As filed with the Securities and Exchange Commission on April 26, 1999
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. 14
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 26
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
GLOBAL 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> <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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM IN LOCATION IN
FORM N-3, PART A PROSPECTUS; CAPTION
- ---------------- -------------------
<S> <C> <C>
11 Purchases and Contract Value Purchase Payments and Contract Values during
Accumulation Period
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> <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
</TABLE>
- -------------------------
* In the Prospectus
<PAGE>
PROSPECTUS
May 1, 1999
COMPASS 3
Sun Life Assurance Company of Canada (U.S.) ("we" or the "Company") and
the variable accounts of the Company identified below offer the individual
flexible payment deferred annuity contracts described in this Prospectus (the
"Contracts").
You may choose among seven variable investment options and a fixed account
option. The variable options are the following variable accounts of the Company
(the "Variable Accounts"), each of which is advised by our affiliate,
Massachusetts Financial Services Company:
<TABLE>
<S> <C>
Money Market Variable Account ("MMVA") Global Governments Variable Account ("GGVA")
High Yield Variable Account ("HYVA") Total Return Variable Account ("TRVA")
Capital Appreciation Variable Account ("CAVA") Managed Sectors Variable Account ("MSVA")
Government Securities Variable Account ("GSVA")
</TABLE>
The fixed account option pays interest at a guaranteed fixed rate.
Please read this Prospectus carefully before investing and keep it for
future reference. It contains important information about the Compass 3 Annuity
and the Variable Accounts.
We have filed a Statement of Additional Information dated May 1, 1999 (the
"SAI") with the Securities and Exchange Commission (the "SEC"). This SAI is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 43 of this Prospectus. You may obtain a copy of the SAI without
charge by writing to our Annuity Service Mailing Address, c/o Sun Life
Assurance Company of Canada (U.S.) Retirement Products and Services, P.O. Box
1024, Boston, MA 02103 or by telephoning us at (800) 752-7215 or (617)
348-9600. In addition, the SEC maintains a website (http://www.sec.gov) that
contains this Prospectus, the SAI, materials incorporated by reference, and
other information regarding companies that file with the SEC.
The Contracts are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency. Although
MMVA seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in MMVA.
The SEC has not approved or disapproved these securities or passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
Any reference in this Prospectus to receipt by us means receipt at the
following address:
Annuity Service Mailing Address, c/o Sun Life Assurance Company of Canada
(U.S.) Retirement Products and Services, P.O. Box 1024, Boston, MA 02103
<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
Management of the Variable Accounts ....................................... 29
Purchase Payments and Contract Values During Accumulation Period .......... 30
Cash Withdrawals .......................................................... 32
Death Benefit ............................................................. 33
Contract Charges .......................................................... 35
Annuity Provisions ........................................................ 37
Other Contract Provisions ................................................. 39
Federal Tax Status ........................................................ 40
Year 2000 Compliance ...................................................... 42
Distribution of the Contracts ............................................. 43
Legal Proceedings ......................................................... 43
Owner Inquiries ........................................................... 43
Table of Contents for Statement of Additional Information ................. 43
Appendix A--Investment Techniques and Practices ........................... A-1
</TABLE>
DEFINITIONS
The Contract is a legal document that uses a number of specially defined
terms. We explain some of the terms that we use in this Prospectus in the
context where they arise, and others are self-explanatory. In addition, for
convenient reference, we have compiled a list of terms used in this Prospectus,
which appears below. If you come across a term that you do not understand,
please refer to this list of definitions for an explanation.
The terms "we" and "the Company" will be used to refer to Sun Life
Assurance Company of Canada (U.S.). We will use the term "you" to refer to the
Owner of the Contract.
Accumulation Account: An account we establish for the Contract to which we
credit net Purchase Payments in the form of Accumulation Units.
Accumulation Period: The period before the Annuity Commencement Date and during
the lifetime of the Annuitant. The Accumulation Period will also terminate when
you surrender your Contract.
Accumulation Unit: A unit of measure we use to calculate 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. You may name a Co-Annuitant only if both
(1) yours if a Non-Qualified Contract and (2) you are not the Annuitant. If you
properly name a Co-Annuitant, all Contract provisions based on the death of the
Annuitant (such as the death benefit provision) will be based on the date of
death of the last surviving Annuitant or Co-Annuitant. Furthermore, if you have
properly named a Co-Annuitant, you may choose one of them to become the sole
Annuitant on the Annuity Commencement Date, for the purpose of calculating and
paying annuity benefits. If you do not make this choice at least 30 days before
the Annuity Commencement Date, and both the Annuitant and Co-Annuitant are
living on the Annuity Commencement Date, the Co-Annuitant will become the sole
Annuitant.
Annuity Commencement Date: The date on which we are to make the first annuity
payment.
Annuity Unit: A unit of measure we use to calculate the amount of the second
and each subsequent Variable Annuity payment.
2
<PAGE>
Beneficiary: The person who has the right to the death benefit set forth in the
Contract.
Company: Sun Life Assurance Company of Canada (U.S.) (also referred to in this
Prospectus as "we").
Contract Years and Contract Anniversaries: The first Contract Year is the
period of 12 months plus a part of a month as measured from the date we issue
the Contract to the first day of the calendar month that follows the calendar
month of issue. All Contract Years and Contract Anniversaries thereafter are 12
month periods based upon the first day of the calendar month that follows the
calendar month of issue.
Due Proof of Death: An original certified copy of an official death
certificate, or an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to us.
Fixed Account: The Fixed Account consists of all assets of the Company other
than those allocated to a separate account of the Company.
Fixed Annuity: An annuity with payments that do not vary as to dollar amount.
Non-Qualified Contract: A Contract used in connection with a retirement plan
that 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").
The 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. In this
Prospectus, we refer to the Owner as "you".
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 or 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 you, or someone on your behalf, pay to us
as consideration for the benefits provided by the Contract.
Qualified Contract: A Contract used in connection with a retirement plan that
receives favorable federal income tax treatment under Sections 401, 403 or 408
of the Code.
Seven Year Anniversary: The seventh Contract Anniversary and each succeeding
Contract Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Contract Anniversaries.
Valuation Period: The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of these
values.
Variable Annuity: An annuity with payments that vary as to dollar amount in
relation to the investment performance of specified Variable Accounts.
We: Sun Life Assurance Company of Canada (U.S.).
You: The Owner of the Contract.
SYNOPSIS
You may allocate Purchase Payments to the Variable Accounts or to the
Fixed Account or both. 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 30). During the Accumulation Period you may, without charge,
transfer amounts among the Variable Accounts and between the Variable Accounts
and the Fixed Account, subject to certain conditions (see "Transfers" on page
31).
We do not deduct a sales charge from Purchase Payments; however, if you
make a cash withdrawal, we will, with certain exceptions, deduct a withdrawal
charge ranging from 6% to 0%. You may withdraw a portion of your Accumulation
Account each year before we impose the withdrawal charge, and after we have
held a Purchase Payment for seven years you may withdraw it without charge. We
do not impose
3
<PAGE>
a withdrawal charge upon annuitization or upon the transfers described above
(see "Cash Withdrawals" and "Withdrawal Charges" on pages 32 and 36,
respectively).
Special restrictions on withdrawals apply to Qualified Contracts,
including Contracts used with Tax-Sheltered Annuities established pursuant to
Section 403(b) of the Code. In addition, under certain circumstances,
withdrawals may result in tax penalties (see "Federal Tax Status" on page 40).
If the Annuitant dies before the Annuity Commencement Date, we will pay a
death benefit to your Beneficiary. If the Annuitant dies on or after the
Annuity Commencement Date, we will not pay a death benefit (unless the annuity
option elected provides for a death benefit) (see "Death Benefit" on page 33).
On each Contract Anniversary and on surrender of the Contract for full
value, we will deduct a contract maintenance charge of $30. After the Annuity
Commencement Date, we deduct this pro rata from each annuity payment we make
during the year (see "Contract Maintenance Charge" on page 35).
We also deduct a mortality and expense risk charge equal to an annual rate
of 1.25% of the daily net assets of the Variable Accounts attributable to the
Contracts. In addition, for the first seven Contract Years we deduct a
distribution expense charge equal to an annual rate of 0.15% of the daily net
assets of the Variable Accounts attributable to the Contracts. We do not deduct
the distribution expense charge after the seventh Contract Anniversary (see
"Mortality and Expense Risk Charge and Distribution Expense Charge" on page
35).
We also make a deduction from the Variable Accounts for the investment
management fees payable to the investment adviser of the Variable Accounts,
Massachusetts Financial Services Company ("MFS" or the "Adviser"). These fees
are based on the average daily net assets of each Variable Account (see
"Management of the Variable Accounts" and "Investment Management Fees" on pages
29 and 35, respectively).
We will deduct a charge for premium taxes payable to any governmental
entity (see "Premium Taxes" on page 37).
Annuity payments will begin on the Annuity Commencement Date. You select
the Annuity Commencement Date, frequency of payments, and the annuity option
(see "Annuity Provisions" on page 37).
If you are not satisfied with the Contract, you may return it to us at our
Annuity Service Mailing Address within ten days after we deliver the Contract
to you. When we receive the returned Contract, we will cancel it and refund to
you the value of the Contract's Accumulation Account at the end of the
Valuation Period during which we received the returned Contract. However, if
applicable state or federal law requires, we will refund the full amount of all
Purchase Payments you have made. State law may also require us to give you a
longer "free look" period or allow you to return your Contract to your sales
representative.
EXPENSE SUMMARY
The purpose of the following table and Examples is to help you understand
the costs and expenses that you will bear, directly and indirectly, under a
Contract. The table reflects expenses of the Variable Accounts attributable to
the Contracts. 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 Global 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% 0.07% 0.07% 0.33% 0.09%
Total Annual Expenses ................. 1.99% 2.26% 2.17% 2.02% 2.22% 2.48% 2.24%
</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 $232
High Yield Variable Account ..................... 77 116 157 260
Capital Appreciation Variable Account ........... 76 113 152 250
Government Securities Variable Account .......... 75 108 145 235
Global Governments Variable Account ............. 79 122 168 282
Managed Sectors Variable Account ................ 77 115 156 257
Total Return Variable Account ................... 77 114 155 255
</TABLE>
If you do not surrender your Contract, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Variable Account ................... $20 $62 $107 $232
High Yield Variable Account ..................... 23 71 121 260
Capital Appreciation Variable Account ........... 22 68 116 250
Government Securities Variable Account .......... 21 63 109 235
Global Governments Variable Account ............. 25 77 132 282
Managed Sectors Variable Account ................ 23 70 120 257
Total Return Variable Account ................... 23 69 119 255
</TABLE>
The Example should not be considered a representation of past or future
expenses, and actual expenses may be greater or lower than those shown.
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,
1998 1997 1996 1995#
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ......... $ 15.1500 $ 12.4143 $ 10.3053 $ 10.0000
--------- --------- --------- ----------
Investment income ............ $ 0.0850 $ 0.0914 $ 0.0790 $ 0.0196
Expenses ..................... 0.3421 0.2935 0.2370 0.0517
--------- --------- --------- ----------
Net investment loss ......... $ (0.2571) $ (0.2021) $ (0.1580) $ (0.0321)
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ................ 4.3791 2.9378 2.2670 0.3374
--------- --------- --------- ----------
Net increase (decrease) in
unit value .................. $ 4.1220 $ 2.7357 $ 2.109 $ 0.3053
--------- --------- --------- ----------
Unit value:
Net asset value -- end of
period ...................... $ 19.2720 $ 15.1500 $ 12.4143 $ 10.3053
========= ========= ========= ==========
Ratios (to average net assets):
Expenses+## .................. 0.77% 0.77% 0.78% 0.80%++
Net investment loss .......... (1.55)% (1.45)% (1.41)% (1.02)%++
Portfolio turnover ............ 78% 60% 66% 96%
Number of units outstanding
at end of year (000
omitted) ..................... 5,055 3,971 2,494 955
<CAPTION>
Capital Appreciation Variable Account
------------------------------------------------------------------------------------
Compass 3
------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ......... $ 36.7764 $ 30.1803 $ 25.0907 $ 18.6531 $ 21.9341
--------- --------- --------- --------- ---------
Investment income ............ $ 0.2031 $ 0.2107 $ 0.1893 $ 0.2402 $ 0.2870
Expenses ..................... 0.8753 0.7383 0.6053 0.4847 0.4421
--------- --------- --------- --------- ---------
Net investment loss ......... $ (0.6722) $ (0.5276) $ (0.4160) $ (0.2445) $ (0.1551)
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ................ 10.6087 7.1237 5.5056 6.6821 (3.1259)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................. $ 9.9365 $ 6.5961 $ 5.0896 $ 6.4376 $ (3.2810)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ...................... $ 46.7129 $ 36.7764 $ 30.1803 $ 25.0907 $ 18.6531
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................. 0.77% 0.77% 0.78% 0.80% 0.79%
Net investment loss .......... (1.55)% (1.45)% (1.41)% (1.02)% (0.69)%
Portfolio turnover ............ 78% 60% 66% 96% 95%
Number of units outstanding
at end of year (000
omitted) ..................... 2,452 2,953 3,721 4,272 4,686
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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,
1998 1997 1996 1995#
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 11.2258 $ 10.4604 $ 10.4172 $ 10.0000
--------- --------- --------- -----------
Investment income .............. $ 0.7608 $ 0.7931 $ 0.7931 $ 0.1868
Expenses ....................... 0.2176 0.2102 0.1966 0.0478
--------- --------- --------- -----------
Net investment income ......... $ 0.5432 $ 0.5829 $ 0.5965 $ 0.1390
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 0.2294 0.1825 ( 0.5533) 0.2782
--------- --------- --------- -----------
Net increase (decrease) in
unit value .................... $ 0.7726 $ 0.7654 $ 0.0432 $ 0.4172
--------- --------- --------- -----------
Unit value:
Net asset value -- end of
period ........................ $ 11.9984 $ 11.2258 $ 10.4604 $ 10.4172
========= ========= ========= ===========
Ratios (to average net assets):
Expenses+## .................... 0.62% 0.66% 0.62% 0.63%++
Net investment income .......... 4.61% 5.31% 5.53% 5.51%++
Portfolio turnover .............. 137% 168% 39% 80%
Number of units
outstanding at end of
year (000 omitted) ............. 1,532 1,319 1,079 608
<CAPTION>
Government Securities Variable Account
-----------------------------------------------------------------
Compass 3
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 19.3693 $ 18.0755 $ 18.0278 $ 15.5227 $ 16.0387
--------- --------- --------- --------- ---------
Investment income .............. $ 1.3267 $ 1.3696 $ 1.3222 $ 1.2529 $ 1.1028
Expenses ....................... 0.4061 0.3848 0.3586 0.3385 0.3146
--------- --------- --------- --------- ---------
Net investment income ......... $ 0.9206 $ 0.9848 $ 0.9636 $ 0.9144 $ 0.7882
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... $ 0.3818 0.3090 ( 0.9159) 1.5907 ( 1.3042)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ 1.3024 $ 1.2938 $ 0.0477 $ 2.5051 $ (0.5160)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ........................ $ 20.6717 $ 19.3693 $ 18.0755 $ 18.0278 $ 15.5227
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.62% 0.66% 0.62% 0.63% 0.61%
Net investment income .......... 4.61% 5.31% 5.53% 5.51% 5.09%
Portfolio turnover .............. 137% 169% 39% 80% 41%
Number of units
outstanding at end of
year (000 omitted) ............. 851 1,129 1,549 1,888 2,922
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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,
1998 1997 1996 1995#
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 12.7936 $ 11.3852 $ 10.2377 $ 10.0000
--------- --------- --------- -----------
Investment income .............. $ 1.1776 $ 1.1903 $ 0.9246 $ 0.3803
Expenses ....................... 0.2556 0.2584 0.2033 0.0765
--------- --------- --------- -----------
Net investment income ......... $ 0.9220 $ 0.9319 $ 0.7213 $ 0.3038
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... (1.1790) 0.4765 0.4262 (0.0661)
--------- --------- --------- -----------
Net increase (decrease) in
unit value .................... $ (0.2570) $ 1.4084 $ 1.1475 $ 0.2377
--------- --------- --------- -----------
Unit value:
Net asset value -- end of
period ........................ $ 12.5366 $ 12.7936 $ 11.3852 $ 10.2377
========= ========= ========= ===========
Ratios (to average net assets):
Expenses+## .................... 0.86% 0.86% 0.88% 0.88%++
Net investment income .......... 7.66% 7.47% 7.59% 7.91%++
Portfolio turnover .............. 174% 164% 108% 88%
Number of units
outstanding at end of
year (000 omitted) ............. 971 2,042 1,819 1,368
<CAPTION>
High Yield Variable Account
-----------------------------------------------------------------
Compass 3
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 24.1529 $ 21.5259 $ 19.3854 $ 16.8283 $ 17.3543
--------- --------- --------- --------- ---------
Investment income .............. $ 2.3041 $ 2.2363 $ 1.9450 $ 1.8912 $ 1.5336
Expenses ....................... 0.5257 0.5196 0.4432 0.4253 0.3711
--------- --------- --------- --------- ---------
Net investment income ......... $ 1.7784 $ 1.7167 $ 1.5018 $ 1.4659 $ 1.1625
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... (2.2988) 0.9103 0.6387 1.0912 (1.6885)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ (0.5204) $ 2.6270 $ 2.1405 $ 2.5571 $ (0.5260)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ........................ $ 23.6325 $ 24.1529 $ 21.5259 $ 19.3854 $ 16.8283
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.86% 0.86% 0.88% 0.88% 0.91%
Net investment income .......... 7.66% 7.47% 7.59% 7.91% 7.41%
Portfolio turnover .............. 174% 164% 108% 88% 77%
Number of units
outstanding at end of
year (000 omitted) ............. 665 1,209 1,438 1,913 2,506
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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,
1998 1997 1996 1995#
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 14.4652 $ 11.6449 $ 9.9892 $ 10.0000
--------- --------- --------- ----------
Investment income .............. $ 0.0880 $ 0.0831 $ 0.0873 $ 0.0231
Expenses ....................... 0.3308 0.3015 0.2287 0.0539
--------- --------- --------- ----------
Net investment loss ........... $ (0.2428) $ (0.2184) $ (0.1414) $ (0.0308)
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 1.8453 3.0387 1.7971 0.0200
--------- --------- --------- ----------
Net increase (decrease) in
unit value .................... $ 1.6025 $ 2.8203 $ 1.6557 $ (0.0108)
--------- --------- --------- ----------
Unit value:
Net asset value -- end of
period ........................ $ 16.0677 $ 14.4652 $ 11.6449 $ 9.9892
========= ========= ========= ==========
Ratios (to average net assets):
Expenses+## .................... 0.84% 0.85% 0.85% 0.87%++
Net investment loss ............ (1.59)% (1.60)% (1.36)% (1.07)%++
Portfolio turnover .............. 159% 103% 64% 115%
Number of units
outstanding at end of
year (000 omitted) ............. 2,542 2,156 1,204 418
<CAPTION>
Managed Sectors Variable Account
-----------------------------------------------------------------------------
Compass 3
-----------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 45.0995 $ 36.3604 $ 31.2371 $ 23.8258 $ 24.6849
--------- --------- --------- --------- ---------
Investment income .............. $ 0.2543 $ 0.2328 $ 0.2830 $ 0.3259 $ 0.3031
Expenses ....................... 1.0369 0.9264 0.7511 0.6452 0.5452
--------- --------- --------- --------- ---------
Net investment loss ........... $ (0.7826) $ (0.6936) $ (0.4681) $ (0.3193) $ (0.2421)
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 5.7044 9.4327 5.5914 7.7306 ( 0.6170)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ 4.9218 $ 8.7391 $ 5.1233 $ 7.4113 $ (0.8591)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ........................ $ 50.0213 $ 45.0995 $ 36.3604 $ 31.2371 $ 23.8258
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.84% 0.85% 0.85% 0.87% 0.90%
Net investment loss ............ (1.59)% (1.60)% (1.36)% (1.07)% (0.97)%
Portfolio turnover .............. 159% 103% 64% 115% 111%
Number of units
outstanding at end of
year (000 omitted) ............. 988 1,258 1,552 1,729 1,810
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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,
1998 1997 1996 1995#
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ............... $ 10.8587 $ 10.4654 $ 10.0997 $ 10.0000
--------- --------- --------- -----------
Investment income .................. $ 0.6068 $ 0.5838 $ 0.5993 $ 0.1358
Expenses ........................... 0.2062 0.1905 0.2336 0.0361
--------- --------- --------- -----------
Net investment income ............. $ 0.4006 $ 0.3933 $ 0.3657 $ 0.0997
--------- --------- --------- -----------
Net increase in unit value ......... $ 0.4006 $ 0.3933 $ 0.3657 $ 0.0997
--------- --------- --------- -----------
Unit value:
Net asset value -- end of
period ............................ $ 11.2593 $ 10.8587 $ 10.4654 $ 10.0997
========= ========= ========= ===========
Ratios (to average net assets):
Expenses+## ........................ 0.59% 0.59% 0.58% 0.58%++
Net investment income .............. 3.58% 3.56% 3.49% 4.00%++
Number of units
outstanding at end of
year (000 omitted) ................. 3,141 1,104 897 561
<CAPTION>
Money Market Variable Account
-----------------------------------------------------------------
Compass 3
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ............... $ 14.6369 $ 14.1277 $ 13.6545 $ 13.1291 $ 12.8359
--------- --------- --------- --------- ---------
Investment income .................. $ 0.8199 $ 0.7782 $ 0.7437 $ 0.7885 $ 0.5688
Expenses ........................... 0.3024 0.2690 0.2705 0.2631 0.2756
--------- --------- --------- --------- ---------
Net investment income ............. $ 0.5175 $ 0.5092 $ 0.4732 $ 0.5254 $ 0.2932
--------- --------- --------- --------- ---------
Net increase in unit value ......... $ 0.5175 $ 0.5092 $ 0.4732 $ 0.5254 $ 0.2932
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ............................ $ 15.1544 $ 14.6369 $ 14.1277 $ 13.6545 $ 13.1291
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## ........................ 0.59% 0.59% 0.58% 0.58% 0.58%
Net investment income .............. 3.58% 3.56% 3.49% 4.00% 2.37%
Number of units
outstanding at end of
year (000 omitted) ................. 1,370 1,160 1,930 3,929 4,599
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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,
1998 1997 1996 1995#
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 14.2173 $ 11.8074 $ 10.4938 $ 10.0000
--------- --------- --------- -----------
Investment income .............. $ 0.6344 $ 0.5718 $ 0.5280 $ 0.1247
Expenses ....................... 0.3107 0.2715 0.2317 0.0525
--------- --------- --------- -----------
Net investment income ......... $ 0.3237 $ 0.3003 $ 0.2963 $ 0.0722
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 1.1350 2.1096 1.0173 0.4216
--------- --------- --------- -----------
Net increase (decrease) in
unit value .................... $ 1.4587 $ 2.4099 $ 1.3136 $ 0.4938
--------- --------- --------- -----------
Unit value:
Net asset value -- end of
period ........................ $ 15.6760 $ 14.2173 $ 11.8074 $ 10.4938
========= ========= ========= ===========
Ratios (to average net assets):
Expenses+## .................... 0.82% 0.83% 0.82% 0.83%++
Net investment income .......... 2.10% 2.32% 2.59% 2.99%++
Portfolio turnover .............. 125% 111% 140% 105%
Number of units
outstanding at end of
year (000 omitted) ............. 6,702 5,260 3,717 1,637
<CAPTION>
Total Return Variable Account
-----------------------------------------------------------------
Compass 3
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 29.7131 $ 24.7133 $ 21.9966 $ 17.2937 $ 17.8462
--------- --------- --------- --------- ---------
Investment income .............. $ 1.3028 $ 1.1487 $ 1.0817 $ 1.0122 $ 0.8371
Expenses ....................... 0.6835 0.5870 0.5068 0.4358 0.3904
--------- --------- --------- --------- ---------
Net investment income ......... $ 0.6193 $ 0.5617 $ 0.5749 $ 0.5764 $ 0.4467
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 2.3807 4.4381 2.1418 4.1265 ( 0.9992)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ 3.0000 $ 4.9998 $ 2.7167 $ 4.7029 $ (0.5525)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ........................ $ 32.7131 $ 29.7131 $ 24.7133 $ 21.9966 $ 17.2937
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 0.82% 0.83% 0.82% 0.83% 0.82%
Net investment income .......... 2.10% 2.32% 2.59% 2.99% 2.60%
Portfolio turnover .............. 125% 111% 140% 105% 63%
Number of units
outstanding at end of
year (000 omitted) ............. 2,943 4,024 5,177 6,322 7,349
</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.
