioned below):
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 Strategic 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 three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income 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 Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS
<PAGE>
International Value Fund and MFS Asia Pacific 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 eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), 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.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the 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") (which has 26 series), 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 (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
<PAGE>
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 Funds (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 Governments 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, MFS
Meridian U.S. High Yield Fund and MFS Meridian 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.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
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 and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
<PAGE>
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 Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman, Chief
Executive Officer and President, Mr. Scott is a Senior Executive Vice President
and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas
J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke 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
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, 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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
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, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
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.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a 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.
<PAGE>
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
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 O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Meridian Funds
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 and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
<PAGE>
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the 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
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, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor 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
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, 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.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
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)
(b) Inapplicable.
(c) Inapplicable.
(d) Inapplicable.
<PAGE>
(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.
Item 34. Principal Underwriters
(a) Clarendon Insurance Agency, Inc., which is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada (U.S.), 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
Business Address* With Underwriter
----------------- ----------------
Jane M. Mancini President and Director
S. Caesar Raboy Director**
C. James Prieur Director**
Robert P. Vrolyk Director
L. Brock Thomson Vice President and Treasurer
Roy P. Creedon Secretary
Margaret Sears Mead Assistant Secretary
Donald E. Kaufman Vice President
Cynthia M. Orcutt Vice President
Laurie Lennox Vice President
Peter A. Marion Tax Officer
- -----------------
* The principal business address of all directors and officers of the
principal underwriter except Ms. Mancini is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181. The principal business address of Ms.
Mancini is One Copley Place, Boston, Massachusetts 02116.
** Messrs. Raboy and Prieur are Directors of Sun Life Assurance Company of
Canada (U.S.) and Sun Life Insurance and Annuity Company of New York.
(c) Inapplicable.
Item 35. Location of Accounts and Records
--------------------------------
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are maintained by Sun Life Assurance Company of Canada (U.S.), in whole or in
part, at its executive office at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181, at the offices of Massachusetts Financial Services Company
at 500 Boylston Street, Boston, Massachusetts 02116, at the offices of Sun Life
of Canada (U.S.) Retirement Products and Services Division at One Copley Place,
Boston, Massachusetts 02116, 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.
<PAGE>
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 27th day of April, 1998.
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 27th day of April, 1998.
SUN LIFE ASSURANCE COMPANY OF
CANADA (U.S.)
By:* JOHN D. MCNEIL
-------------------------------
Name: John D. McNeil
Title: Chairman
*Executed by Margaret Sears
Mead 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 and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
JOHN D. MCNEIL* Chairman and Member of the Boards of Managers
- ------------------------
John D. McNeil
SAMUEL ADAMS* Member of the Boards of Managers
- ------------------------
Samuel Adams
J. KERMIT BIRCHFIELD* Member of the Boards of Managers
- ------------------------
J. Kermit Birchfield
WILLIAM R. GUTOW* Member of the Boards of Managers
- ------------------------
William R. Gutow
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
</TABLE>
*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 and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
JOHN D. MCNEIL* Chairman and Director (Principal Executive Officer)
- ------------------------
John D. McNeil
DONALD A. STEWART* President and Director
- ------------------------
Donald A. Stewart
ROBERT P. VROLYK* Vice President and Actuary (Principal Financial &
- ------------------------ Accounting Officer)
Robert P. Vrolyk
Director
- ------------------------
Richard B. Bailey
M. COLYER CRUM* Director
- ------------------------
M. Colyer Crum
Director
- ------------------------
David D. Horn
Director
- ------------------------
John S. Lane
ANGUS A. MACNAUGHTON* Director
- ------------------------
Angus A. MacNaughton
C. JAMES PRIEUR* Director
- ------------------------
C. James Prieur
S. CAESAR RABOY* Director
- ------------------------
S. Caesar Raboy
</TABLE>
*By: MARGARET SEARS MEAD
--------------------------------
Name: Margaret Sears Mead
Executed by Margaret Sears Mead on
behalf of those indicated pursuant to
Powers of Attorney filed herewith.
<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
24th day of July, 1997.