++ Annualized.
# For the period from May 1, 1995, (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
11
<PAGE>
PER UNIT AND OTHER DATA--continued
<TABLE>
<CAPTION>
Global Governments Variable Account
------------------------------------------------------------
Compass 3--Level 2
------------------------------------------------------------
Year Ended December 31, Period Ended
----------------------------------------- December 31,
1998 1997 1996 1995#
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 10.4553 $ 10.6836 $ 10.3582 $ 10.0000
--------- --------- --------- -----------
Investment income .............. $ 0.6269 $ 0.6710 $ 0.7308 $ 0.1819
Expenses ....................... 0.2531 0.2440 0.2391 0.0554
--------- --------- --------- -----------
Net investment income ......... $ 0.3738 $ 0.4270 $ 0.4917 $ 0.1265
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 1.0848 (0.6553) ( 0.1663) 0.2317
--------- --------- --------- -----------
Net increase (decrease) in
unit value .................... $ 1.4586 $ (0.2283) $ 0.3254 $ 0.3582
--------- --------- --------- -----------
Unit value:
Net asset value -- end of
period ........................ $ 11.9139 $ 10.4553 $ 10.6836 $ 10.3582
========= ========= ========= ===========
Ratios (to average net assets):
Expenses+## .................... 1.08% 1.05% 1.00% 1.00%++
Net investment income .......... 3.33% 3.95% 4.54% 5.25%++
Portfolio turnover .............. 306% 338% 397% 330%
Number of units
outstanding at end of
year (000 omitted) ............. 695 670 563 316
<CAPTION>
Global Governments Variable Account
-----------------------------------------------------------------
Compass 3
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per unit data:*
Net asset value --
beginning of period ........... $ 18.0103 $ 18.4308 $ 17.8962 $ 15.6705 $ 16.7563
--------- --------- --------- --------- ---------
Investment income .............. $ 1.0464 $ 1.1298 $ 1.2367 $ 1.3045 $ 1.0666
Expenses ....................... 0.4279 0.4390 0.4322 0.4086 0.3760
--------- --------- --------- --------- ---------
Net investment income ......... $ 0.6185 $ 0.6908 $ 0.8045 $ 0.8959 $ 0.6906
Net realized and unrealized
gain (loss) on
investments and foreign
currency transactions ......... 1.8636 (1.1113) (0.2699) 1.3298 (1.7764)
--------- --------- --------- --------- ---------
Net increase (decrease) in
unit value .................... $ 2.4821 $ (0.4205) $ 0.5346 $ 2.2257 $ (1.0858)
--------- --------- --------- --------- ---------
Unit value:
Net asset value -- end of
period ........................ $ 20.4924 $ 18.0103 $ 18.4308 $ 17.8962 $ 15.6705
========= ========= ========= ========= =========
Ratios (to average net assets):
Expenses+## .................... 1.08% 1.05% 1.00% 1.00% 1.00%
Net investment income .......... 3.33% 3.95% 4.54% 5.25% 4.45%
Portfolio turnover .............. 306% 338% 397% 330% 256%
Number of units
outstanding at end of
year (000 omitted) ............. 290 500 789 1,021 1,321
</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.
++ Annualized.
# For the period from May 1, 1995 (commencement of Level 2 Units) through
December 31, 1995.
## The Variable Account has an expense offset arrangement which reduces the
Variable Account's custodian fee based upon the amount of cash maintained
by the Variable Account with its custodian and dividend disbursing agent.
For years ending on or after December 31, 1995, the Variable Account's
expenses are calculated without reduction for this expense offset
arrangement.
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.) is a stock life insurance
company incorporated under the laws of Delaware on January 12, 1970. Our
Executive Office is located at One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada, 150 King Street West, Toronto, Ontario, Canada, a mutual life
insurance company incorporated in Canada in 1865.
The Variable Accounts
MMVA, HYVA and CAVA were established as separate accounts of the Company
on July 22, 1982 pursuant to a resolution of its Board of Directors. GSVA was
established on April 20, 1984. GGVA, TRVA and MSVA were established on January
4, 1988. Each of the Variable Accounts meets the definition of a separate
account under federal securities laws. 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.
12
<PAGE>
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, GGVA and MSVA are registered as
open-end, non-diversified management investment companies. As non-diversified
companies, HYVA, GGVA and MSVA may invest a relatively high percentage of their
assets in a small number of issuers.
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").
Each of these Variable Accounts is managed by MFS and is described below.
Investment strategies which are common to all Variable Accounts are described
under the caption "Certain Common Investment Techniques" below.
- --------------------------------
1. MONEY MARKET VARIABLE ACCOUNT
- --------------------------------
[arrow] Investment Objective
MMVA's investment objective is to 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.
[arrow] How MMVA Intends to Achieve Its Objective
MMVA is a money market fund, meaning it tries to maintain a share price of
$1.00 while paying - income to its shareholders. MMVA will invest
exclusively in the following types of U.S. dollar denominated money market
instruments:
o Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities;
o 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, and bankers' acceptances issued by domestic branches of any such
bank;
o Commercial paper which at the date of investment is rated A-1 by Standard
& Poor's or P-1 by Moody's; and
o Repurchase agreements collateralized by U.S. Government securities.
The average maturity of the investments in the series may not exceed 90
days. MMVA will invest only in corporate obligations which have a maturity
when purchased of less than 13 months.
[arrow] Principal Risks
The principal risks of investing in MMVA and the circumstances reasonably
likely to cause the value - of your investment in MMVA to decline are
described below.
o Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in a lower
yield than would be available from debt obligations of a lower quality or
longer term. Although MMVA seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in MMVA.
13
<PAGE>
o Foreign Markets Risk: Although MMVA's investments in foreign issuers
involve relatively low credit risk, an investment in MMVA may involve a
greater degree of risk than an investment in a fund that invests only in
debt obligations of U.S. domestic issuers. Investing in foreign
securities involves risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject:
[arrow] These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
- ------------------------------
2. HIGH YIELD VARIABLE ACCOUNT
- ------------------------------
[arrow] Investment Objective
HYVA's investment objective is to provide high current income and capital
appreciation by investing - primarily in fixed income securities of U.S.
and foreign issuers which may be in the lower rated categories or unrated
(commonly known as junk bonds) and may involve equity features.
[arrow] How HYVA Intends to Achieve Its Objective
HYVA invests, under normal market conditions, at least 80% of its total
assets in high income fixed income - securities. Fixed income securities
offering the high current income sought by HYVA generally are lower rated
bonds. These bonds, commonly known as junk bonds, are assigned lower credit
ratings by credit rating agencies or are unrated and considered by MFS to
be comparable to lower rated bonds.
While HYVA focuses its investments on bonds issued by corporations or
similar entitles, it may invest in all types of debt securities. HYVA may
invest in foreign securities (including emerging markets securities), and
may have exposure to foreign currencies through its investment in these
securities, its direct holdings of foreign currencies or through its use of
foreign currency contracts for the purchase or sale of a fixed quantity of
foreign currency at a future date.
In selecting fixed income investments for HYVA, MFS considers the views of
its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented
funds (including HYVA) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets. In assessing
the credit quality of fixed income securities, MFS does not rely solely on
the credit ratings assigned by credit rating agencies, but rather performs
its own independent credit analysis.
HYVA is a non-diversified mutual fund. This means that HYVA may invest a
relatively high percentage of its assets in a small number of issuers.
[arrow] Principal Risks
The principal risks of investing in HYVA and the circumstances reasonably
likely to cause the value - of your investment in HYVA to decline are
described below. As with any non-money market mutual fund, the share price
of HYVA will change daily based on market conditions and other factors.
14
<PAGE>
The principal risks of investing in HYVA are:
o Allocation Risk: HYVA will allocate its investments among fixed income
markets based upon judgments made by MFS. HYVA could miss attractive
investment opportunities by underweighting markets where there are
significant returns, and could lose value by overweighting markets where
there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in HYVA's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in HYVA's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of HYVA's fixed income investments will
affect the volatility of HYVA's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by HYVA may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on HYVA's performance.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds are subject to a substantially
higher degree of credit risk than higher rated bonds. During
recessions, a high percentage of issuers of junk bonds may
default on payments of principal and interest. The price of a
junk bond may therefore fluctuate drastically due to bad news
about the issuer or the economy in general.
[arrow] Higher Liquidity Risk: During recessions and periods of broad
market declines, junk bonds could become less liquid, meaning
that they will be harder to value or sell at a fair price.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
[arrow] These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
[arrow] Foreign securities often trade in currencies other than the U.S.
dollar, and HYVA may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect HYVA's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An
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<PAGE>
increase in the strength of the U.S. dollar relative to these other
currencies may cause the value of HYVA to decline. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in HYVA's foreign currency holdings. By entering into
forward foreign currency exchange contracts, HYVA may be required to
forego the benefits of advantageous changes in exchange rates and, in
the case of forward contracts entered into for the purpose of
increasing return, HYVA may sustain losses which will reduce its
gross income. Forward foreign currency exchange contracts involve the
risk that the party with which HYVA enters the contract may fail to
perform its obligations to HYVA.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with
low per capita income. Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with more
mature economies. These markets often have provided
significantly higher or lower rates of return than developed
markets, and significantly greater risks, to investors.
o Non-Diversified Status Risk: Because HYVA may invest a higher percentage
of its assets in a small number of issuers, HYVA is more susceptible to
any single economic, political or regulatory event affecting those
issuers than is a diversified fund.
- ----------------------------------------
3. CAPITAL APPRECIATION VARIABLE ACCOUNT
- ----------------------------------------
[arrow] Investment Objective
CAVA's investment objective is to maximize capital appreciation by
investing in securities of all types - with a major emphasis on common
stocks.
[arrow] How CAVA Intends to Achieve Its Objective
CAVA invests, under normal market conditions, at least 65% of its total
assets in common stocks - and related securities, such as preferred stocks,
convertible securities and depositary receipts, of companies which MFS
believes possess above-average growth opportunities. CAVA also invests in
fixed income securities when relative values or economic conditions make
these securities attractive. CAVA's investments may include securities
listed on a securities exchange or traded in the over-the-counter markets.
Growth companies are companies that MFS considers well-run and poised for
growth. MFS looks particularly for companies which demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream
o A solid industry position, where there is
[arrow] potential for high profit margins
[arrow] substantial barriers to new entry in the industry
o A strong management team with a clearly defined strategy
o A catalyst that may accelerate growth.
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MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as CAVA) it advises. This means
that securities are selected based upon fundamental analysis performed by
CAVA's portfolio manager and MFS' large group of equity research analysts.
CAVA may invest in foreign securities (including emerging market
securities) and may have exposure to foreign currencies through its
investment in these securities, its direct holdings of foreign currencies
or through its use of foreign currency exchange contracts for the purchase
or sale of a fixed quantity of foreign currency at a future date.
[arrow] Principal Risks
The principal risks of investing in CAVA and the circumstances reasonably
likely to cause the value - of your investment in CAVA to decline are
described below. As with any non-money market mutual fund, the share price
of CAVA will change daily based on market conditions and other factors.
The principal risks of investing in CAVA are:
o Market Risk: This is the risk that the price of a security held by CAVA
will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Growth Companies Risk: Prices of growth company securities held by CAVA
may fall to a greater extent than the overall equity markets (e.g., as
represented by the Standard and Poor's Composite 500 Index) due to
changing economic, political or market conditions or disappointing growth
company earnings results.
o Over-the-Counter Risk: Equity securities and fixed income securities
purchased by CAVA may be traded in the over-the-counter (OTC) market
rather than on an organized exchange. Many OTC securities trade less
frequently and in smaller volume than exchange-traded securities. OTC
investments are therefore subject to liquidity risk, meaning the
securities are harder to value or sell at a fair price. Companies that
issue OTC securities may have limited product lines, markets or financial
resources compared to companies that issue exchange-traded securities.
The value of OTC securities may be more volatile than exchange-traded
securities. These factors could have a negative impact on the value of an
OTC security and therefore on CAVA's performance.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
[arrow] These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
[arrow] Foreign securities often trade in currencies other than the U.S.
dollar. Changes in currency exchange rates will affect CAVA's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase
in the strength of the U.S. dollar relative to these other
currencies may cause the value of CAVA to decline. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in CAVA's foreign currency
holdings.
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<PAGE>
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with low
per capita income. Investments in emerging markets securities involve all
of the risks of investments in foreign securities, and also have
additional risks:
[arrow] All of the risks of investing in foreign securities are heightened
by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more volatile
than the markets of developed countries with more mature
economies. These markets often have provided significantly
higher or lower rates of return than developed markets, and
significantly greater risks, to investors.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in CAVA's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in CAVA's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity because
changes in interest rates are increasingly difficult to predict over
longer periods of time. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income securities with
shorter maturities. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower returns than
fixed income securities with longer maturities. The average maturity of
CAVA's fixed income investments will affect the volatility of CAVA's
share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
- -----------------------------------------
4. GOVERNMENT SECURITIES VARIABLE ACCOUNT
- -----------------------------------------
[arrow] Investment Objective
GSVA's investment objective is to provide current income and preservation
of capital by investing - in U.S. Government securities.
[arrow] How GSVA Intends to Achieve Its Objective
GSVA invests, under normal market conditions, at least 80% of its total
assets in U.S. Government - securities. These securities include:
o 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 U.S. Government;
and
o Obligations issued or guaranteed by U.S. Government agencies, authorities
or instrumentalities, some of which are
[arrow] backed by the full faith and credit of the U.S. Treasury; for
example, direct pass-through certificates of the Government
National Mortgage Association;
[arrow] supported by the right of the issuer to borrow from the U.S.
Government; for example, obligations of Federal Home Loan Banks;
[arrow] backed only by the credit of the issuer itself; for example,
obligations of the Student Loan Marketing Association; and
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<PAGE>
[arrow] supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; for example, obligations
of the Federal National Mortgage Association (no assurance can
be given that the U.S. Government will provide financial support
to these entities because it is not obligated by law, in certain
instances, to do so).
In selecting fixed income investments for GSVA, MFS considers the views of
its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented
funds (including GSVA) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets.
[arrow] Principal Risks
The principal risks of investing in GSVA and the circumstances reasonably
likely to cause the value - of your investment in GSVA to decline are
described below. As with any non-money market mutual fund, the share price
of GSVA will change daily based on market conditions and other factors.
The principal risks of investing in GSVA are:
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in GSVA's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in GSVA's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of GSVA's fixed income investments will
affect the volatility of GSVA's share price.
o Mortgage-Backed Securities:
[arrow] Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed maturity,
and their expected maturities may vary when interest rates rise or
fall.
- When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on GSVA's
mortgage-backed securities will result in an unforeseen loss of
interest income to GSVA as GSVA may be required to reinvest
assets at a lower interest rate. Because prepayments increase
when interest rates fall, the price of mortgage-backed securities
does not increase as much as other fixed income securities when
interest rates fall.
- When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates rise.
+ Collateralized Mortgage Obligations: GSVA may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, GSVA may manage the
prepayment risk of mortgage-backed securities. However, prepayments
may cause the actual maturity of a CMO to be substantially shorter
than its stated maturity.
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<PAGE>
[arrow] Credit Risk: As with any fixed income security, mortgage-backed
securities are subject to the risk that the issuer will default
on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed
securities in the case of default. However, the U.S. Government
or its agencies will guarantee the payment of principal and
interest on the mortgage-backed securities purchased by GSVA.
- --------------------------------
5. TOTAL RETURN VARIABLE ACCOUNT
- --------------------------------
[arrow] Investment Objective
TRVA's main investment objective is to provide above-average income
(compared to a portfolio - invested entirely in equity securities)
consistent with the prudent employment of capital. Its secondary objective
is to provide reasonable opportunity for growth of capital and income.
[arrow] How TRVA Intends to Achieve Its Objective
TRVA is a "balanced fund," and invests in a combination of equity and fixed
income securities. Under normal market conditions, TRVA invests:
o At least 40%, but not more than 75%, of its net assets in common stocks
and related securities (referred to as equity securities), such as
preferred stock; bonds, warrants or rights convertible into stock; and
depositary receipts for those securities.
o At least 25% of its net assets in non-convertible fixed income
securities.
TRVA may vary the percentage of its assets invested in any one type of
security (within the limits described above) in accordance with MFS's
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values.
Equity Investments. MFS uses a bottom-up, as opposed to a top-down,
investment style in managing the equity-oriented funds (including the
equity portion of TRVA) it advises. This means that securities are selected
based upon fundamental analysis performed by TRVA's portfolio manager and
MFS' large group of equity research analysts.
While TRVA may invest in all types of equity securities, MFS generally
seeks to purchase for TRVA equity securities of companies that MFS believes
are undervalued in the market relative to their long-term potential. The
equity securities of these companies may be undervalued because:
o They are viewed by MFS as being temporarily out of favor in the market
due to
[arrow] a decline in the market,
[arrow] poor economic conditions,
[arrow] developments that have affected or may affect the issuer of the
securities or the issuer's industry.
o The market has overlooked them.
Undervalued equity securities generally have low price-to-book,
price-to-sales and/or price-to-earnings ratios. TRVA focuses on undervalued
equity securities issued by companies with relatively large market
capitalizations (i.e., market capitalizations of $5 billion or more).
As noted above, TRVA's investments in equity securities include convertible
securities. A convertible security is a security that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security generally provides:
o A fixed income stream.
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<PAGE>
o The opportunity, through its conversion feature, to participate in an
increase in the market price of the underlying common stock.
Fixed Income Investments. TRVA invests in securities which pay a fixed
interest rate, which include:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities.
o Mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables. These investments entitle TRVA to a share of the
principal and interest payments made on the underlying mortgage, car
loan, or credit card. For example, if TRVA invests in a pool that
includes your mortgage loan, a share of the principal and interest
payments on your mortgage would pass to TRVA.
o Corporate bonds, which are bonds or other debt obligations issued by
corporations or other similar entities. These bonds include lower rated
bonds, commonly known as junk bonds. Junk bonds are assigned lower credit
ratings by credit rating agencies or are unrated and considered by MFS to
be comparable to lower rated bonds.
In selecting fixed income investments for TRVA, MFS considers the views of
its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed-income oriented
funds (including the fixed-income portion of TRVA) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed-income securities,
MFS does not rely solely on the credit ratings assigned by credit rating
agencies, but rather performs its own independent credit analysis.
Other Considerations. TRVA may invest in foreign securities (including
emerging markets securities), and may have exposure to foreign currencies
through its investment in these securities, its direct holdings of foreign
currencies or through its use of foreign currency exchange contracts for
the purchase or sale of a fixed quantity of foreign currency at a future
date.
[arrow] Principal Risks
The principal risks of investing in TRVA and the circumstances reasonably
likely to cause the value - of your investment in TRVA to decline are
described below. As with any non-money market mutual fund, the share price
of TRVA will change daily based on market conditions and other factors.
The principal risks of investing in TRVA are:
o Allocation Risk: TRVA will allocate its investments between equity and
fixed income securities, and among various segments of the fixed income
markets, based upon judgments made by MFS. TRVA could miss attractive
investment opportunities by underweighting markets where there are
significant returns, and could lose value by overweighting markets where
there are significant declines.
o Market Risk: This is the risk that the price of a security held by TRVA
will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Undervalued Securities Risk: Prices of securities react to the economic
condition of the company that issued the security. TRVA's equity
investments in an issuer may rise and fall based on the issuer's actual
and anticipated earnings, changes in management and the potential for
takeovers and acquisitions. MFS will invest in securities that are
undervalued based on its belief that the market value of these securities
will rise due to anticipated events and investor perceptions. If these
events do not occur or are delayed, or if investor perceptions about the
securities do not improve, the market price of these securities may not
rise or may fall.
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<PAGE>
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in TRVA's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in TRVA's
portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed income
securities, tend to increase in value when interest rates decline and
decrease in value when interest rates rise. The market value of a
convertible security also tends to increase as the market value of the
underlying stock rises and decrease as the market value of the underlying
stock declines.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of TRVA's fixed income investments will
affect the volatility of TRVA's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by TRVA may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on TRVA's performance. TRVA may experience difficulty in
establishing or closing out positions in these securities at prevailing
market prices.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds are subject to a substantially
higher degree of credit risk than higher rated bonds. During
recessions, a high percentage of issuers of junk bonds may
default on payments of principal and interest. The price of a
junk bond may therefore fluctuate drastically due to bad news
about the issuer or the economy in general.
[arrow] Higher Liquidity Risk: During recessions and periods of broad
market declines, junk bonds could become less liquid, meaning
that they will be harder to value or sell at a fair price.
o Mortgage and Asset-Backed Securities:
[arrow] Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will mature
when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed maturity,
and their expected maturities may vary when interest rates rise or
fall.
- When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on TRVA's
mortgage-backed securities will result in an unforeseen loss of
interest income to TRVA as TRVA may be required to reinvest
assets at a lower interest rate. Because prepayments increase
when interest rates fall, the prices of mortgage-backed
securities does not increase as much as other fixed income
securities when interest rates fall.
- When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens
the expected maturity of a mortgage-backed security. Therefore,
the prices of mortgage-backed securities may decrease more than
prices of other fixed income securities when interest rates rise.
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<PAGE>
+ Collateralized Mortgage Obligations: TRVA may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, TRVA may manage the
prepayment risk of mortgage-backed securities. However, prepayments
may cause the actual maturity of a CMO to be substantially shorter
than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security, mortgage-backed
and asset-backed securities are subject to the risk that the
issuer will default on principal and interest payments. It may
be difficult to enforce rights against the assets underlying
mortgage-backed and asset-backed securities in the case of
default. The U.S. Government or its agencies may guarantee the
payment of principal and interest on some mortgage-backed
securities. Mortgage-backed securities and asset-backed
securities issued by private lending institutions or other
financial intermediaries may be supported by insurance or other
forms of guarantees.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
[arrow] These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
[arrow] Foreign securities often trade in currencies other than the U.S.
dollar, and TRVA may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect TRVA's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase
in the strength of the U.S. dollar relative to these other
currencies may cause the value of TRVA to decline. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in TRVA's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, TRVA may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing
return, TRVA may sustain losses which will reduce its gross
income. Forward foreign currency exchange contracts involve the
risk that the party with which TRVA enters the contract may fail
to perform its obligations to TRVA.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with
low per capita income. Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with more
mature economies. These markets often have provided
significantly higher or lower rates of return than developed
markets, and significantly greater risks, to investors.
23
<PAGE>
- --------------------------------------
6. GLOBAL GOVERNMENTS VARIABLE ACCOUNT
- --------------------------------------
Prior to May 1, 1999, GGVA was known as World Governments Variable Account.
[arrow] Investment Objective
GGVA's investment objective is to provide moderate current income,
preservation of capital and growth of capital by investing in debt
obligations that are issued or guaranteed as to principal and interest by
either (i) the U.S. Government, its agencies, authorities or
instrumentalities or (ii) the governments of foreign countries (to the
extent that MFS believes that the higher yields available from foreign
government securities are sufficient to justify the risks of investing in
these securities).
[arrow] How GGVA Fund Intends to Achieve Its Objective
GGVA invests, under normal market conditions, at least 80% of its total
assets in:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities (including mortgage-backed securities).
o Foreign government securities of developed countries, which are bonds or
other debt obligations issued by foreign governments of developed
countries; these foreign government securities are either:
[arrow] issued, guaranteed or supported as to payment of principal and
interest by foreign governments, foreign government agencies,
foreign semi-governmental entities, or supra-national entities.
[arrow] interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of
foreign government securities.
GGVA may also invest up to 20% of its total assets in foreign government
securities of emerging market countries.
In selecting fixed income investments for GGVA, MFS considers the views of
its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented
funds (including GGVA) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets. In assessing
the credit quality of fixed income securities, MFS does not rely solely on
the credit ratings assigned by credit rating agencies, but rather performs
its own independent credit analysis.
GGVA may have exposure to foreign currencies through its investments in
foreign securities, its direct holdings of foreign currencies, or through
its use of foreign currency exchange and similar contracts for the purchase
or sale of a fixed quantity of a foreign currency at a future date.
GGVA may invest in derivative securities. Derivatives are securities whose
value may be based on other securities, currencies, interest rates, or
indices. Derivatives include:
o Futures and forward contracts.
o Options on futures contracts, foreign currencies, securities and bond
indices.
o Structured notes and indexed securities.
o Swaps, caps, collars and floors.
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<PAGE>
GGVA is non-diversified. This means that GGVA may invest a relatively high
percentage of its assets in a small number of issuers. GGVA may invest a
substantial amount of its assets (i.e., more than 25% of its assets) in
issuers located in a single country or a limited number of countries.
[arrow] Principal Risks
The principal risks of investing in GGVA and the circumstances reasonably
likely to cause the value of your investment in GGVA to decline are
described below. As with any non-money market mutual fund, the share price
of GGVA will change daily based on market conditions and other factors.
Please note that there are many circumstances which could cause the value
of your investment in GGVA to decline, and which could prevent GGVA from
achieving its objective, that are not described here.
The principal risks of investing in GGVA are:
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
[arrow] These risks may include excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign entities may not be subject to accounting standards or
governmental supervision comparable to U.S. entities, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
[arrow] Foreign securities often trade in currencies other than the U.S.
dollar, and GGVA may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect GGVA's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase
in the strength of the U.S. dollar relative to these other
currencies may cause the value of GGVA to decline. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in GGVA's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, GGVA may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purposes of increasing
return, GGVA may sustain losses which will reduce its gross
income. Forward foreign currency exchange contracts involve the
risk that the party with which GGVA enters the contract may fail
to perform its obligations to GGVA.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with
low per capita income. Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with more
mature economies. These markets often have provided
significantly higher or lower rates of return than developed
markets, and significantly greater risks, to investors.
o Allocation Risk: GGVA will allocate its investments among various
government securities based upon judgments made by MFS. GGVA could miss
attractive investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting markets
where there are significant declines.
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o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in GGVA's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in GGVA's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities. Conversely,
fixed income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of GGVA's fixed income investments will
affect the volatility of GGVA's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by GGVA may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on GGVA's performance.
o Mortgage-Backed Securities:
[arrow] Maturity Risk: A mortgage-backed security will mature when all
the mortgages in the pool mature or are prepaid. Therefore,
mortgage-backed securities do not have a fixed maturity, and
their expected maturities may vary when interest rates rise or
fall.
+ When interest rates fall, homeowners are more likely to prepay
their mortgage loans. An increased rate of prepayments on GGVA's
mortgage-backed securities will result in an unforeseen loss of
interest income to GGVA as GGVA may be required to reinvest assets
at a lower interest rate. Because prepayments increase when
interest rates fall, the price of mortgage-backed securities does
not increase as much as other fixed income securities when interest
rates fall.
+ When interest rates rise, homeowners are less likely to prepay
their mortgage loans. A decreased rate of prepayments lengthens the
expected maturity of a mortgage-backed security. Therefore, the
prices of mortgage-backed securities may decrease more than prices
of other fixed income securities when interest rates rise.
[arrow] Credit Risk: As with any fixed income security, mortgage-backed
securities are subject to the risk that the issuer will default
on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed
securities in the case of default. The U.S. Government or its
agencies may guarantee the payment of principal and interest on
mortgage-backed securities.
o Derivatives Risk:
[arrow] Hedging Risk: When a derivative is used as a hedge against an
opposite position that GGVA also holds, any loss generated by
the derivative should be substantially offset by gains on the
hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains.
[arrow] Correlation Risk: When GGVA uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not
match those of the asset being hedged. Incomplete correlation
can result in unanticipated losses.
[arrow] Investment Risk: When GGVA uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging
purposes, any loss on the derivative investment will not be
offset
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by gains on another hedged investment. GGVA is therefore
directly exposed to the risks of that derivative. Gains or
losses from derivative investments may be substantially greater
than the derivative's original cost.
[arrow] Availability Risk: Derivatives may not be available to GGVA upon
acceptable terms. As a result, GGVA may be unable to use
derivatives for hedging or other purposes.
[arrow] Credit Risk: When GGVA uses derivatives, it is subject to the
risk that the other party to the agreement will not be able to
perform.
o Non-Diversified Status Risk: Because GGVA may invest a higher percentage
of its assets in a small number of issuers, GGVA is more susceptible to
any single economic, political or regulatory event affecting those
issuers than is a diversified fund.
o Concentration Risk: Because GGVA may invest a substantial amount of its
assets in issuers located in a single country or a limited number of
countries, economic, political and social conditions in these countries
will have a significant impact on its investment performance.
- -----------------------------------
7. MANAGED SECTORS VARIABLE ACCOUNT
- -----------------------------------
[arrow] Investment Objective
MSVA's investment objective is capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
[arrow] How MSVA Intends to Achieve Its Objective
MSVA invests, under normal market conditions, at least 65% of its total
assets in common stocks - and related securities, such as preferred stock,
convertible securities and depositary receipts of companies in 13 equity
sectors. 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 securities. MSVA generally focuses on four or five sectors at any
one time, and may invest a maximum of 50% of its net assets in any one
sector. MSVA adds or eliminates a sector from its portfolio based on
considerations of the sector's economic cycle and sensitivity to interest
rates. MSVA's investments may include securities traded in the
over-the-counter markets.
MSVA may invest in foreign securities (including emerging market
securities), and may have exposure to foreign currencies through its
investment in these securities, its direct holdings of foreign currencies
or through its use of foreign currency exchange contracts for the purchase
or sale of a fixed quantity of a foreign currency at a future date.
MSVA is a non-diversified mutual fund. This means that MSVA may invest a
relatively high percentage of its assets in a small number of issuers.
[arrow] Principal Risks
The principal risks of investing in MSVA and the circumstances reasonably
likely to cause the value of your investment in MSVA to decline are
described below. As with any non-money market mutual fund, the share price
of MSVA will change daily based on market conditions and other factors.
The principal risks of investing in MSVA are:
o Market Risk: This is the risk that the price of a security held by MSVA
will fall due to changing economic, political or market conditions or
disappointing earnings results.
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o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. MSVA's equity investments in an issuer
may rise and fall based on the issuer's actual and anticipated earnings,
changes in management and the potential for takeovers and acquisitions.
o Allocation Risk: MSVA will allocate its investments among various equity
sectors, based upon judgments made by MFS. MSVA could miss attractive
investment opportunities by underweighting sectors where there are
significant returns, and could lose value by overweighting sectors where
there are significant declines.
o Concentration Risk: Because MSVA may invest to a significant degree in
securities of companies in a limited number of sectors, MSVA's
performance is particularly sensitive to changes in the value of
securities in these sectors. A decline in the value of these types of
securities may result in a decline in MSVA's net asset value and your
investment.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks
may be more volatile than exchange-listed stocks, and MSVA may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well
as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject:
[arrow] These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
[arrow] Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
[arrow] Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there
may be less public information about their operations.
[arrow] Foreign markets may be less liquid and more volatile than U.S.
markets.
[arrow] Foreign securities often trade in currencies other than the U.S.
dollar, and MSVA may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect MSVA's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase
in the strength of the U.S. dollar relative to these other
currencies may cause the value of MSVA to decline. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in MSVA's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, MSVA may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing
return, MSVA may sustain losses which will reduce its gross
income. Forward foreign currency exchange contracts involve the
risk that the party with which MSVA enters the contract may fail
to perform its obligations to MSVA.
o Emerging Markets Risk: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles with
low per capita income. Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
[arrow] All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
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[arrow] The markets of emerging markets countries have been more
volatile than the markets of developed countries with more
mature economies. These markets often have provided
significantly higher or lower rates of return than developed
markets, and significantly greater risks, to investors.
o Non-Diversified Status Risk: Because MSVA may invest its assets in a
small number of issuers, MSVA is more susceptible to any single economic,
political or regulatory event affecting those issuers than is a
diversified fund.
Certain Common Investment Strategies
Each Variable Account may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While a Variable Account invests defensively, it
may not be able to pursue its investment objective. A Variable Account's
defensive investment position may not be effective in protecting its value.
Each Variable Account, except for MMVA, may engage in active and frequent
trading to achieve its principal investment strategies. This may result in the
realization and distribution to shareholders of higher capital gains, which
could increase your tax liability. Frequent trading also increases transaction
costs, which could detract from the Variable Account's performance.
Each Variable Account may invest in various types of securities and engage
in various investment techniques and practices which are not the principal
focus of the Variable Account and therefore are not described in this
Prospectus. The types of securities and investment techniques and practices in
which a Variable Account may engage are identified in Appendix A to this
Prospectus, and are discussed, together with their risks, in the SAI. You may
obtain a copy of the SAI by contacting Sun Life Assurance Company of Canada
(U.S.) Retirement Products and Services Division (see back cover for address
and phone number).
The Fixed Account
See Appendix A to the SAI for a description of the Fixed Account.
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. MFS, located at 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, 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
You must send all Purchase Payments to us at our Annuity Service Mailing
Address. Unless you have surrendered the Contract, you may make Purchase
Payments at any time during the life of the Annuitant and before the Annuity
Commencement Date (the "Accumulation Period"). Purchase Payments may be made
annually, semi-annually, quarterly, monthly, or on any other frequency
acceptable to us. The amount of Purchase Payments may vary; however, Purchase
Payments must total at least $300 for the first Contract Year, and each
Purchase Payment must be at least $25. In addition, our approval is required
before we will accept a Purchase Payment if the value of your Accumulation
Account exceeds $1,000,000, or if the Purchase Payment would cause the value of
your Accumulation Account to exceed $1,000,000.
An applicant's completed application forms, together with the initial
Purchase Payment, are forwarded to us. Upon acceptance, we issue the Contract
to you and credit the initial Purchase Payment to the Contract in the form of
Accumulation Units. We will credit the initial Purchase Payment within two
business days after we receive your completed application. If your application
is incomplete, we may retain the Purchase Payment for up to five business days
while we try to complete the application. If we cannot complete the application
within five business days, we will notify you of the reason for the delay and
will return the Purchase Payment immediately unless you specifically consent to
our retaining the Purchase Payment until we can complete the application. Once
the application is completed, we will credit the Purchase Payment within two
business days. We will credit all subsequent Purchase Payments using the
Accumulation Unit values for the Valuation Period during which we receive the
Purchase Payment.
We will establish an Accumulation Account for each Contract. Your
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 your Accumulation Account.
We will allocate each net Purchase Payment to either the Fixed Account or
to the Variable Accounts or to both the Variable Accounts and the Fixed Account
in accordance with the allocation factors you have specified in the application
or as subsequently changed. When we receive a Purchase Payment, we will credit
all of that portion, if any, of the net Purchase Payment to be allocated to the
Variable Accounts to the Accumulation Account in the form of Variable
Accumulation Units. The number of Variable Accumulation Units we credit is
determined by dividing the dollar amount allocated to the Variable Account by
the Variable Accumulation Unit value for that Variable Account for the
Valuation Period during which we receive the Purchase Payment.
We established the Variable Accumulation Unit value for each Variable
Account at $10.00 for the first Valuation Period of that Valuation Account. We
determine the Variable Accumulation Unit value for any subsequent Valuation
Period as follows: we multiply the Variable Accumulation Unit value for the
immediately preceding Valuation Period by the appropriate Net Investment Factor
for the 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 Variable Account for any Valuation
Period is determined by adding (a) and (b), subtracting from that amount the
sum of (c) and (d), and then dividing the result of the difference by (a),
where:
(a) is the value of the Variable Account's net assets attributable to
the Contracts at the end of the preceding Valuation Period;
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(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; and
(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 normally will be composed chiefly of
investment securities. The Board of Managers of each Variable Account values
the assets of the Variable Account as of the close of trading on the New York
Stock Exchange on each day the Exchange is open for trading, and on other days
on which there was enough trading in the Variable Account's portfolio
securities that the values of the Variable Account's Accumulation Units and
Annuity Units might be materially affected. The Board of Managers of MMVA
values the assets of MMVA at amortized cost in accordance with Rule 2a-7 under
the Investment Company Act. Under the amortized cost valuation methodology,
portfolio securities are valued at MMVA's acquisition value, as adjusted to
account for premiums and discounts, rather than at their value based on current
market factors. The Board of Managers of each of the other Variable Accounts
values the assets of the Variable Account as follows:
(a) The Board of Managers normally values equity securities 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) The Board of Managers normally values debt securities (other than
short-term obligations, but including listed issues) and forward foreign
currency exchange contracts on the basis of valuations provided by a
pricing service because it believes that these valuations reflect the fair
value of such securities. The Board of Managers has approved the use of the
pricing service. (Valuations provided by the pricing service may be
determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institution-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data.)
(c) The Board of Managers values short-term debt securities (that is,
those maturing in not more than sixty days) on the basis of amortized cost,
which it has determined approximates market value.
(d) The Board of Managers normally values Options, Futures Contracts
and Options on Futures Contracts at the settlement price on the exchange on
which they are primarily traded.
(e) The Board of Managers 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 of such determinations to others, such as the Variable Account's
investment adviser.
Transfers
During the Accumulation Period, you may transfer all or part of the value
of your Accumulation Account to one or more Variable Accounts or to the Fixed
Account, or to any combination of these options. We make these transfers by
converting the value of the Accumulation Units you wish to transfer into
Variable Accumulation Units of the Variable Accounts and/or Fixed Accumulation
Units of the same aggregate value, as you choose. These transfers are subject
to the following conditions:
1. you may make transfers involving Fixed Accumulation Units only
during the 45 day period before and the 45 day period after each Contract
Anniversary;
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2. you may not make more than 12 transfers in any Contract Year; and
3. the amount transferred may not be less than $1,000 unless you are
transferring your entire balance in the Fixed Account or a Variable
Account.
We will make these transfers using the Accumulation Unit values for the
Valuation Period during which we receive the request for transfer. Under
current tax law a transfer will not result in any tax liability. You may
request transfers in writing or by telephone. The telephone transfer privilege
is available automatically, and does not require your written election. We will
require personal identifying information to process a request for transfer made
by telephone. We will not be liable for following instructions communicated by
telephone that we reasonably believe are genuine.