<TABLE>
<CAPTION>
Signatures Title(s)
- ---------- --------
<S> <C>
SAMUEL ADAMS
- ----------------------- Manager
Samuel Adams
J. KERMIT BIRCHFIELD
- ----------------------- Manager
J. Kermit Birchfield
<PAGE>
WILLIAM R. GUTOW
- ----------------------- Manager
William R. Gutow
DAVID D. HORN
- ----------------------- Manager
David D. Horn
GARTH MARSTON
- ----------------------- Manager
Garth Marston
JOHN D. MCNEIL
- ----------------------- Chairman of the Board; Manager;
John D. McNeil and Principal Executive Officer
DERWYN PHILLIPS
- ----------------------- Manager
Derwyn Phillips
W. THOMAS LONDON
- ----------------------- Principal Financial and
W. Thomas London Accounting Officer
</TABLE>
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that S. Caesar Raboy, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead, Ruth S. Epstein and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any registration statement and amendments to registration
statements for Sun Life Assurance Company of Canada (U.S.) and its separate
accounts and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ S. CAESAR RABOY
---------------------
S. Caesar Raboy
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Robert P. Vrolyk, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead, Ruth S. Epstein and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any registration statement and amendments to registration
statements for Sun Life Assurance Company of Canada (U.S.) and its separate
accounts and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ ROBERT P. VROLYK
----------------------
Robert P. Vrolyk
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that C. James Prieur, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead, Ruth S. Epstein and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any registration statement and amendments to registration
statements for Sun Life Assurance Company of Canada (U.S.) and its separate
accounts and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ E. JAMES PRIEUR
--------------------
E. James Prieur
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that M. Colyer Crum, whose signature appears
below, constitutes and appoints Margaret E. Hankard, Margaret Sears Mead, Ruth
S. Epstein and David N. Brown, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
registration statement and amendments to registration statements for Sun Life
Assurance Company of Canada (U.S.) and its separate accounts and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ M. COLYER CRUM
--------------------
M. Colyer Crum
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Angus A. MacNaughton, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead, Ruth S. Epstein and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any registration statement and amendments to registration
statements for Sun Life Assurance Company of Canada (U.S.) and its separate
accounts and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ ANGUS A. MACNAUGHTON
-------------------------
Angus A. MacNaughton
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Donald A. Stewart, whose signature
appears below, constitutes and appoints Margaret E. Hankard, Margaret Sears
Mead, Ruth S. Epstein and David N. Brown, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any registration statement and amendments to registration
statements for Sun Life Assurance Company of Canada (U.S.) and its separate
accounts and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ DONALD A. STEWART
------------------------
Donald A. Stewart
April 17, 1998
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John D. McNeil, whose signature appears
below, constitutes and appoints Margaret E. Hankard, Margaret Sears Mead, Ruth
S. Epstein and David N. Brown, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
registration statement and amendments to registration statements for Sun Life
Assurance Company of Canada (U.S.) and its separate accounts and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ JOHN D. MCNEIL
------------------------
John D. McNeil
April 17, 1998
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
12 Consent and Opinion of Counsel for each of Capital Appreciation
Variable Account, Government Securities Variable Account, World
Governments Variable Account, High Yield Variable Account,
Managed Sectors Variable Account, Money Market Variable Account
and Total Return Variable Account.
13 Consent of Deloitte & Touche, LLP.
17 Financial Data Schedules.
</TABLE>
EXHIBIT NO. 99.B12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
Total Return Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 33-19626). In
giving this opinion, I have examined the Registration Statement and have
examined such other documents and reviewed such questions of Delaware law as I
considered necessary and appropriate. Based on such examination and review it is
my opinion that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
Money Market Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 2-79141). In giving
this opinion, I have examined the Registration Statement and have examined such
other documents and reviewed such questions of Delaware law as I considered
necessary and appropriate. Based on such examination and review it is my opinion
that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
Managed Sectors Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 33-19627). In
giving this opinion, I have examined the Registration Statement and have
examined such other documents and reviewed such questions of Delaware law as I
considered necessary and appropriate. Based on such examination and review it is
my opinion that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
High Yield Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 2-79142). In giving
this opinion, I have examined the Registration Statement and have examined such
other documents and reviewed such questions of Delaware law as I considered
necessary and appropriate. Based on such examination and review it is my opinion
that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
World Government Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 33-19629). In
giving this opinion, I have examined the Registration Statement and have
examined such other documents and reviewed such questions of Delaware law as I
considered necessary and appropriate. Based on such examination and review it is
my opinion that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
Government Securities Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 33-19630). In
giving this opinion, I have examined the Registration Statement and have
examined such other documents and reviewed such questions of Delaware law as I
considered necessary and appropriate. Based on such examination and review it is
my opinion that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
<PAGE>
EXHIBIT NO. 99.12
SUN LIFE OF CANADA (U.S.)
A member of Sun Financial Group
One Sun Life Executive Park, Wellesley Hills, MA 02181 (617) 237-6030
April 21, 1998
Sun Life Assurance Company of Canada (U.S.)
Capital Appreciation Variable Account (The "Account")
One Sun Life Executive Park
Wellesley Hills, MA 02181
Gentleman and Ladies:
I am the Assistant Vice President and Secretary of Sun Life Assurance Company of
Canada (U.S.) (the "Company"). I am rendering this opinion to you in connection
with the issuance of an indefinite amount of securities in the form of variable
annuity contracts (the "Contract") and registration of the Contracts with the
Securities and Exchange Commission under the Securities Act in 1933, as amended
and the Investment Company Act of 1940 on Form N-3 (File No. 33-19632). In
giving this opinion, I have examined the Registration Statement and have
examined such other documents and reviewed such questions of Delaware law as I
considered necessary and appropriate. Based on such examination and review it is
my opinion that:
1. The Company is a corporation duly organized and validly existing under the
laws of the State of Delaware.
2. The Account has been duly created and is existing as a separate account
established by the Company pursuant to the provisions of 18 Delaware Code
SS. 2932.
3. The Contracts when issued in the manner described in the Registration
Statement will be legal, validly issued and will represent binding
obligations of the Company and the Account under Delaware law. I express no
opinion as to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 or applicable State laws regulating the sale of the
Contracts.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to reference to this opinion under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ MARGARET SEARS MEAD
Margaret Sears Mead
Assistant Vice President and Secretary
Sun Life Assurance Company of Canada (U.S.)
MSM/slc
EXHIBIT NO. 99.B13
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment to
the Registration Statement on Form N-3 of Money Market Variable Account, High
Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, World Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account of our report dated
February 6, 1998 appearing in the annual report to contract owners for the year
ended December 31, 1997, and to the use of our report dated February 5, 1998
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, 1998
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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