CASH WITHDRAWALS
At any time during the Accumulation Period you may withdraw in cash all or
any portion of the value of your Accumulation Account. Withdrawals may be
subject to a withdrawal charge (see "Withdrawal Charges" below.) Withdrawals
also may have adverse federal income tax consequences, including a 10% penalty
tax. See "Federal Tax Status." In addition, if you own a Qualified Contract you
should check the terms of your retirement plan for restrictions on withdrawals.
Your withdrawal request will be effective on the date we receive it. If
you request a withdrawal of more than $5,000 we may require a signature
guarantee. Your request must specify the amount you wish to withdraw. For a
partial withdrawal you may specify the amount you want withdrawn from the Fixed
Account and/or each Variable Account to which your Accumulation Account is
allocated. If you do not so specify, we will deduct the total amount you
request pro rata based on your allocations at the end of the Valuation Period
during which we receive your request.
If you request a full withdrawal, we will pay you the value of your
Accumulation Account at the end of the Valuation Period during which we receive
your request, minus the contract maintenance charge for the current Contract
Year and any applicable withdrawal charge. If you request a partial withdrawal,
we will pay you the amount you request and reduce the value of your
Accumulation Account by deducting the amount paid plus any applicable
withdrawal charge. If you request a partial withdrawal that would result in the
value of your Accumulation Account being reduced to an amount less than the
contract maintenance charge for the current Contract Year, we will treat it as
a request for a full withdrawal.
We will pay you the applicable amount of any full or partial withdrawal
within seven days after we receive your withdrawal request, except in cases
where we are permitted to defer payment under the Investment Company Act of
1940 and applicable state insurance law. Currently, we may defer payment of
amounts you withdraw only for following periods:
o when the New York Stock Exchange is closed except weekends and
holidays or when trading on the New York Stock Exchange is restricted;
o when it is not reasonably practical to dispose of securities held by
the Variable Accounts or to determine the value of the net assets of
the Variable Accounts, because an emergency exists; or
o when an SEC order permits us to defer payment for the protection of
security holders.
Section 403(b) Annuities
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for the Contract 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 you attain age 591/2 , separate from
service with your employer, die or become 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").
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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, you must have an
immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contract (see "Federal
Tax Status"). Under certain circumstances, the 10% tax penalty will not apply
to withdrawals to pay medical expenses.
Under the terms of a particular Section 403(b) plan, you may be entitled
to transfer all or a portion of the Accumulation Account value to one or more
alternative funding options. You should consult the documents governing your
plan and the person who administers such plan for information as to such
investment alternatives.
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, we 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
If the Annuitant dies before the Annuity Commencement Date, we will pay a
death benefit to your Beneficiary. If the Annuitant dies on or after the
Annuity Commencement Date, we will not pay a death benefit except as may be
provided under annuity option B, D, or E if elected. (Under these options, the
Beneficiary may choose to receive remaining payments as they become due or in a
single lump sum payment of their discounted value).
You select the Beneficiary in your Contract application. You may change
your Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change. If your
designated Beneficiary is not living on the date of death of the Annuitant, we
will pay the death benefit in one lump sum to you, or if you are the Annuitant,
to your estate.
During the lifetime of the Annuitant and before the Annuity Commencement
Date, you may elect to have the death benefit payable under one or more of our
annuity options listed under "Annuity Provisions" in this Prospectus, for the
Beneficiary as Payee. If you have not elected a method of settlement of the
death benefit that is in effect on the date of death of the Annuitant, the
Beneficiary may elect to receive the death benefit in the form of either a cash
payment or one or more of our annuity options. If we do not receive an election
by the Beneficiary within 60 days after the date we receive Due Proof of Death
of the Annuitant and any required release or consent, the Beneficiary will be
deemed to have elected a cash payment as of the last day of the 60 day period.
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In all cases, no Owner or Beneficiary will be entitled to exercise any
rights that would adversely affect the treatment of the Contract as an annuity
contract under the Internal Revenue Code (see "Other Contractual
Provisions--Death of Owner").
Payment of Death Benefit
If the death benefit is to be paid in cash to the Beneficiary, we will
make payment within seven days of the date the election becomes effective or is
deemed to become effective, except as we may be permitted to defer such payment
in accordance with the Investment Company Act of 1940 under the circumstances
described in this Prospectus under "Cash Withdrawals." If the death benefit is
to be paid in one lump sum to you (or to your estate if you are the Annuitant),
we will make payment within seven days of the date we receive Due Proof of
Death of the Annuitant, the Owner and/or the Beneficiary, as applicable. If you
elect to have the death benefit paid under one or more of our annuity options,
the Annuity Commencement Date will be the first day of the second calendar
month following the date we receive Due Proof of Death of the Annuitant and the
Beneficiary, if any. If your Beneficiary elects to have the death benefit paid
under one or more of our annuity options, the Annuity Commencement Date will be
the first day of the second calendar month following the effective date or the
deemed effective date of the election, and we will maintain your Accumulation
Account in effect until the Annuity Commencement Date. Unless otherwise
restricted by the terms of your retirement plan or applicable law, you or your
Beneficiary, as the case may be, may elect an Annuity Commencement Date later
than that specified above, provided that the later 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 you or your Beneficiary, as applicable (see
"Annuity Commencement Date").
Amount of Death Benefit
The death benefit is equal to the greatest of:
1. the value of your Accumulation Account;
2. the total Purchase Payments made under the Contract reduced by all
withdrawals; and
3. unless prohibited by applicable state law, the value of your
Accumulation Account on the Seven Year Anniversary immediately preceding
the death of the Annuitant, adjusted for any Purchase Payments or cash
withdrawal payments made and Contract charges assessed after such Seven
Year Anniversary.
To determine the amount of the death benefit under (1) above we will use
Accumulation Unit values for the Valuation Period during which we receive Due
Proof of Death of the Annuitant if you have elected settlement under one or
more of the annuity options; if no election by you is in effect, we will use
either the values for the Valuation Period during which an election by the
Beneficiary becomes or is deemed effective or, if the death benefit is to be
paid in one sum to you or your estate, the values for the Valuation Period
during which we receive Due Proof of Death of both the Annuitant and the
designated Beneficiary.
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CONTRACT CHARGES
We will assess contract charges under the Contracts as follows:
Contract Maintenance Charge
We deduct an annual contract maintenance charge of $30 as partial
reimbursement for administrative expenses relating to the issuance and
maintenance of the Contract. Prior to the Annuity Commencement Date, we deduct
this charge on each Contract Anniversary. We also deduct this charge on
surrender of the Contract for full value on a date other than the Contract
Anniversary. We deduct the contract maintenance charge in equal amounts from
the Fixed Account and each Variable Account in which you have Accumulation
Units at the time of the deduction.
On the Annuity Commencement Date we will reduce the value of your
Accumulation Account by the proportionate amount of the contract maintenance
charge to reflect the time elapsed between the last Contract Anniversary and
the day before the Annuity Commencement Date. After the Annuity Commencement
Date, we will deduct the contract maintenance charge pro rata from each annuity
payment made during the year.
We will not increase the amount of the contract maintenance charge. We
reserve the right to reduce the amount of the contract maintenance charge for
groups of participants with individual Contracts under an employer's retirement
program in situations in which the size of the group and established
administrative efficiencies contribute to a reduction in administrative
expenses.
Mortality and Expense Risk Charge and Distribution Expense Charge
We assume the risk that Annuitants may live for a longer period of time
than we have estimated in establishing the guaranteed annuity rates
incorporated into the Contract and the risk that administrative charges
assessed under the Contracts may be insufficient to cover our actual
administrative expenses.
For assuming these risks, we make a deduction from the Variable Accounts
at the end of each Valuation Period both during the Accumulation Phase and
after annuity payments begin at an effective annual rate of 1.25%. We may
change the rate of this deduction annually but it will not exceed 1.25% on an
annual basis. If the deduction is insufficient to cover the actual cost of the
mortality and expense risk undertaking, we will bear the loss. Conversely, if
the deduction proves more than sufficient, the excess would be profit to us and
would be available for any proper corporate purpose including, among other
things, payment of distribution expenses. If the withdrawal charges and
distribution expense charges described below prove insufficient to cover
expenses associated with the distribution of the Contracts, we will meet the
deficiency from our general corporate funds, which may include amounts derived
from the mortality and expense risk charges.
We assume the risk that withdrawal charges we assess under the Contracts
may be insufficient to compensate us for the costs of distributing the
Contracts. For assuming this risk, we make 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 Phase 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. We do not
make a deduction for this charge after the seventh Contract Anniversary. If the
distribution expense charge is insufficient to cover the actual risk assumed,
we will bear the loss; however, if the charge is more than sufficient, any
excess will be profit to us and would be available for any proper corporate
purpose. In no event will the distribution expense charges and any withdrawal
charges assessed under a Contract exceed 9% of the Purchase Payments.
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, 1998 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%; GGVA, 0.75%; TRVA, 0.75%; and MSVA, 0.75%.
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Withdrawal Charges
We do not deduct a sales charge from Purchase Payments. However, we will
impose a withdrawal charge (i.e., a contingent deferred sales charge) on
certain amounts you withdraw as reimbursement for certain expenses relating to
the distribution of the Contracts, including commissions, costs of preparation
of sales literature and other promotional costs and acquisition expenses.
You may withdraw a portion of your Accumulation Account value each year
before incurring the withdrawal charge, and after we have held a Purchase
Payment for seven years you may withdraw it free of any withdrawal charge. In
addition, we do not impose a withdrawal charge upon annuitization or upon the
transfer of Accumulation Account values among the Variable Accounts or between
the Variable Accounts and the Fixed Account.
We do not impose the withdrawal charge 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.
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: In a given
Contract Year, "New Payments" are Payments you have made in that Contract
Year or in the six previous Contract Years; "Old Payments" are all Purchase
Payments made before the previous six Contract years; and the remainder of
your Accumulation Account value--that is, the value of your Accumulation
Account minus the total of Old and New Payments--is called the "accumulated
value."
(2) Order of withdrawal: When you make a partial withdrawal or
surrender your Contract, we consider the oldest Payment not previously
withdrawn to be withdrawn 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) Free withdrawal amount: In any Contract Year, you may withdraw the
following amount before we impose a withdrawal charge: (a) any Old Payments
you have not previously withdrawn, and (b) 10% of any New Payments, whether
or not these new Payments have been previously withdrawn.
(4) Amount subject to withdrawal charge: We will impose the withdrawal
charge on the excess, if any, of (a) Old and New Payments being withdrawn
over (b) the remaining free withdrawal amount at the time of the
withdrawal. We do not impose the withdrawal charge on amounts attributed to
accumulated value.
The withdrawal charge percentage varies according to the number of
Contract Years the Purchase Payment has been in your Accumulation Account,
including the year in which you made the Payment, but not the year you withdraw
it. The applicable percentages are as follows:
<TABLE>
<CAPTION>
Number of Withdrawal Charge
Contract Years Percentage
- ------------------ ------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
Aggregate withdrawal charges (including the distribution expense risk
charge described above) assessed against a Contract will never exceed 9% of the
total amount of Purchase Payments made under the Contract. (See Appendix C in
the Statement of Additional Information for examples of withdrawals and
withdrawal charges.)
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Premium Taxes
We will make a deduction, when applicable, for premium taxes or similar
state or local taxes. The amount of such applicable tax varies by jurisdiction
and in many jurisdictions there is no premium tax at all. We believe that such
premium taxes or similar taxes currently range from 0% to 3.5%. It is currently
our policy to deduct the tax from the amount applied to provide an annuity at
the time annuity payments commence. However, we reserve the right to deduct
such taxes on or after the date they are incurred.
ANNUITY PROVISIONS
Annuity Commencement Date
We begin making annuity payments under a Contract on the Annuity
Commencement Date, which you select in your Contract application. You may
change the Annuity Commencement Date from time to time as provided in the
Contract. The 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. Any new Annuity Commencement Date must be at least 30 days after we
receive notice of the change.
For Qualified Contracts, there may be other restrictions on your selection
of the Annuity Commencement Date imposed by the particular retirement plan or
by applicable law. For example, in most situations, current law requires that
under a Qualified Contract certain minimum distributions commence 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). The
Annuity Commencement Date may also be changed by an election of an annuity
option as described under "Death Benefit." Please refer to the terms of your
plan for additional restrictions.
On the Annuity Commencement Date, we will cancel your Accumulation Account
and apply its adjusted value to provide an annuity. The adjusted value will be
equal to the value of the Accumulation Account for the Valuation Period which
ends immediately before 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 Annuity Option B, D, or E if elected.
(Under these options, if the Annuitant dies on or after the Annuity
Commencement Date, the Beneficiary may choose to receive the remaining payments
as they become due or in a single lump sum payment of their discounted value.)
Annuity Options
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, you may elect one or more of the annuity options described below or such
other settlement option as we may agree to for the Annuitant as Payee, except
as restricted by the particular retirement plan or any applicable legislation.
These annuity options may also be elected by you or the Beneficiary as provided
under "Death Benefit."
You may not change any election after 30 days before the Annuity
Commencement Date, and no change of annuity option is permitted after the
Annuity Commencement Date. If no election is in effect on the 30th day before
the Annuity Commencement Date, we will deem Annuity Option B, for a Life
Annuity with 120 monthly payments certain, to have been elected. If you have
properly named a Co-Annuitant, but have not selected the sole Annuitant at
least 30 days before the Annuity Commencement Date, the person you have named
as the Co-Annuitant will become the sole Annuitant.
Any election may specify the proportion of the adjusted value of your
Accumulation Account to be applied to the Fixed Account and the Variable
Accounts. If 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 your Accumulation Account on the Annuity Commencement Date.
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Annuity Options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity Options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: We make monthly payments during the
lifetime of the Payee. This option offers a higher level of monthly payments
than Annuity Options B or C because we do not make further payments after the
death of the Payee, and there is no provision for a death benefit payable to a
Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: We make monthly payments during the lifetime of the Payee and in any
event for 60, 120, 180 or 240 months certain as elected. The election of a
longer period certain results in smaller monthly payments than would be the
case if a shorter period certain were elected.
Annuity Option C. Joint and Survivor Annuity: We make monthly payments
during the joint lifetime of the Payee and the 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: We make
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: We will hold the amount applied to
provide fixed payments in accordance with this option at interest. We will make
fixed payments in such amounts and at such times (at least over a period of
five years) as we have agreed upon and will continue until the amount we hold
with interest is exhausted. We will credit interest yearly on the amount
remaining unpaid at a rate which we shall determine from time to time but which
shall not be less than 4% per year compounded annually. We may change the rate
so determined at any time; however, the rate may not be reduced more frequently
than once during each calendar year.
Determination of Annuity Payments
We will determine the dollar amount of the first Variable Annuity payment
in accordance with the annuity payment rates found in the Contract, which are
based on an assumed interest rate of 4% per year. We determine all Variable
Annuity payments other than the first by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Variable Account is determined by dividing the 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 that ends immediately before
the Annuity Commencement Date. The number of Annuity Units of each 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 election of this Annuity Option may result in the imposition of a penalty
tax.
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The Statement of Additional Information contains detailed disclosure
regarding the method of determining the amount of each Variable Annuity payment
and calculating the value of a Variable Annuity Unit, as well as hypothetical
examples of these calculations.
Exchange of Variable Annuity Units
After the Annuity Commencement Date, the Payee may exchange Variable
Annuity Units from one Variable Account to another, up to a maximum of twelve
such exchanges each Contract Year. We calculate the number of new Variable
Annuity Units so that the dollar amount of an annuity payment made on the date
of the exchange would be unaffected by the fact of the exchange.
Annuity Payment Rates
The Contract contains annuity payment rates for each annuity option
described above. The rates show, for each $1,000 applied, the dollar amount of
(a) the first monthly Variable Annuity payment based on the assumed interest
rate of 4%, and (b) the monthly Fixed Annuity payment, when this payment is
based on the minimum guaranteed interest rate of 4% per year. The annuity
payment rates may vary according to the annuity option elected and the adjusted
age of the Payee.
If net investment return of the Variable Accounts were exactly equal to
the assumed interest rate of 4%, the amount of each Variable Annuity payment
would remain level. If a net investment return is greater than 4%, the amount
of each Variable Annuity payment would increase; conversely, if the net
investment return is less than 4%, the amount of each Variable Annuity payment
would decrease.
OTHER CONTRACT PROVISIONS
Owner
As the Owner, you are entitled to exercise all Contract rights and
privileges without the consent of the Beneficiary or any other person. Such
rights and privileges may be exercised only during the lifetime of the
Annuitant and prior to the Annuity Commencement Date, except as otherwise
provided in the Contract. The Owner of a Non-Qualified Contract may change the
ownership of the Contract, subject to the provisions of the Contract, although
such change may result in the imposition of tax (see "Federal Tax
Status--Taxation of Annuities in General"). Transfer of ownership of a
Qualified Contract is governed by the laws and regulations applicable to the
retirement or deferred compensation plan for which the Contract was issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
Subject to the rights of an irrevocably designated Beneficiary, you may
change or revoke the designation of a Beneficiary at any time while the
Annuitant is living.
Death of Owner
If you are the Owner of a Non-Qualified Contract and you die before the
Annuity Commencement Date, the entire value of the Accumulation Account must be
distributed either (1) within five years after the date of your death, or (2)
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 your death. 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 mandatory distribution requirements will not apply when the
Beneficiary is your spouse, if your spouse elects to continue the Contract in
his or her own name as Owner. If you were the Annuitant as well as the Owner
(unless your spouse is your Beneficiary and elects to continue the Contract)
the Death Benefit provision of the Contract controls, subject to the condition
that any annuity option elected complies with the Section 72(s) distribution
requirements.
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If you are both the Owner and Annuitant and you die 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 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 Account's investment objectives and/or restrictions and such other
matters as the Investment Company Act of 1940 may require.
Prior to the Annuity Commencement Date, you as the Owner may cast one vote
for each Variable Accumulation Unit in the particular Variable Account credited
to your 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 you, or to the Payee during the annuity period, we may
modify the Contract, but only if such modification (i) is necessary to make the
Contract or the Variable Accounts comply with any law or regulation issued by a
governmental agency to which we are 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, we may make
appropriate endorsement to the Contract to reflect such modification.
Change in Operation of Variable Accounts
At the Company's election and subject to any necessary vote by persons
having the right to vote, the Variable Accounts may be operated as unit
investment trusts under the Investment Company Act of 1940 or they may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Accounts requires an
order by the Securities and Exchange Commission. In the event of any change in
the operation of the Variable Accounts pursuant to this provision, we may make
appropriate endorsement to the Contract to reflect the change and take such
action as may be necessary and appropriate to effect the change.
Splitting Units
We reserve the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change in 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
our 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
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of annuity contracts, and such legislation could be applied retroactively to
Contracts purchased before the date of enactment. A more detailed discussion of
the federal tax status of the Contracts is contained in the Statement of
Additional Information. Any person contemplating the purchase of a Contract
should consult a qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE
REGARDING ANY TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT OR ANY
TRANSACTION INVOLVING THE CONTRACTS.
Tax Treatment of the Company
Under existing federal income tax laws, the income of the Variable
Accounts, to the extent that it is applied to increase reserves under the
Contracts, is not taxable to the Company.
Taxation of Annuities in General
Generally no tax is imposed on the increase in the value of a Contract
held by an individual Owner until a distribution occurs, either as an annuity
payment or in the form of a cash withdrawal, a lump sum payment or a loan from
(or pledge of) the Contract prior to the Annuity Commencement Date. Corporate
Owners and other Owners that are not natural persons are subject to current
taxation on the annual increase in the value of a Non-Qualified Contract's
Accumulation Account. This rule does not apply where a non-natural person holds
the Contract as agent for a natural person (such as where a bank holds a
Contract as trustee under a trust agreement).
Taxable cash withdrawals from either Qualified or Non-Qualified Contracts
are subject to a 10% penalty, except in certain circumstances (such as where
the distribution is made after the Owner has reached age 59-1/2 or upon the
death of the Owner). In the case of a Qualified Contract, certain
distributions, known as "eligible rollover distributions," if rolled over to
certain other qualified retirement plans (either directly or after being
distributed to the Owner or Payee), are not taxable until distributed from the
plan to which they are rolled over. In general, an eligible rollover
distribution is any taxable distribution to a plan participant or sponsor other
than a hardship distribution or a distribution that is part of a series of
payments made for life or for a specified period of ten years or more. Owners,
Annuitants, Payees and Beneficiaries should seek qualified advice about the tax
consequences of distributions, withdrawals, rollovers and payments under the
retirement plans in connection with which the Contracts are purchased.
If the Owner dies before the Annuity Commencement Date, the Contract's
Accumulation Account must be distributed within a specified period. In the case
of a Non-Qualified Contract, this distribution requirement does not apply where
the spouse of the Owner is the successor Owner.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis.
We 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 us and
notifies us (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), we 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
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do not comply with these regulations do not qualify as annuities for income tax
purposes. We believe 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, we
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.
YEAR 2000 COMPLIANCE
Company Compliance.
The Company's business, financial condition, and results of operations
could be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to
properly operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. The Company's principal
systems were Year 2000 compliant at the end of 1998, leaving 1999 for extensive
testing. While it is believed that these efforts do involve substantial costs,
the Company closely monitors associated costs and continues to evaluate
associated risks based on actual testing. Based on available information, the
Company believes that it will be able to manage its total Year 2000 transition
without a material adverse effect on its business operations, financial
condition, or results of operations.
MFS Compliance.
The Variable Accounts could be adversely affected if the computer systems
used by MFS, the Variable Accounts' other service providers or the companies in
which the Variable Accounts invest do not properly process date-related
information from and after January 1, 2000 (the "Year 2000 Issue"). MFS
recognizes the importance of the Year 2000 Issue and, to address Year 2000
compliance, created a Year 2000 Program Management Office in 1996, which is
separately funded, has a specialized staff and reports directly to MFS senior
management. The Office, with the help of external consultants, is responsible
for ascertaining that all
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internal systems, data feeds and third party applications are Year 2000
compliant. While MFS is confident that all MFS systems will be Year 2000
compliant before the turn of the century, there are significant systems
interdependencies in the domestic and foreign markets for securities, the
business environments in which companies held by the Variable Accounts operate
and in MFS' own business environment. MFS has been actively working with the
Variable Accounts' other service providers to identify and respond to potential
problems in an effort to ensure Year 2000 compliance or develop contingency
plans. Year 2000 compliance is also one of the factors considered by MFS in its
ongoing assessment of companies in which the Variable Accounts invest. There
can be no assurance, however, that these steps will be sufficient to avoid any
adverse impact on the Variable Accounts.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by licensed insurance agents in those states
where 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 02481, a wholly-owned
subsidiary of the Company. Commissions and other distribution expenses 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, we may, from time to time, as permitted by
applicable regulations, 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 we offer. We will not pay commissions with respect to Contracts
established for the personal account of our employees or any of our affiliates
or of persons engaged in the distribution of the Contracts.
LEGAL PROCEEDINGS
We, MFS and the Variable Accounts are engaged in various kinds of routine
litigation which, in management's opinion, is not of material importance to the
Company's total assets or material with respect to the Variable Accounts.
OWNER INQUIRIES
All Owner inquiries should be directed to the Company at the Annuity
Service Mailing Address shown on the cover of this Prospectus.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
General Information .................................................................... 2
The Variable Accounts' Investment Objectives, Policies and Restrictions ................ 3
Management of the Variable Accounts .................................................... 7
Annuity Provisions ..................................................................... 11
Other Contractual Provisions ........................................................... 11
Federal Tax Status ..................................................................... 12
Administration of the Contracts ........................................................ 15
Distribution of the Contracts .......................................................... 16
Accountants and Financial Statements ................................................... 16
Appendix A -- The Fixed Account ........................................................ A-1
Appendix B -- Examples of Certain Calculations ......................................... B-1
Appendix C -- Withdrawals and Withdrawal Charges ....................................... C-1
Appendix D -- Transactions in Securities of Regular Broker-Dealers and their Affiliates D-1
Appendix E -- Investment Techniques, Practices and Risks ............................... E-1
Appendix F -- Description of Bond Ratings .............................................. F-1
</TABLE>
43
<PAGE>
- -----------------
A p p e n d i x A
- -----------------
> Investment Techniques and Practices
In pursuing its investment objective, the Variable Accounts may engage in
the following investment - techniques and practices, which are further
described, together with their risks, in Appendix E of the SAI.
<TABLE>
<CAPTION>
Investment Techniques/Practices
.....................................................................................
Symbols X permitted -- not permitted
-------------------------------------------------------------------------------------
MMVA HYVA CAVA GSVA
---- ---- ---- ----
<S> <C> <C> <C> <C>
Debt Securities
--------------------------------------------------------------------------------------
Asset-Backed Securities
--------------------------------------------------------------------------------------
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities -- X -- X
--------------------------------------------------------------------------------------
Corporate Asset-Backed Securities X X -- --
--------------------------------------------------------------------------------------
Mortgage Pass-Through Securities -- X -- X
--------------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities -- -- X --
--------------------------------------------------------------------------------------
Corporate Securities -- X -- --
--------------------------------------------------------------------------------------
Loans and Other Direct Indebtedness -- X -- --
--------------------------------------------------------------------------------------
Lower Rated Bonds -- X X --
--------------------------------------------------------------------------------------
Municipal Bonds -- -- -- --
--------------------------------------------------------------------------------------
Speculative Bonds -- X X --
--------------------------------------------------------------------------------------
U.S. Government Securities X X X X
--------------------------------------------------------------------------------------
Variable and Floating Rate Obligations X X X X
--------------------------------------------------------------------------------------
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X X X --
--------------------------------------------------------------------------------------
Equity Securities --* X X --*
--------------------------------------------------------------------------------------
Foreign Securities Exposure
Brady Bonds -- X X --
--------------------------------------------------------------------------------------
Depositary Receipts -- -- X --
--------------------------------------------------------------------------------------
Dollar-Denominated Foreign Debt
Securities X X X --
--------------------------------------------------------------------------------------
Emerging Markets -- X X --
--------------------------------------------------------------------------------------
Foreign Securities -- X X --
--------------------------------------------------------------------------------------
Forward Contracts -- X X --
--------------------------------------------------------------------------------------
Futures Contracts -- X X --
--------------------------------------------------------------------------------------
Indexed Securities/Structured Products -- -- X --
--------------------------------------------------------------------------------------
Inverse Floating Rate Obligations -- -- -- --
--------------------------------------------------------------------------------------
Investment in Other Investment Companies
Open-End Funds --* --* --* --*
--------------------------------------------------------------------------------------
Closed-End Funds --* --* --* --*
--------------------------------------------------------------------------------------
Lending of Portfolio Securities --* --* --* --*
--------------------------------------------------------------------------------------
</TABLE>
- ----------------
*May not be modified without Contract holder approval.
A-1
<PAGE>
<TABLE>
<CAPTION>
Investment Techniques/Practices (continued)
.....................................................................................
Symbols X permitted -- not permitted
-------------------------------------------------------------------------------------
MMVA HYVA CAVA GSVA
---- ---- ---- ----
<S> <C> <C> <C> <C>
Leveraging Transactions
--------------------------------------------------------------------------------------
Bank Borrowings --* --* --* --*
--------------------------------------------------------------------------------------
Mortgage "Dollar-Roll" Transactions --* --* --* --*
--------------------------------------------------------------------------------------
Reverse Repurchase Agreements --* --* --* --*
--------------------------------------------------------------------------------------
Options
Options on Foreign Currencies --* --* X --
--------------------------------------------------------------------------------------
Options on Futures Contracts --* --* X --
--------------------------------------------------------------------------------------
Options on Securities --* --* X --
--------------------------------------------------------------------------------------
Options on Stock Indices --* --* X --
--------------------------------------------------------------------------------------
Reset Options --* --* -- --
--------------------------------------------------------------------------------------
"Yield Curve" Options --* --* -- --
--------------------------------------------------------------------------------------
Repurchase Agreements X X X X
--------------------------------------------------------------------------------------
Restricted Securities -- X X X
--------------------------------------------------------------------------------------
Short Sales --* --* --* --*
--------------------------------------------------------------------------------------
Short Sales Against the Box --* --* --* --*
--------------------------------------------------------------------------------------
Short Term Instruments X X X X
--------------------------------------------------------------------------------------
Swaps and Related Derivative Instruments -- X -- --
--------------------------------------------------------------------------------------
Temporary Borrowings X X X X
--------------------------------------------------------------------------------------
Temporary Defensive Positions X X X X
--------------------------------------------------------------------------------------
Warrants -- X X --
--------------------------------------------------------------------------------------
"When-issued" Securities -- X X X
--------------------------------------------------------------------------------------
</TABLE>
- ----------------
*May not be modified without Contract holder approval.
A-2
<PAGE>
<TABLE>
<CAPTION>
Investment Techniques/Practices (continued)
.............................................................................
Symbols X permitted -- not permitted
-----------------------------------------------------------------------------
TRVA GGVA MSVA
---- ---- ----
<S> <C> <C> <C>
Debt Securities
------------------------------------------------------------------------------
Asset-Backed Securities
------------------------------------------------------------------------------
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities X -- --
------------------------------------------------------------------------------
Corporate Asset-Backed Securities X -- --
------------------------------------------------------------------------------
Mortgage Pass-Through Securities X X --
------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities X -- --
------------------------------------------------------------------------------
Corporate Securities X -- --
------------------------------------------------------------------------------
Loans and Other Direct Indebtedness X -- --
------------------------------------------------------------------------------
Lower Rated Bonds X -- --
------------------------------------------------------------------------------
Municipal Bonds X -- --
------------------------------------------------------------------------------
Speculative Bonds X X --
------------------------------------------------------------------------------
U.S. Government Securities X X X
------------------------------------------------------------------------------
Variable and Floating Rate Obligations X X X
------------------------------------------------------------------------------
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X -- X
------------------------------------------------------------------------------
Equity Securities X X X
------------------------------------------------------------------------------
Foreign Securities Exposure
Brady Bonds X X --
------------------------------------------------------------------------------
Depositary Receipts X X X
------------------------------------------------------------------------------
Dollar-Denominated Foreign Debt
Securities X X --
------------------------------------------------------------------------------
Emerging Markets X X X
------------------------------------------------------------------------------
Foreign Securities X X X
------------------------------------------------------------------------------
Forward Contracts X X X
------------------------------------------------------------------------------
Futures Contracts X X X
------------------------------------------------------------------------------
Indexed Securities/Structured Products X X --
------------------------------------------------------------------------------
Inverse Floating Rate Obligations X X --
------------------------------------------------------------------------------
Investment in Other Investment Companies
Open-End Funds --* --* --*
------------------------------------------------------------------------------
Closed-End Funds X X X
------------------------------------------------------------------------------
Lending of Portfolio Securities X X --*
------------------------------------------------------------------------------
Leveraging Transactions
Bank Borrowings --* --* --*
------------------------------------------------------------------------------
Mortgage "Dollar-Roll" Transactions --* --* --*
------------------------------------------------------------------------------
Reverse Repurchase Agreements --* --* --*
------------------------------------------------------------------------------
</TABLE>
- ----------------
*May not be modified without Contract holder approval.
A-3
<PAGE>
<TABLE>
<CAPTION>
Investment Techniques/Practices (continued)
.............................................................................
Symbols X permitted -- not permitted
-----------------------------------------------------------------------------
TRVA GGVA MSVA
---- ---- ----
<S> <C> <C> <C>
Options
------------------------------------------------------------------------------
Options on Foreign Currencies --* X X
------------------------------------------------------------------------------
Options on Futures Contracts --* X X
------------------------------------------------------------------------------
Options on Securities --* X X
------------------------------------------------------------------------------
Options on Stock Indices --* X X
------------------------------------------------------------------------------
Reset Options --* X --
------------------------------------------------------------------------------
"Yield Curve" Options --* X --
------------------------------------------------------------------------------
Repurchase Agreements X X X
------------------------------------------------------------------------------
Restricted Securities X X X
------------------------------------------------------------------------------
Short Sales --* --* --*
------------------------------------------------------------------------------
Short Sales Against the Box -- --* X
------------------------------------------------------------------------------
Short Term Instruments X X X
------------------------------------------------------------------------------
Swaps and Related Derivative Instruments X X --
------------------------------------------------------------------------------
Temporary Borrowings X X X
------------------------------------------------------------------------------
Temporary Defensive Positions X X X
------------------------------------------------------------------------------
Warrants X X X
------------------------------------------------------------------------------
"When-issued" Securities X X X
------------------------------------------------------------------------------
</TABLE>
- ----------------
*May not be modified without Contract holder approval.
A-4
<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, 1999 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 2--Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, Total Return Variable
Account, Global Governments Variable Account and Managed Sectors Variable
Account.
Name ___________________________________________________________
Address_________________________________________________________
________________________________________________________________
City ______________________ State __________ Zip _____________
Telephone ______________________________________________________
<PAGE>
PROSPECTUS
May 1, 1999
Combination Fixed/Variable
Annuity for Personal and
Qualified Retirement Plans
[logo: Compass 3]
Issued in connection with
o Money Market Variable Account
o High Yield Variable Account
o Capital Appreciation Variable Account
o Government Securities Variable Account
o Global Governments Variable Account
o Total Return Variable Account
o Managed Sectors Variable Account
CO3US-1-5/98/60M
Issued by
Sun Life Assurance Company of Canada (U.S.)
Annuity Service Mailing Address:
Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Toll-Free Telephone: (800) 752-7215
In Massachusetts: (617) 348-9600
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
<PAGE>
May 1, 1999
COMPASS 2 and COMPASS 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 .................................................... 7
Annuity Provisions ..................................................................... 11
Other Contractual Provisions ........................................................... 11
Federal Tax Status ..................................................................... 12
Administration of the Contracts ........................................................ 15
Distribution of the Contracts .......................................................... 16
Accountants and Financial Statements ................................................... 16
Appendix A -- The Fixed Account ........................................................ A-1
Appendix B -- Examples of Certain Calculations ......................................... B-1
Appendix C -- Withdrawals and Withdrawal Charges ....................................... C-1
Appendix D -- Transactions in Securities of Regular Broker-Dealers and their Affiliates D-1
Appendix E -- Investment Techniques, Practices and Risks ............................... E-1
Appendix F -- Description of Bond Ratings .............................................. F-1
</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 Compass 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, Global Governments Variable Account and Managed
Sectors Variable Account (the "Variable Accounts") which is not necessarily
included in the Compass 2 and Compass 3 Prospectuses, each dated May 1, 1999
(the "Prospectuses"). This SAI should be read in conjunction with the
Prospectuses, copies of which may be obtained without charge from the Company at
its Annuity Service Mailing Address, 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 those used in the
Prospectuses.
- --------------------------------------------------------------------------------
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, Sun Life Financial
Services Limited which provides off-shore administrative services to the Company
and Sun Life Assurance Company of Canada ("Sun Life (Canada)"), and Sun Life
Information Services Ireland Limited, an offshore technology center.
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"), 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 in
all U.S. states (except New York) and in 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"), Global
Governments Variable Account ("GGVA") 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 objective and principal investment policies of each Variable
Account are described in the Prospectus. In pursuing its investment objective
and principal investment policies, a Variable Account may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without contract
holder approval unless indicated otherwise, are identified in Appendix A to the
Prospectus, and are more fully described, together with their associated risks,
in Appendix E of this SAI. The following percentage limitations (as a percentage
of net assets) apply to these investment techniques and practices:
<TABLE>
<CAPTION>
Percentage Restriction
(Based on Net Assets)
Investment Limitation ----------------------
<S> <C>
1. MMVA
Finance Companies, Banks, Bank Holding Companies and
Utilities Companies: ........................................... 75%
Bank Obligations Where the Issuing Bank Has Capital, Surplus
and Undivided Profit Less Than or Equal to $100 million:........ 10%
2. HYVA
Foreign Securities: ............................................. 25%
Emerging Market Securities: ..................................... 5%
Lower Rated Bonds: .............................................. 100%
3. CAVA
Foreign Securities: ............................................. 25%
Lower Rated Bonds: .............................................. 5%
4. TRVA
Foreign Securities .............................................. up to (but not including) 20%
Lower Rated Bonds: .............................................. up to (but not including) 20%
Securities Lending: ............................................. 30%
5. GGVA
Foreign Securities: ............................................. 100%
Emerging Market Securities: ..................................... up to (but not including) 20%
Lower Rated Bonds: .............................................. 0%
Securities Lending: ............................................. 30%
6. MSVA
Foreign Securities: ............................................. up to (but not including) 20%
</TABLE>
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 GGVA 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,
3
<PAGE>
TRVA, GGVA 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,
GGVA, 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, GGVA 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, GGVA and MSVA from purchasing, owning, holding or
selling contracts for the future delivery of securities or currencies.
Warrants and convertible securities may be purchased and sold by the
Variable Account; however, except as to TRVA where the grantor of warrants
is the issuer of the underlying securities, no more than 5% of the Variable
Account's total assets may consist of warrants and no more than 5% of the
Variable Account's total assets may consist of convertible securities. A
warrant is a certificate entitling the Variable Account to purchase a
specified amount of securities at a specified time at a specified price. A
convertible security is a bond, debenture or preferred security which may
be exchanged by the Variable Account for common stock or another security.
With respect to warrants, the risk exists that the market value of the
underlying security will not exceed or equal the exercise price at some
time during the exercise period.
(6) Purchase or retain the securities of any issuer if any of the members
of the Board of Managers of the Variable Account or the directors and
officers of the Company or MFS own beneficially more than one-half of one
percent (.50%) of the securities of such issuer and together own more than
5% of the securities of such issuer.
(7) Invest for the purpose of exercising control or management of another
issuer.
(8) Invest in commodities or commodity futures contracts or in real
estate; except that this shall not prevent CAVA, GSVA, GGVA 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, GGVA 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)
4
<PAGE>
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, GGVA and MSVA, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies, and
collateral arrangements with respect to initial and variation margins are
not deemed to be the issuance of a senior security.
With the exception of repurchase agreements, if a percentage restriction
is adhered to at the time of investment, a later increase or decrease in
percentage beyond the specified limit resulting from a change in values or net
assets will not be considered a violation.
Investment Restrictions That Apply Only to MMVA:
MMVA will operate under the general investment restrictions described
above. In addition, MMVA will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the
value of its assets would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class).
(3) Concentrate more than 25% of the value of its assets in any one
industry, provided that the restriction shall not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities, or certificates of deposit or securities issued or
guaranteed by domestic banks (See "Money Market Variable Account" for a
description of such securities).
(4) Purchase equity securities, voting securities or local or state
government securities.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements).
Investment Restrictions That Apply Only To HYVA:
HYVA will operate under the general investment restrictions described
above. In addition, HYVA will not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if, as a result of such purchase, more than 10% of the
value of its assets would be invested in securities of that issuer.
(2) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric and gas utilities shall each be
considered a separate industry.
(3) Invest more than 10% of its total assets in securities of issuers
which are not readily marketable.
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.
5
<PAGE>
(3) Concentrate more than 25% of the value of its assets in any one
industry. Water, communications, electric and gas utilities shall each be
considered a separate industry.
(4) Invest more than 10% of its total assets in securities of issuers
which are not readily marketable.
Investment Restrictions That Apply Only To GSVA:
GSVA will operate under the general investment restrictions described
above. In addition, GSVA will not:
(1) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the
value of its assets would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class).
(3) Purchase equity securities or voting securities.
(4) Purchase interests in pools of mortgages evidenced by direct pass
through mortgage certificates if, as a result of such purchase, more than
90% of the value of its assets would be evidenced by direct pass through
mortgage certificates.
(5) Invest in securities of issuers which are not readily marketable
(except for repurchase agreements maturing in more than seven days).
Investment Restrictions That Apply Only To TRVA:
TRVA will operate under the general investment restrictions described
above. In addition, TRVA will not:
(1) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objectives, up to
25% of its assets, taken at market value at the time of each investment,
may be invested in any one industry.
(2) Purchase the securities of any issuer (other than obligations of, or
guaranteed by the United States government, its agencies or
instrumentalities) if such purchase, at the time thereof, would cause more
than 5% of its total assets, taken at market value, to be invested in the
securities of such issuer.
(3) Purchase voting securities of any issuer if such purchase, at the
time thereof, would cause more than 10% of the outstanding voting
securities of such issuer to be held by the Account, or purchase securities
of any issuer if such purchase, at the time thereof, would cause the
Account to hold more than 10% of any class of securities of such issuer.
For this purpose, all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a single class.
Investment Restrictions That Apply Only To GGVA:
GGVA will operate under the general investment restrictions described
above. In addition, GGVA 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.
6
<PAGE>
(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 the Boards of
Managers of all seven Variable Accounts 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, Member 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.; and former Senior
Vice President and General Counsel for M/A Com, Inc.
(manufacturer of microwave communications equipment)
(prior to December 1995).
William R. Gutow, Member He is a private investor; real estate consultant; and Vice
(born 9/27/41) Chairman of Capital Entertainment (Blockbuster Video
3102 Maple Avenue, #100 Franchise).
Dallas, Texas 75201
David D. Horn*, Member He is a Director of Sun Life Assurance Company of
(born 6/7/41) Canada (U.S.); and a former Senior Vice President and
Strong Road General Manager for the United States of Sun Life
New Vineyard, Maine 04956 Assurance Company of Canada.
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 and Sun Life Insurance and Annuity
(born 2/17/34) Company of New York; and Director and former Chairman
150 King Street West of Sun Life Assurance Company of Canada (U.S.).
Toronto, Ontario, Canada M5H 1J9
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Members and Officers During Past Five Years
-------------------- ----------------------
<S> <C>
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
officers of Sun Life Assurance Company of Canada, received from $4,230 to
$7,190 annually from each Variable Account depending on attendance at meetings.
Trustee Compensation Table
<TABLE>
<CAPTION>
Total Trustee Fees
Trustee Fees from from the Variable Accounts
Trustee each Variable Account(1) and Fund Complex(2)
- ------------------------------ -------------------------- ---------------------------
<S> <C> <C>
Samuel Adams ................. $1,286 $36,000
J. Kermit Birchfield ......... 1,286 36,000
William Gutow ................ 1,286 71,200
David D. Horn ................ 1,143 32,000
John D. McNeil ............... 0** 0**
Garth Marston ................ 1,000 28,000
Derwyn F. Phillips ........... 1,286 36,000
</TABLE>
- ---------------------
(1) For the year ended December 31, 1998.
(2) Information provided for calendar year 1998. All Trustees receiving
compensation from the Variable Accounts served as Trustees of 33 funds
within the MFS fund complex, having aggregate net assets at December 31,
1998 of $11.8 billion, except Mr. Gutow, who served as Trustee of 58 funds
within the MFS complex (having aggregate net assets at December 31, 1998,
of approximately $14.8 billion).
** Mr. McNeil is affiliated with MFS and received no compensation from the
Variable Accounts.
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
8
<PAGE>
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 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
CAVA
GGVA 0.75% of first $300 million in ADNA and 0.675% of ADNA in
TRVA excess of $300 million
MSVA
</TABLE>
Each Variable Account pays its respective fees and expenses of the Board of
Managers, independent certified public accountants, counsel, and custodian, the
cost of reports and notices to owners of contracts, brokerage commissions and
transaction costs, foreign and domestic taxes and registration fees. MFS has
undertaken to reimburse each Variable Account whose operating expenses,
excluding taxes, extraordinary expenses and brokerage and transaction costs, and
excluding the mortality and expense risk charges and contract maintenance
charges payable to the Company, exceed 1.25% of the average daily net assets of
the Variable Account for the calendar year. No reimbursements were made in 1996,
1997 or 1998. The investment management fees paid by the Variable Accounts
during 1996, 1997 and 1998, 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 1998 % ADNA ended 1997 % ADNA ended 1996 % ADNA
- ------------------ ------------- ------ ------------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
MMVA ............. $ 596,040 0.50% $ 639,020 0.50% $ 734,295 0.50%
GSVA ............. 1,022,826 0.55 1,159,662 0.55 1,360,942 0.55
HYVA ............. 1,359,299 0.75 1,428,572 0.75 1,416,024 0.75
CAVA ............. 4,766,483 0.71 4,299,068 0.71 3,818,062 0.75
GGVA ............. 156,531 0.75 200,641 0.75 252,025 0.75
TRVA ............. 2,389,991 0.75 2,247,413 0.75 2,058,627 0.75
MSVA ............. 913,490 0.75 836,134 0.75 674,276 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
9
<PAGE>
to December 31, 1997, and the year ended December 31, 1998, MFS received fees
under this Agreement as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CAVA .......... $83,818 $71,615
GSVA .......... 23,491 24,486
HYVA .......... 23,081 22,104
MSVA .......... 15,354 13,312
MMVA .......... 15,121 15,246
TRVA .......... 40,297 35,404
GGVA .......... 2,619 3,075
</TABLE>
(3) Portfolio Transactions
In placing orders for any purchases and sales of portfolio securities for
the Variable Accounts, MFS 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 to
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 is 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 1996, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
Brokerage Commissions Paid
--------------------------------------
Variable Account 1996 1997 1998
- ------------------ ----------- ----------- ----------
<S> <C> <C> <C>
CAVA ............. $765,000 $857,057 1,137,489
HYVA ............. 0 2,824 3,242
TRVA ............. 236,000 86,763 364,718
MSVA ............. 264,000 233,940 453,476
</TABLE>
No commissions were paid by MMVA, GSVA or GGVA in 1996, 1997 and 1998.
See Appendix D 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.
10
<PAGE>
ANNUITY PROVISIONS
Determination of Annuity Payments
On the Annuity Commencement Date the Contract's Accumulation Account will
be canceled and its adjusted value will be applied to provide a Variable Annuity
or a Fixed Annuity or a combination of both. The adjusted value will be equal to
the value of the Accumulation Account for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by any applicable
premium or similar taxes and a proportionate amount of the contract maintenance
charge to reflect the time elapsed between the last Contract Anniversary and the
day before the Annuity Commencement Date.
The dollar amount of the first variable annuity payment will be determined
in accordance with the annuity payment rates found in the Contract which are
based on an assumed interest rate of 4% per year. All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract. The number of Annuity Units to be credited in respect of a particular
Variable Account is determined by dividing that portion of the first variable
annuity payment attributable to that Variable Account by the Annuity Unit value
of that Variable Account for the Valuation Period which ends immediately
preceding the Annuity Commencement Date. The number of Annuity Units of each
particular Variable Account credited to the Contract then remains fixed unless
an exchange of Annuity Units is made as described below. The dollar amount of
each variable annuity payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of a particular Variable Account credited to the
Contract by the Annuity Unit value for the particular Variable Account for the
Valuation Period which ends immediately preceding the due date of each
subsequent payment.
For a description of fixed annuity payments see Appendix B.
For a hypothetical example of the calculation of a variable annuity
payment, see Appendix B.
Annuity Unit Value
The Annuity Unit value for each Variable Account was established at $10.00
for the first Valuation Period of the particular Variable Account. The Annuity
Unit value for any subsequent Valuation Period is determined by multiplying the
Annuity Unit value for the immediately preceding Valuation Period by the
appropriate Net Investment Factor (See "Net Investment Factor" in the
Prospectus) for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of 4% per year used to
establish the annuity payment rates found in the Contract. This factor is
0.99989255 for a one day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix B.
OTHER CONTRACTUAL PROVISIONS
Owner and Change of Ownership
The Contract shall belong to the Owner. All Contract rights and privileges
may be exercised by the Owner without the consent of the Beneficiary (other than
an irrevocably designated beneficiary) or any other person. Such rights and
privileges may be exercised only during the lifetime of the Annuitant and prior
to the Annuity Commencement Date, except as otherwise provided in the Contract.
In some qualified plans the Owner of the Contract is a Trustee and the Trust
authorizes the Annuitant/Participant to exercise certain contract rights and
privileges.
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Owner; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement or
deferred compensation plans for which a Qualified Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold,
11
<PAGE>
assigned, transferred, discounted or pledged as collateral for a loan or as
security for the performance of an obligation or for any other purpose to any
person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, although such change may result in the imposition of tax (see
"Federal Tax Status--Taxation of Annuities in General"). A change of ownership
will not be binding upon the Company until written notification is received by
the Company. Once received by the Company the change will be effective as of the
date on which the request for change was signed by the Owner but the change will
be without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change. The Company may require that
the signature of the Owner be guaranteed by a member firm of the New York,
American, Boston, Midwest, Philadelphia or Pacific Stock Exchange, or by a
commercial bank (not a savings bank) which is a member of the Federal Deposit
Insurance Corporation or, in certain cases, by a member firm of the National
Association of Securities Dealers, Inc. which has entered into an appropriate
agreement with the Company.
Designation and Change of Beneficiary
The Beneficiary designation contained in the application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
may change or revoke the designation of a Beneficiary at any time while the
Annuitant is living by filing with the Company a written beneficiary designation
or revocation in such form as the Company may require. The change or revocation
will not be binding upon the Company until it is received by the Company. When
it is so received the change or revocation will be effective as of the date on
which the Beneficiary designation or revocation was signed by the Owner.
Custodian
The Custodian of the assets of the Variable Accounts is State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
The Custodian's responsibilities include safekeeping and controlling the
Variable Accounts' cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Variable Accounts' investments, maintaining books of original entry for
portfolio and fund accounting and other required books and accounts, and
calculating Accumulation Unit and Annuity Unit values. The Custodian does not
determine the investment policies of the Variable Accounts or decide which
securities the Variable Accounts will buy or sell. The Variable Accounts may,
however, invest in securities of the Custodian and may deal with the Custodian
as principal in securities transactions. Portfolio securities may be deposited
into the Federal Reserve--Treasury Department Book Entry System or the
Depository Trust Company.
FEDERAL TAX STATUS
Introduction
The Contracts described in the Prospectuses are designed for use in
connection with retirement plans that may or may not be qualified plans under
Sections 401, 403, 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
12
<PAGE>
STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
Tax Treatment of the Company and the Variable Accounts
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Accounts are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Accounts are not separately taxable as regulated investment companies or
otherwise as taxable entities separate from the Company. Under existing federal
income tax laws, the income (consisting primarily of interest, dividends, and
net capital gains) of the Variable Accounts, to the extent that it is applied to
increase reserves under the Contracts, is not taxable to the Company.
Taxation of Annuities in General
Generally, no tax is imposed on the increase in the value of a Contract
held by an individual Owner until distribution occurs, either as annuity
payments under the annuity option elected or in the form of cash withdrawals or
lump-sum payments prior to the Annuity Commencement Date.
Corporate Owners and other Owners that are not natural persons (other than
the estate of a decedent Owner) are subject to current taxation on the annual
increase in the value of a Non-Qualified Contract's Accumulation Account. This
rule does not apply where a non-natural person holds the Contract as agent for a
natural person (such as where a bank holds a Contract as trustee under a trust
agreement). This provision does not apply to earnings accumulated under an
immediate annuity (as defined below). This provision applies to earnings on
Purchase Payments made after February 28, 1986.
The following discussion of annuity taxation applies only to contributions
(and attributable earnings) made to Non-Qualified Contracts after August 13,
1982. If an Owner has made contributions before August 14, 1982 to another
annuity contract and exchanges that contract for this Contract, then different
tax treatment will apply to the contributions (and attributable earnings) made
before August 14, 1982. For example, non-taxable principal may be withdrawn
before taxable earnings and the 10% penalty tax for early withdrawal is not
applicable.
In the case of a Non-Qualified Contract (other than a Contract issued in
exchange for a contract issued prior to August 14, 1982, as discussed above), a
partial cash withdrawal (that is, a withdrawal of less than the entire value of
the Contract's Accumulation Account), must be treated first as a withdrawal
from the excess of the Accumulation Account's value over the Contract's cost
basis. The amount of the withdrawal so allocable will be includible in the
Owner's income. Similarly, if an individual receives a loan under a Contract or
if the Contract is assigned or pledged as collateral for a loan, the amount of
the loan or the amount assigned or pledged must be treated as if withdrawn from
the Contract. (For Non-Qualified Contracts entered into after October 21, 1988
(or any annuity contract entered into on or before such date that is exchanged
for a Non-Qualified Contract issued after such date), any withdrawal or loan
amount that is includible in the Owner's income will increase the Contract's
cost basis. Repayment of a loan or payment of interest on a loan will not
affect the Contract's cost basis. For these purposes the Contract's
Accumulation Account value will not be reduced by the amount of any loan,
assignment, or pledge of the Contract. In addition, all non-qualified deferred
annuity contracts that are issued by the Company to the same Owner during any
calendar year will be treated as a single annuity contract. Therefore, the
proceeds of a withdrawal or loan from, or assignment or pledge of, one or more
such contracts will be fully includible in the Owner's income to the extent of
the aggregate excess of the accumulation account values over the cost bases of
all such contracts entered into during the calendar year).
The taxable portion of a cash withdrawal or a lump-sum payment prior to the
Annuity Commencement Date is subject to tax at ordinary income rates. In the
case of payments after the Annuity Commencement Date under the annuity option
elected, a portion of each payment generally is taxable at ordinary income
rates. The nontaxable portion is determined by applying to each payment an
"exclusion ratio" which is the ratio that the cost basis of the Contract bears
to the expected return under the Contract. The remainder of the payment is
taxable.
13
<PAGE>
The total amount that a Payee may exclude from income through application
of the "exclusion ratio" is limited to the cost basis in the Contract. If an
Annuitant survives for his full life expectancy so that the Payee recovers the
entire basis in the Contract, any subsequent annuity payment after basis
recovery will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire basis, the Payee will be allowed a
deduction for the amount of the unrecovered basis. This limitation applies to
distributions made under a Contract with an Annuity Commencement Date after
December 31, 1986.
In the case of Non-Qualified Contracts, taxable cash withdrawals and
lump-sum payments will be subject to a 10% penalty, except in the circumstances
described below. This 10% penalty also affects certain annuity payments. In a
situation where this penalty applies, the recipient's tax for the tax year in
which the amount is received shall be increased by an amount equal to 10% of the
portion of the amount which is includible in the recipient's gross income. This
penalty will not apply to distributions which are: (a) made after the Owner has
reached age 59-1/2; (b) made to a Beneficiary or to the estate of the Owner upon
the death of the Owner; (c) attributable to the Owner's becoming disabled, so as
to be unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or to be of long-continued and indefinite duration; (d)
allocable to Purchase Payments made before August 14, 1982; or (e) one of a
series of substantially equal periodic payments made for the life of the Owner
or over the joint lives of the Owner and a designated beneficiary. In the case
of this last exception payments cannot be made less frequently than annually.
Further, any modification of the payment schedule before the later of five years
after payments commence or the Owner reaching age 59-1/2 will trigger the
penalty tax with respect to current and prior distributions (plus, in the case
of prior distributions, interest thereon). The withdrawal penalty does not apply
to distributions under an immediate annuity (defined as a single premium
contract with an annuity commencement date within one year of the date of
purchase). In the case of Contracts issued prior to January 18, 1985, the
penalty on taxable cash withdrawals and lump sum distributions will not apply if
the amount withdrawn is allocable to a Purchase Payment made prior to the
preceding ten year period. For this purpose, a "first in, first out" rule is
used, so that the earliest Purchase Payment with respect to which amounts have
not been previously fully allocated will be deemed to be the source of the
amount.
If the Owner of a Non-Qualified Contract dies before the Annuity
Commencement Date, the entire value of the Contract's Accumulation Account must
be either (1) distributed within five years after the date of death of the
Owner, or (2) distributed over some period not greater than the expected life of
the designated Payee, with annuity payments beginning within one year after the
date of death of the Owner. These distribution requirements will not apply where
the spouse of the Owner is the designated Beneficiary; rather, in such a case,
the Contract may be continued in the name of the spouse as Owner. If the
Owner/Annuitant dies on or after the Annuity Commencement Date and before the
entire accumulation under the Contract has been distributed, the remaining
portion of such accumulation, if any, must be distributed at least as rapidly as
the method of distribution then in effect. In the case of Contracts issued prior
to January 18, 1985, these rules regarding distributions upon the death of the
Owner or the Annuitant will not apply. In the case of Contracts issued after
April 22, 1987, where the Owner of a Contract is not an individual, the rules
requiring distributions upon the death of the Owner will be applied with respect
to the Annuitant, resulting in income to the Payee. In such a case, a change in
the Annuitant would be treated as the death of the Owner. Distributions required
due to the death of the Owner (or, where the Owner is not an individual, to the
death of the Annuitant) will not be subject to the 10% penalty on premature
distributions. A purchaser of a Qualified Contract should refer to the terms of
the applicable retirement plan and consult a tax adviser regarding distribution
requirements upon death.
A transfer of a Non-Qualified Contract by gift (other than to the Owner's
spouse) is treated as the receipt by the Owner of income in an amount equal to
the excess of the cash surrender value over the Contract's cost basis. This
provision applies to Contracts issued after April 22, 1987.
In the case of Qualified Contracts, distributions made prior to age 59-1/2
generally are subject to a 10% penalty tax, although this tax will not apply in
certain circumstances. Certain distributions, known as "eligible rollover
distributions," if rolled over to certain other qualified retirement plans
(either directly or after being distributed to the Owner or Payee), are not
taxable until distributed from the plan to which
14
<PAGE>
they are rolled over. In general, an eligible rollover distribution is any
taxable distribution other than a hardship distribution or a distribution that
is part of a series of payments made for life or for a specified period of ten
years or more. Owners, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Contracts are purchased.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Owner or Payee provides his or her taxpayer identification number to
the Company and notifies the Company (in the manner prescribed) before the time
of the distribution that he or she chooses not to have any amounts withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Owner or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Owner or Payee can choose not to
have amounts withheld as described above for Non-Qualified Contracts and
individual retirement accounts.
Amounts withheld from any distribution may be credited against the Owner's
or Payee's federal income tax liability for the year of the distribution.
The Tax Reform Act of 1984 authorizes the Internal Revenue Service to
promulgate regulations that prescribe investment diversification requirements
for segregated asset accounts underlying non-qualified variable contracts.
Contracts that do not comply with these regulations do not qualify as
"annuities" for income tax purposes. The Internal Revenue Service has issued
Regulations containing diversification requirements for segregated asset
accounts and mutual fund series underlying non-qualified variable contracts. The
Regulations provide generally that a segregated asset account (such as the
Variable Accounts) will be adequately diversified if (1) not more than 55% of
its total assets are invested in the securities of one issuer, (2) not more than
70% of its total assets are invested in the securities of two issuers, (3) not
more than 80% of its total assets are invested in the securities of three
issuers, and (4) not more than 90% of its total assets are invested in the
securities of four issuers. In the case of "government securities," each United
States government agency or instrumentality is treated as a separate issuer.
"Government securities" include any security that is issued or guaranteed by the
United States or an instrumentality of the United States and related options,
Futures Contracts and Options on Futures Contracts. The Company believes the
Variable Accounts comply with the Regulations.
The preamble to the Regulations states that the Internal Revenue Service
may promulgate guidelines under which a variable contract will not be treated as
an annuity for tax purposes if the owner has excessive control over the
investments underlying the contract. It is not known whether such guidelines, if
in fact promulgated, would have retroactive effect. If guidelines are
promulgated, the Company will take any action (including modification of the
Contract or the Variable Accounts) necessary to comply with the guidelines.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
contracts participating in the Variable Accounts and the Variable Accounts.
These functions include, among other things, maintaining the books and records
of the Variable Accounts and maintaining records of the name, address, taxpayer
identification number, contract number, type of contract issued to each owner,
the status of the accumulation account under each contract and other pertinent
information necessary to the administration and operation of the contracts.
15
<PAGE>
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 02481, a wholly-owned subsidiary
of the Company. Commissions and other distribution compensation will be paid by
the Company and will not be more than 5.11% of the Purchase Payments 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, as
permitted by applicable regulations, 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 1996, 1997, and 1998, 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>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Compass 2 .......... $208,000 $168,000 $156,670
Compass 3 .......... 576,000 560,000 560,830
</TABLE>
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, 1998. 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,
---------------------------------
1998 1997
--------------- ---------------
(In Thousands)
<S> <C> <C>
Admitted Assets
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and
uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
----------- -----------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
----------- -----------
Total Admitted Assets $16,902,621 $15,925,357
=========== ===========
Liabilities
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
----------- -----------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
----------- -----------
Total liabilities 15,992,697 15,092,662
----------- -----------
Capital Stock and Surplus
Common capital stock 5,900 5,900
----------- -----------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
----------- -----------
Surplus 904,024 826,795
----------- -----------
Total common capital stock and surplus 909,924 832,695
----------- -----------
Total Liabilities, Capital Stock and Surplus $16,902,621 $15,925,357
=========== ===========
</TABLE>
See notes to statutory financial statements.
17
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
<TABLE>
<CAPTION>
Statutory Statements of Operations
Years ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Income:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary contracts without life
contingencies and dividend accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance reserve 2,282 1,166 1,557
Income from fees associated with investment
management and administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from Separate Account -- 5 --
Other income 87,364 102,889 87,532
--------- --------- ---------
Total 2,768,277 2,895,044 2,520,632
--------- --------- ---------
Benefits and Expenses:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits under accident and
health policies 104 132 105
Surrender benefits and other fund withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts without life
contingencies and dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate reserves for life and
accident and health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium and other deposit
funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for supplementary
contracts without life contingencies and for dividend
and coupon accumulations (362) 42 327
--------- --------- ---------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity considerations
(direct business only) 137,718 132,700 109,894
Commissions and expense allowances on reinsurance
assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees, excluding federal
income taxes 7,388 8,267 8,431
Increase (decrease) in loading on and cost of
collection in excess of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on reinsurance
terminated 1,017,112 -- --
--------- --------- ---------
Total 2,637,538 2,751,853 2,378,681
--------- --------- ---------
Net gain from operations before dividends to
policyholders and Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
--------- --------- ---------
Net gain from operations after dividends to
policyholders and before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense (benefit), (excluding tax
on capital gains) 11,713 7,339 (5,400)
--------- --------- ---------
Net gain from operations after dividends to
policyholders and federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less capital gains tax and
transferred to the IMR 394 26,706 4,862
--------- --------- ---------
Net Income $ 125,401 $ 129,242 $ 123,024
========= ========= =========
</TABLE>
See notes to statutory financial statements.
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,
----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Capital and surplus, beginning of year $832,695 $ 567,143 $ 792,452
-------- ---------- ----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation
basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate
Accounts during period 82 -- 100
Other changes in surplus in Separate Accounts
Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
-------- ---------- ----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
-------- ---------- ----------
Capital and surplus, end of year $909,924 $ 832,695 $ 567,143
======== ========== ==========
</TABLE>
See notes to statutory financial statements.
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,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and deposit funds
received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary contracts and
dividend accumulations received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
------------ ------------ ------------
Total receipts 2,853,846 2,966,036 2,475,126
------------ ------------ ------------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid (other than
federal income and capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments (recoveries),(excluding
tax on capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
------------ ------------ ------------
Total payments 3,198,741 3,150,273 2,608,634
------------ ------------ ------------
Net cash used in operations (344,895) (184,237) (133,508)
------------ ------------ ------------
Proceeds from long-term investments sold, matured
or repaid (after deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and $1,555 for
1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
------------ ------------ ------------
Total cash provided 1,220,867 1,664,898 1,581,103
------------ ------------ ------------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
------------ ------------ ------------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
------------ ------------ ------------
End of year $ 265,226 $ 544,418 $ 148,059
============ ============ ============
</TABLE>
See notes to statutory financial statements.
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, 1998, 1997 and 1996
1. Description of Business and Summary of Significant Accounting Policies
General
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada--U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices, as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
20 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
Invested Assets
Bonds are carried at cost, adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
21
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Policy and Contract Reserves
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
Income and Expenses
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
Separate Accounts
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value as determined
by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
Changes in Accounting Principles and Reporting
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
Other
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
22
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
1. Description of Business and Summary of Significant Accounting Policies
(continued)
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"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
MFS. On December 24, 1997, the Company transferred all of its shares of MFS to
Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the offshore
products of Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
23
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
2. Investments in Subsidiaries (continued)
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
MCIC -- $2,000 $10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------ ------------ ------------
Total net assets $ 128,445 $ 116,985 $ 144,043
============ ============ ============
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------ ------------ ------------
Net income (loss) $ (302) $ 59,481 $ 50,261
============ ============ ============
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
24
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
3. Bonds
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
---------- -------- -------- ----------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
---------- -------- -------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances
and commercial paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
---------- -------- -------- ----------
Total short-term bonds 263,400 -- -- 263,400
---------- -------- -------- ----------
Total bonds $2,026,868 $134,431 $ (7,346) $2,153,953
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government
agencies and authorities $ 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>
25
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
3. Bonds (continued)
The amortized cost and estimated fair value of bonds at December 31, 1998 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Amortized Estimated
Cost Fair Value
---- ----------
(In Thousands)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
---------- ----------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
---------- ----------
Total bonds $2,026,868 $2,153,953
========== ==========
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. Securities Lending
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. Mortgage Loans
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
26
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
5. Mortgage Loans (continued)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
California $ 82,397 $119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
-------- --------
$535,003 $684,035
======== ========
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. Investment Gains and Losses
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48 -- --
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
-------- -------- --------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
-------- -------- --------
Total $ 394 $ 26,706 $ 4,862
======== ======== ========
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
-------- -------- --------
Total $ (384) $ 1,152 $ (1,715)
======== ======== ========
</TABLE>
27
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
6. Investment Gains and Losses (continued)
Realized capital gains and losses on bonds and mortgages and interest rate
swaps which relate to changes in levels of interest rates are charged or
credited to an interest maintenance reserve ("IMR") and amortized into income
over the remaining contractual life of the security sold. The net realized
capital gains credited to the interest maintenance reserve were $8,943,000 in
1998, $6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are
transferred net of applicable income taxes.
7. Net Investment Income
Net investment income consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest income from bonds $167,436 $188,924 $178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
-------- -------- --------
Gross investment income 242,552 326,728 342,443
-------- -------- --------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
-------- -------- --------
Net investment income $184,532 $270,249 $303,753
======== ======== ========
</TABLE>
8. Derivatives
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in the IMR and amortized over the shorter of the remaining life of
the hedged asset sold or the remaining term of the swap contract. The net
differential to be paid or received on interest rate swaps is recorded monthly
as interest rates change.
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:
28
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
8. Derivatives (continued)
<TABLE>
<CAPTION>
Swaps Outstanding
At December 31, 1998
-----------------------------------
Notional Market Value
Principal Amounts of Positions
------------------- -------------
(In Thousands)
<S> <C> <C>
Conventional interest rate swaps $45,000 $508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
Swaps Outstanding
At December 31, 1998
-----------------------------------
Notional Market Value
Principal Amounts of Positions
------------------- -------------
(In Thousands)
<S> <C> <C>
Conventional interest rate swaps $80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of nonperformance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. Leveraged Leases
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997
------------ ------------
(In Thousands)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
--------- ---------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
--------- ---------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
--------- ---------
Net investment in leveraged leases $ 32,097 $ 30,679
========= =========
</TABLE>
The net investment is included in "other invested assets" on the balance sheet.
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, 1998, 1997 and 1996
10. Reinsurance
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $2,377,364 $2,340,733 $1,941,423
Net investment income and realized gains 187,208 298,120 310,172
---------- ---------- ----------
Subtotal 2,564,572 2,638,853 2,251,595
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
---------- ---------- ----------
Subtotal 2,515,485 2,537,945 2,167,529
---------- ---------- ----------
Income from operations $ 49,087 $ 100,908 $ 84,066
========== ========== ==========
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
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, 1998, 1997 and 1996
11. Withdrawal Characteristics of Annuity Actuarial Reserves and Deposit
Liabilities
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
Amount % of Total
------------- -----------
(In Thousands)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
----------- ---
Total annuity actuarial reserves and deposit liabilities $15,494,391 100
=========== ===
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
Amount % of Total
------------- -----------
(In Thousands)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
----------- --
Total annuity actuarial reserves and deposit liabilities $13,511,954 100
=========== ===
</TABLE>
12. Segment Information
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
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, 1998, 1997 and 1996
12. Segment Information (continued)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
Federal
Total Total PreTax Income Total
(In Thousands) Revenues Expenditures Income Taxes Assets
- ---------------------- ------------ -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
---------- ---------- -------- --------- -----------
Total $2,768,277 $2,631,557 $136,720 $ 11,713 $16,902,621
---------- ---------- -------- --------- -----------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
---------- ---------- -------- --------- -----------
Total $2,895,044 $2,785,168 $109,875 $ 7,339 $15,925,357
---------- ---------- -------- --------- -----------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
---------- ---------- -------- --------- -----------
Total $2,520,632 $2,407,870 $112,762 $ (5,400) $13,563,953
---------- ---------- -------- --------- -----------
</TABLE>
- ------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. Retirement Plans
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
Other Post-Retirement Benefit Plans
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company,
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, 1998, 1997 and 1996
13. Retirement Plans (continued)
or retire early upon satisfying an alternate age plus service condition. Life
insurance benefits are generally set at a fixed amount.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of
retiree benefit payments during the years the employee provides services. SFAS
No. 106 allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to 20
years. The obligation of approximately $455,000 is recognized over a period of
ten years. The Company's cash flows are not affected by implementation of this
standard, but implementation decreased net income by $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
--------- --------- --------- --------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
========= ========= ========= ========
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
--------- --------- --------- --------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
========= ========= ========= ========
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
--------- --------- --------- --------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
========= ========= ========= ========
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
</TABLE>
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, 1998, 1997 and 1996
13. Retirement Plans (continued)
<TABLE>
<CAPTION>
Weighted-average assumptions as of
December 31:
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
For measurement purposes, a 10.1% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998 (5.7% for dental
benefits). The rates were assumed to decrease gradually to 5% for 2005 and
remain at that level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
------------ ----------- -------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
--------- -------- ----- ------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $1,147
========= ======== ===== ======
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
========= ======== ===== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage-Point
Increase Decrease
-------------------- -------------------
(In Thousands)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
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, 1998, 1997 and 1996
14. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Carrying Amount Estimated Fair Value
----------------- ---------------------
(In Thousands)
<S> <C> <C>
Assets:
Bonds $2,026,868 $2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
Liabilities:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
Carrying Amount Estimated Fair Value
----------------- ---------------------
(In Thousands)
<S> <C> <C>
Assets:
Bonds $2,451,731 $2,569,199
Mortgages 684,035 706,975
Liabilities:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
35
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
15. Statutory Investment Valuation Reserves
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to
changes in levels of interest rates are charged or credited to an interest
maintenance reserve ("IMR") and amortized into income over the remaining
contractual life of the security sold.
The table shown below presents changes in the major elements of the AVR and
IMR.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
----------------------- -------------------------
AVR IMR AVR IMR
---------- ---------- ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of
tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
-------- -------- --------- --------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
======== ======== ========= ========
</TABLE>
16. Federal Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. Surplus Notes and Notes Receivable (Payable)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after
November 6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semiannually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner.
36
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
17. Surplus Notes and Notes Receivable (Payable) (continued)
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
18. Transactions with Affiliates
The Company has an agreement with SLOC which provides that SLOC will furnish,
as requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in
1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of
thirteen successive five-year terms at fair market rental not to exceed 125% of
the fixed rent for the term which is ending. Rent received by the Company under
the leases for 1998 amounted to approximately $6,856,000.
19. Risk-Based Capital
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1998, 1997 and 1996.
20. Accounting Policies and Principles
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP: deferred policy acquisition
costs, deferred federal income taxes and statutory nonadmitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving
37
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
Notes to Statutory Financial Statements (continued)
Years Ended December 31, 1998, 1997 and 1996
20. Accounting Policies and Principles (continued)
methods differ under statutory accounting practices and GAAP. Premiums for
universal life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Sun Life Assurance Company of Canada (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory financial
statements referred to above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Sun Life Assurance
Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
Deloitte & Touche LLP
Boston, Massachusetts
February 5, 1999
39
<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
A-1
<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
A-2
<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.
A-3
<PAGE>
APPENDIX B
Examples of Certain Calculations
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).
B-1
<PAGE>
APPENDIX C
Withdrawals and Withdrawal Charges
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.
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.
C-1
<PAGE>
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>
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.
C-2
<PAGE>
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.
C-3
<PAGE>
APPENDIX D
Transactions in Securities of Regular
Broker-Dealers and Their Affiliates
During the year ended December 31, 1998 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, 1998
- --------- ------------------------------------------------- ------------------
<S> <C> <C>
MMVA Goldman Sachs & Co. $3,962,600
MMVA Merrill Lynch, Pierce, Fenner & Smith, Inc. $2,959,330
TRVA Assoc. Corp. $ 947,755
TRVA Goldman Sachs & Co. $ 596,643
TRVA Ford Motor Co. $ 513,132
MSVA Ford Motor co. $3,618,486
MSVA Assoc. Corp. $ 288,150
CAVA Morgan Stanley Dean Witter & Co. $3,464,800
HYVA Merrill Lynch, Pierce, Fenner & Smith, Inc. $ 945,469
GSVA Goldman Sachs & Co. $1,131,000
</TABLE>
D-1
<PAGE>
APPENDIX E
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the Variable Account may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Variable Account will engage only
in certain of these investment techniques and practices, as identified in
Appendix A of the Variable Account's Prospectus. Investment practices and
techniques that are not identified in Appendix A of the Variable Account's
Prospectus do not apply to the Variable Account.
Investment Techniques and Practices
Debt Securities
To the extent the Variable Account invests in the following types of debt
securities, its net asset value may change as the general levels of interest
rates fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Variable Account's investment in debt
securities with longer terms to maturity are subject to greater volatility than
the Variable Account's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
Asset-Backed Securities: The Variable Account may purchase the following
types of asset-backed securities:
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Variable Account may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities.
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 among the several classes of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes 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. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Variable Account may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). 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.
Corporate Asset-Backed Securities: The Variable Account 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. These 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
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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.
Corporate asset-backed securities are 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
Variable Account 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.
Mortgage Pass-Through Securities: The Variable Account may invest in
mortgage pass-through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
Variable Account may be different than the quoted yield on the securities.
Mortgage premiums generally increase with falling interest rates and decrease
with rising interest rates. Like other fixed income securities, when interest
rates rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities. In the event of an increase in interest rates which
results in a decline in mortgage prepayments, the anticipated maturity of
mortgage pass-through securities held by the Variable Account may increase,
effectively changing a security which was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as the
Federal National Mortgage Association "FNMA") or the Federal Home Loan Mortgage
Corporation, ("FHLMC") which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities may also be issued by non-governmental issuers (such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of insurance
or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or
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specified call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these payments are
a "pass- through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal resulting
from the sale, refinancing or foreclosure of the underlying property, net of
fees or costs which may be incurred. Some mortgage pass- through securities
(such as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interests and
principal payments owed on the mortgages in the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration ("FHA") insured or Veterans
Administration ("VA") guaranteed mortgages. These guarantees, however, do not
apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the
full faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (i.e., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages (i.e., not federally insured or guaranteed)
for FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass
through pools of mortgage loans. Such issuers may also be the originators and/or
servicers of the underlying mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Variable Account may also buy mortgage-related securities
without insurance or guarantees.
Stripped Mortgage-Backed Securities: The Variable Account may invest a
portion of its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions, mortgage
banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class
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will receive all of the interest (the interest-only or "I0" class) while the
other class will receive all of the principal (the principal-only or "P0"
class). The yield to maturity on an I0 is extremely sensitive to the rate of
principal payments, including prepayments on the related underlying Mortgage
Assets, and a rapid rate of principal payments may have a material adverse
effect on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Variable
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 the securities are traded
among institutional investors and investment banking firms.
Corporate Securities: The Variable Account may invest in debt securities,
such as convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
Loans and Other Direct Indebtedness: The Variable Account may purchase
loans and other direct indebtedness. In purchasing a loan, the Variable Account
acquires some or all of the interest of a bank or other lending institution in a
loan to a corporate, governmental or other 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 Variable 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 borrowers obligation,
or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Variable Account would assume all of the rights of the lending institution in a
loan or as an assignment, pursuant to which the Variable Account would purchase
an assignment of a portion of a lenders interest in a loan either directly from
the lender or through an intermediary. The Variable Account may also purchase
trade or other claims against companies, which generally represent money owned
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 loans and the other direct indebtedness acquired by the
Variable Account may involve revolving credit facilities or other standby
financing commitments which obligate the Variable Account to pay additional cash
on a certain date or on demand. These commitments may have the effect of
requiring the Variable Account to increase its investment in a company at a time
when the Variable 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 Variable Account is committed to advance
additional funds, it will at all times hold and maintain in a segregated account
cash or other high grade debt obligations in an amount sufficient to meet such
commitments.
The Variable Account's ability to receive payment 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 loans and other
direct indebtedness which the Variable Account will purchase, the Adviser will
rely upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Variable Account may be required to rely upon another
lending institution to collect and pass onto the Variable Account amounts
payable with respect to the loan and to enforce the Variable Account's rights
under the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Variable
Account from receiving such amounts. In such cases, the Variable 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 for
purposes of certain investment restrictions pertaining to the diversification of
the Variable Account's portfolio investments. The highly leveraged
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nature of many such loans and other direct indebtedness may make such loans and
other direct indebtedness especially vulnerable to adverse changes in economic
or market conditions. Investments in such loans and other direct indebtedness
may involve additional risk to the Variable Account.
Lower Rated Bonds: The Variable Account may invest in fixed income
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"). See
Appendix F for a description of bond ratings. No minimum rating standard is
required by the Variable Account. These securities 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 and
because 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 the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) 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). 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. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Variable Account's policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the extent a
Variable Account invests in these lower rated securities, the achievement of its
investment objectives may be a more dependent on the Adviser's own credit
analysis than in the case of a fund investing in higher quality fixed income
securities. These lower rated securities may also include zero coupon bonds,
deferred interest bonds and PIK bonds.
Municipal Bonds: The Variable Account may invest in debt securities issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay interest
income that is subject to the alternative minimum tax. The Variable Account may
invest in Municipal Bonds whose issuers pay interest on the Bonds from revenues
from projects such as multifamily housing, nursing homes, electric utility
systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds of
such an issue, there is a risk that the proceeds of the issue will be in excess
of demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when the
bonds are issued. Any difference in the actual cash flow from such mortgages
from the assumed
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cash flow could have an adverse impact upon the ability of the issuer to make
scheduled payments of principal and interest on the bonds, or could result in
early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate. The
financing of multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound management
of the developments, timely and adequate increases in rents to cover increases
in operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs importantly
in this process. The facilities may also be affected by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government agencies to
limit rates and expenses, confidence in the hospital, service area economic
developments, competition, availability and expense of malpractice insurance,
Medicaid and Medicare funding, and possible federal legislation limiting the
rates of increase of hospital charges.
The Variable Account may invest in municipal lease securities. These are
undivided interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to acquire
equipment and facilities. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in the
security of municipal lease securities, both within a particular classification
and between classifications, depending on numerous factors.
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The Variable Account may also invest in bonds for industrial and other
projects, such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and other
general economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
Speculative Bonds: The Variable Account may invest in fixed income and
convertible securities rated Baa by Moody's or BBB by S&P, Fitch or Duff &
Phelps and comparable unrated securities. See Appendix F for a description of
bond ratings. These 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.
U.S. Government Securities: The Variable Account may invest in U.S.
Government Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, some of which are backed by the full faith and credit of
the U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations of
the Student Loan Marketing Association; and some of which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities.
Variable and Floating Rate Obligations: The Variable Account may invest in
floating or variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on behalf of the Variable Account on short notice at par plus
accrued interest, which amount may be more or less than the amount the
bondholder paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of (i)
the notice period required before the Variable Account is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Variable
Account through the demand feature, the obligations mature on a specified date
which may range up to thirty years from the date of issuance.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: The Variable
Account may invest in zero coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued 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 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 than debt obligations which make regular payments of
interest. The Variable Account will accrue income on such investments for tax
and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Variable Account's distribution
obligations.
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Equity Securities
The Variable Account may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
Foreign Securities Exposure
The Variable Account may invest in various types of foreign securities, or
securities which provide the Variable Account with exposure to foreign
securities or foreign currencies, as discussed below:
Brady Bonds: The Variable Account may invest in Brady Bonds, which 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 or 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.
Depositary Receipts: The Variable Account may invest in American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other types of depositary
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Variable Account's policy to
invest a certain percentage of its assets in foreign securities, the investments
of the Variable Account in ADRs, GDRs and other types of depositary receipts are
deemed to be investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary 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, depositories 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 depository 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. The Variable Account 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 depositary receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Variable Account may purchase securities in local markets and direct
delivery of these ordinary shares to the local depositary of an ADR agent bank
in foreign country. Simultaneously, the ADR agents create a certificate which
settles at the Variable Account's custodian in five days. The Variable Account
may also execute trades on the U.S. markets using existing ADRs. A foreign
issuer of the security underlying an ADR is generally not subject to the
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same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its 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 denominated in a
foreign currency.
Dollar-Denominated Foreign Debt Securities: The Variable Account may invest
in dollar- denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign countries
could be affected by other factors including extended settlement periods.
Emerging Markets: The Variable Account may invest in securities of
government, government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described below.
o Company Debt--Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Variable Account's
portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments
have occurred frequently over the history of certain emerging markets and
could adversely affect the Variable Account's assets should these
conditions recur.
o Default; Legal Recourse--The Variable Account may have limited legal
recourse in the event of a default with respect to certain debt
obligations it may hold. If the issuer of a fixed income security owned
by the Variable Account defaults, the Variable Account may incur
additional expenses to seek recovery. Debt obligations issued by emerging
market governments differ from debt obligations of private entities;
remedies from defaults on debt obligations issued by emerging market
governments, unlike those on private debt, must be pursued in the courts
of the defaulting party itself. The Variable Account's ability to enforce
its rights against private issuers may be limited. The ability to attach
assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially
different from those of other countries. The political context, expressed
as an emerging market governmental issuer's willingness to meet the terms
of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank
debt may not contest payments to the holders of debt obligations in the
event of default under commercial bank loan agreements.
o Foreign Currencies--The securities in which the Variable Account invests
may be denominated in foreign currencies and international currency units
and the Variable Account may invest a portion of its assets directly in
foreign currencies. Accordingly, the weakening of these currencies and
units against the U.S. dollar may result in a decline in the Variable
Account's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of their
currencies into other currencies. Further, certain emerging market currencies
may not be internationally traded. Certain of these currencies have experienced
a steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which a Variable Account's portfolio securities are denominated
may have a detrimental impact on the Variable Account's net asset value.
o Inflation--Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
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emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these
countries, some, in recent years, have begun to control inflation through
prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight--The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Variable Account's securities in such
markets may not be readily available. The Variable Account may suspend
redemption of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "SEC"). Accordingly,
if the Variable Account believes that appropriate circumstances exist, it will
promptly apply to the SEC for a determination that an emergency is present.
During the period commencing from the Variable Account's identification of such
condition until the date of the SEC action, the Variable Account's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
o Sovereign Debt--Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to
reduce principal and interest on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may
be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due
may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to service its debts in a timely manner.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Variable Account) may be
requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy
proceedings by which sovereign debt on which governmental entities have
defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
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The ability of emerging market governmental issuers to make timely payments
on their obligations is likely to be influenced strongly by the issuer's balance
of payments, including export performance, and its access to international
credits and investments. An emerging market whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international prices of
one or more of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent that
emerging markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
o Withholding--Income from securities held by the Variable Account could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Variable Account makes its
investments. The Variable Account's net asset value may also be affected
by changes in the rates or methods of taxation applicable to the Variable
Account or to entities in which the Variable Account has invested. The
Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the
taxes will not be subject to change.
Foreign Securities: The Variable Account may invest in dollar-denominated
and non dollar-denominated 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. As a result of
its investments in foreign securities, the Variable Account 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.
Under certain circumstances, 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 Variable Account may hold such currencies for an indefinite period
of time. While the holding of currencies will permit the Variable Account to
take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Variable Account to risk of loss if exchange rates
move in a direction adverse to the Variable Account's position. Such losses
could reduce any profits or increase any losses sustained by the Variable
Account from the sale or redemption of securities and could reduce the dollar
value of interest or dividend payments received.
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Forward Contracts
The Variable Account 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 (e.g., to protect its
current or intended investments from fluctuations in currency exchange rates) as
well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Variable Account seeks to protect against an anticipated increase in the
exchange rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Variable
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 the Variable Account intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline in
the dollar value of portfolio securities or the increase in the dollar 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, the
Variable 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 Variable Account does not presently intend to hold Forward Contracts
entered into until the value date, at which time it 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 Variable Account's profit or loss
based upon the value of the Contracts at the time the offsetting transaction is
executed.
The Variable Account will also enter into transactions in Forward Contracts
for other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Variable Account may purchase a
given foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the U.S.
dollar. Conversely, the Variable Account may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to the
dollar.
The Variable Account will profit if the anticipated movements in foreign
currency exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Variable Account may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative and could
involve significant risk of loss.
The use by the Variable Account of Forward Contracts also involves the
risks described under the caption "Special Risk Factors--Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Futures Contracts
The Variable Account may purchase and sell futures contracts ("Futures
Contracts") on stock indices, foreign currencies, interest rates or
interest-rate related instruments, indices of foreign currencies or commodities.
The Variable Account may also purchase and sell Futures Contracts on foreign or
domestic fixed income securities or indices of such securities including
municipal bond indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, foreign currency
or commodity, or 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 month in which, in the case of the majority of
commodities, interest rate and foreign currency futures contracts, the
underlying commodities, fixed income securities or currency are delivered by the
seller and paid for by the purchaser, or on which, in the case of 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
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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. Futures Contracts call for settlement only on the
expiration date and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract 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 varies
but may be as low as 5% or less 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
"mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Variable Account's current or intended stock investments from broad
fluctuations in stock prices. For example, the Variable Account may sell stock
index futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Variable 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 part, by gains on the futures
position. When the Variable Account is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock index
futures contracts in order to gain rapid market exposure that may, in part or
entirely, offset increases in the cost of securities that the Variable Account
intends to purchase. As such purchases are made, the corresponding positions in
stock index futures contracts will be closed out. In a substantial majority of
these transactions, the Variable Account will purchase such securities upon
termination of the futures position, but under unusual market conditions, a long
futures position may be terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Variable Account's
current or intended investments in fixed income securities. For example, if the
Variable Account owned long-term bonds and interest rates were expected to
increase, the Variable Account might enter into interest rate futures contracts
for the sale of debt securities. Such a sale would have much the same effect as
selling some of the long-term bonds in the Variable Account's portfolio. If
interest rates did increase, the value of the debt securities in the portfolio
would decline, but the value of the Variable Account's interest rate futures
contracts would increase at approximately the same rate, subject to the
correlation risks described below, thereby keeping the net asset value of the
Variable Account from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Variable Account could protect itself against the effects
of the anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized. At
that time, the interest rate futures contracts could be liquidated and the
Variable Account's cash reserves could then be used to buy long-term bonds on
the cash market. The Variable Account could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market in certain cases or at certain times,
the use of interest rate futures contracts as a hedging technique may allow the
Variable Account to hedge its interest rate risk without having to sell its
portfolio securities.
The Variable Account may purchase and sell foreign currency futures
contracts for hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such fluctuations
could reduce the dollar value of portfolio securities denominated in foreign
currencies, or increase the dollar cost of foreign-denominated securities to be
acquired, even if the value of such securities in the currencies in which they
are denominated remains constant. The Variable Account may sell futures
contracts on a foreign currency, for example, where it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar.
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In the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Variable Account could protect against a rise in the dollar
cost of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where the Variable Account purchases futures
contracts under such circumstances, however, and the prices of securities to be
acquired instead decline, the Variable Account will sustain losses on its
futures position which could reduce or eliminate the benefits of the reduced
cost of portfolio securities to be acquired.
The use by the Variable Account of Futures Contracts also involves the
risks described under the caption "Special Risk Factors--Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Indexed Securities
The Variable Account may purchase securities with principal and/or interest
payments whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to a
specific instrument or statistic. The Variable Account may also purchase indexed
deposits with similar characteristics. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar denominated securities of equivalent
issuers. Currency-indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other. Certain indexed securities may expose the
Variable Account to the risk of loss of all or a portion of the principal amount
of its investment and/or the interest that might otherwise have been earned on
the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument 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-sponsored entities.
Inverse Floating Rate Obligations
The Variable Account may invest in so-called "inverse floating rate
obligations" or "residual interest bonds" or other obligations or certificates
relating thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a fixed
interest rate. Half of the debt is issued as variable rate short term
obligations, the interest rate of which is reset at short intervals, typically
35 days. The other half of the debt is issued as inverse floating rate
obligations, the interest rate of which is calculated based on the difference
between a multiple of (approximately two times) the interest paid by the issuer
and the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short term obligation and link the two obligations
in order to create long-term fixed rate bonds. Because the interest rate on the
inverse floating rate obligation is determined by subtracting the short-term
rate from a fixed amount, the interest rate will decrease as the short-term rate
increases and will increase as the short-term rate decreases. The magnitude of
increases and decreases in the market
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value of inverse floating rate obligations may be approximately twice as large
as the comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and have
similar credit quality, redemption and maturity provisions.
Investment in Other Investment Companies
The Variable Account may invest in other investment companies. The total
return on such investment will be reduced by the operating expenses and fees of
such other investment companies, including advisory fees.
Open-End Funds. The Variable Account may invest in open-end investment
companies.
Closed-End Funds. The Variable Account may invest in closed-end investment
companies. Such investment may involve the payment of substantial premiums above
the value of such investment companies' portfolio securities.
Lending of Portfolio Securities
The Variable Account may seek to increase its income by lending portfolio
securities. Such loans will usually be made only to member firms of the New York
Stock Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States ("U.S.")
Treasury securities maintained on a current basis at an amount at least equal to
the market value of the securities loaned. The Variable Account would have the
right to call a loan and obtain the securities loaned at any time on customary
industry settlement notice (which will not usually exceed five business days).
For the duration of a loan, the Variable Account would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned. The Variable Account would also receive a fee from the borrower or
compensation from the investment of the collateral, less a fee paid to the
borrower (if the collateral is in the form of cash). The Variable Account would
not, however, have the right to vote any securities having voting rights during
the existence of the loan, but the Variable Account 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 Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk.
Leveraging Transactions
The Variable Account may engage in the types of transactions described
below, which involve "leverage" because in each case the Variable Account
receives cash which it can invest in portfolio securities and has a future
obligation to make a payment. The use of these transactions by the Variable
Account will generally cause its net asset value to increase or decrease at a
greater rate than would otherwise be the case. Any investment income or gains
earned from the portfolio securities purchased with the proceeds from these
transactions which is in excess of the expenses associated from these
transactions can be expected to cause the value of the Variable Account's shares
and distributions on the Variable Account's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or gains
earned from the portfolio securities purchased with proceeds from these
transactions fail to cover the expenses associated with these transactions, the
value of the Variable Account's shares is likely to decrease more quickly than
otherwise would be the case and distributions thereon will be reduced or
eliminated. Hence, these transactions are speculative, involve leverage and
increase the risk of owning or investing in the shares of the Variable Account.
These transactions also increase the Variable Account's expenses because of
interest and similar payments and administrative expenses associated with them.
Unless the appreciation and income on assets purchased with proceeds from these
transactions exceed the costs associated with them, the use of these
transactions by a Variable Account would diminish the investment performance of
the Variable Account compared with what it would have been without using these
transactions.
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Bank Borrowings: The Variable Account may borrow money for investment
purposes from banks and invest the proceeds in accordance with its investment
objectives and policies.
Mortgage "Dollar Roll" Transactions: The Variable Account may enter into
mortgage "dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to repurchase
substantially similar securities on a specified future date. During the roll
period, the Variable Account foregoes principal and interest paid on the
mortgage-backed securities. The Variable Account is compensated for the lost
interest by the difference between the current sales price and the lower price
for the future purchase (often referred to as the "drop") as well as by the
interest earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Variable Account may also be compensated by receipt of a
commitment fee.
If the income and capital gains from the Variable Account's investment of
the cash from the initial sale do not exceed the income, capital appreciation
and gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Variable Account compared with what the performance would
have been without the use of the dollar rolls. Dollar roll transactions involve
the risk that the market value of the securities the Variable Account is
required to purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Variable Account sells securities
becomes insolvent, the Variable Account's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may depend
upon the Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
Reverse Repurchase Agreements: The Variable Account may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Variable Account
will sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a market
rate of interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Variable Account. The Variable Account will
invest the proceeds received under a reverse repurchase agreement in accordance
with its investment objective and policies.
Options
The Variable Account may invest in the following types of options, which
involve the risks described under the caption "Special Risk Factors--Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this Appendix:
Options On Foreign Currencies: The Variable Account may purchase and write
options on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Variable Account may purchase put options on the
foreign currency. If the value of the currency does decline, the Variable
Account will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Variable Account may purchase call options thereon.
The purchase of such options could offset, at least partially, the effect of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Variable Account deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Variable Account could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Variable Account may write options on foreign currencies for the same types
of hedging purposes. For example, where the Variable Account anticipates a
decline in the
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dollar value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received less related transaction
costs. As in the case of other types of options, therefore, the writing of
Options on Foreign Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Variable Account could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow the
Variable Account to hedge such increased cost up to the amount of the premium.
Foreign currency options written by the Variable Account will generally be
covered in a manner similar to the covering of other types of options. As in the
case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If this does not occur, the option
may be exercised and the Variable Account would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Variable
Account also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
The use of foreign currency options for non-hedging purposes, like the use of
other types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
Options On Futures Contracts: The Variable Account also may purchase and
write options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures Contracts."
Such investment strategies will be used for hedging purposes and for non-hedging
purposes, subject to applicable law.
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 clearinghouse 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 initial and variation
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.
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 type (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 Variable
Account's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Variable
Account on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and the
performance guarantee of the exchange clearinghouse. In addition, Options on
Futures Contracts may be traded on foreign exchanges. The Variable Account may
cover the writing of call Options on Futures Contracts (a) through purchases of
the underlying Futures Contract, (b) through ownership of the instrument, or
instruments included in the index, underlying the Futures Contract, or (c)
through the holding of a call on the same Futures Contract and in the same
principal amount as the call written where the exercise price of the call held
(i) is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the Variable Account owns
liquid and unencumbered assets equal to the difference. The Variable Account may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index underlying the
Futures Contract, or
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(c) through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held (i)
is equal to or greater than the exercise price of the put written or where the
exercise price of the put held (ii) is less than the exercise price of the put
written if the Variable Account owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be covered 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. Upon the
exercise of a call Option on a Futures Contract written by the Variable Account,
the Variable Account will be required to sell the underlying Futures Contract
which, if the Variable 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 the Variable Account is exercised,
the Variable Account will be required to purchase the underlying Futures
Contract which, if the Variable Account has covered its obligation through the
sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Variable Account will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Variable Account's portfolio holdings. The writing of a put
option on a Futures Contract constitutes a partial hedge against increasing
prices of the securities or other instruments required to be delivered under the
terms of the Futures Contract. If the futures price at expiration of the option
is higher than the exercise price, the Variable Account will retain the full
amount of the option premium which provides a partial hedge against any increase
in the price of securities which the Variable Account intends to purchase. If a
put or call option the Variable Account has written is exercised, the Variable
Account 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 the changes in the value of its futures positions,
the Variable 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.
The Variable Account may purchase Options on Futures Contracts for hedging
purposes instead of 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 or changes in interest or exchange
rates, the Variable 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 in part, by a profit on the option. Conversely, where it is
projected that the value of securities to be acquired by the Variable Account
will increase prior to acquisition, due to a market advance or changes in
interest or exchange rates, the Variable Account could purchase call Options on
Futures Contracts rather than purchasing the underlying Futures Contracts.
Options on Securities: The Variable Account may write (sell) covered put
and call options, and purchase put and call options, on securities. Call and put
options written by the Variable Account may be covered in the manner set forth
below.
A call option written by the Variable Account is "covered" if the Variable
Account owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration if the Variable Account owns liquid and
unencumbered assets equal to the amount of cash consideration) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Variable Account holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the Variable Account
owns liquid and unencumbered assets equal to the difference. A put option
written by the Variable Account is "covered" if the Variable Account owns liquid
and unencumbered assets with a value equal to the exercise price, or else holds
a put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise
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price of the put written if the Variable Account owns liquid and unencumbered
assets equal to the difference. Put and call options written by the Variable
Account may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. 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.
Effecting a closing transaction in the case of a written call option will
permit the Variable 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 the Variable Account to write
another put option to the extent that the Variable Account owns liquid and
unencumbered assets. Such transactions permit the Variable 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 of the Variable Account, provided that another option on such
security is not written. If the Variable 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.
The Variable Account will realize a profit from a closing transaction if
the premium paid in connection with the closing of an option written by the
Variable Account 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
the Variable Account is more than the premium paid for the original purchase.
Conversely, the Variable 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 the Variable Account is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Variable Account.
The Variable Account may write options in connection with buy-and-write
transactions; that is, the Variable Account may purchase a security and then
write a call option against that security. The exercise price of the call option
the Variable Account determines to write 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.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will decline moderately
during the option period. Buy-and-write transactions using out-of-the-money call
options may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, the Variable Account's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Variable Account's purchase price of the security and the
exercise price, less related transaction costs. 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. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Variable Account's gain will be limited to
the premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Variable Account may elect to close the position or retain the option until it
is exercised, at which time the Variable Account will be required to take
delivery of the security at the exercise price; the Variable Account's return
will be the premium received from the put option minus the amount by which the
market price of the security is below the exercise price, which could result in
a loss. Out-of-the-money, at-the-money and in-the-money put options may be used
by the Variable
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Account in the same market environments that call options are used in equivalent
buy- and-write transactions.
The Variable Account may also write combinations of put and call options on
the same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Variable 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 Variable Account
will be required to sell the underlying security at a below market price. This
loss may be offset, however, in whole or 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 the security
remains stable and neither the call nor the put is exercised. In those instances
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, the Variable 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, the Variable 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 capital
loss unless the security subsequently appreciates in value. The writing of
options on securities will not be undertaken by the Variable Account solely for
hedging purposes, and could involve certain risks which are not present in the
case of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions 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.
The Variable Account may also purchase options for hedging purposes or to
increase its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put options will
permit the Variable 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
Variable 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 by
transaction costs.
The Variable Account may also purchase call options to hedge against an
increase in the price of securities that the Variable Account anticipates
purchasing in the future. If such increase occurs, the call option will permit
the Variable Account to purchase the securities at the exercise price, or to
close out the options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Variable
Account upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Variable
Account.
Options on Stock Indices: The Variable Account may write (sell) covered
call and put options and purchase call and put options on stock indices. In
contrast to an option on a security, an option on a stock index 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 generally 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 Variable Account may cover written call options on stock
indices by owning securities whose price changes, in the opinion of the Adviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration if the Variable Account owns
liquid and unencumbered assets equal to the amount of cash consideration) upon
conversion or exchange of other securities in its portfolio. Where the Variable
Account covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that event,
the Variable 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. The Variable
Account may also cover call options on stock indices by holding a call on the
same index and in the same principal amount
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as the call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the Variable Account owns liquid and
unencumbered assets equal to the difference. The Variable Account may cover put
options on stock indices by owning liquid and unencumbered assets with a value
equal to the exercise price, or by holding a put on the same stock index and in
the same principal amount as the put written where the exercise price of the put
held (a) is equal to or greater than the exercise price of the put written or
(b) is less than the exercise price of the put written if the Variable Account
owns liquid and unencumbered assets equal to the difference. Put and call
options on stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
The Variable Account will receive a premium from writing a put or call
option, which increases the Variable Account's gross income in the event the
option expires unexercised or is closed out at a profit. If the value of an
index on which the Variable Account has written a call option falls or remains
the same, the Variable 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 Variable Account will realize a loss in its call option position,
which will reduce the benefit of any unrealized appreciation in the Variable
Account's stock investments. By writing a put option, the Variable Account
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Variable Account correlate with changes in the value
of the index, writing covered put options on indices will increase the Variable
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 Variable Account may also purchase put options on stock indices to
hedge its investments against a decline in value. By purchasing a put option on
a stock index, the Variable 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 Variable Account's investments does not decline as anticipated, or if the
value of the option does not increase, the Variable 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
Variable Account's security holdings.
The purchase of call options on stock indices may be used by the Variable
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 the Variable Account
holds uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Variable Account will also bear
the risk of losing all or a portion of the premium paid if the value of the
index does not rise. The purchase of call options on stock indices when the
Variable 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 Variable Account owns.
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. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included. The composition of the index is changed periodically.
Reset Options:
In certain instances, the Variable Account may purchase or write options on
U.S. Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during the
term of each such option. Like other types of options, these transactions, which
may be referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type of U.S. Treasury security at
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any time up to a stated expiration date (or, in certain instances, on such
date). In contrast to other types of options, however, the price at which the
underlying security may be purchased or sold under a "reset" option is
determined at various intervals during the term of the option, and such price
fluctuates from interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option, at the
time of exercise, may be less advantageous than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for the
purchase of the option may be determined at the termination, rather than the
initiation, of the option. If the premium for a reset option written by the
Variable Account is paid at termination, the Variable Account assumes the risk
that (i) the premium may be less than the premium which would otherwise have
been received at the initiation of the option because of such factors as the
volatility in yield of the underlying Treasury security over the term of the
option and adjustments made to the strike price of the option, and (ii) the
option purchaser may default on its obligation to pay the premium at the
termination of the option. Conversely, where the Variable Account purchases a
reset option, it could be required to pay a higher premium than would have been
the case at the initiation of the option.
"Yield Curve" Options: The Variable Account may also enter into options on
the "spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other types of
options, a yield curve option is based on the difference between the yields of
designated securities, rather than the prices of the individual securities, and
is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call) or
narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Variable Account may purchase or write such
options for hedging purposes. For example, the Variable Account may purchase a
call option on the yield spread between two securities, if it owns one of the
securities and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two securities. The
Variable Account may also purchase or write yield curve options for other than
hedging purposes (i.e., in an effort to increase its current income) if, in the
judgment of the Adviser, the Variable Account will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated. Yield curve options written by the Variable Account will be
"covered". A call (or put) option is covered if the Variable Account holds
another call (or put) option on the spread between the same two securities and
owns liquid and unencumbered assets sufficient to cover the Variable Account's
net liability under the two options. Therefore, the Variable Account's liability
for such a covered option is generally limited to the difference between the
amount of the Variable Account's liability under the option written by the
Variable Account less the value of the option held by the Variable Account.
Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
Repurchase Agreements
The Variable Account may enter into repurchase agreements with sellers who
are member firms (or a subsidiary thereof) of the New York Stock Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Variable Account purchases
and holds through its agent are U.S. Government securities, the values of which
are equal to or greater than the repurchase price agreed to be paid by the
seller. The repurchase price may be higher than the purchase price, the
difference being income to the Variable Account, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Variable
Account together with the repurchase
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price on repurchase. In either case, the income to the Variable Account is
unrelated to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay
the amount agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the Variable Account will have the right to liquidate the
securities. If at the time the Variable Account is contractually entitled to
exercise its right to liquidate the securities, the seller is subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject to a
stay order, the Variable Account's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to the Variable
Account. The Variable Account has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the
Variable Account only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors that
seller's creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Variable Account has
the right to make margin calls at any time if the value of the securities falls
below the agreed upon collateral.
Restricted Securities
The Variable Account may purchase securities that are not registered under
the Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities") and commercial paper
issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A determination is
made, based upon a continuing review of the trading markets for the Rule 144A
security or 4(2) Paper, whether such security is liquid and thus not subject to
the Variable Account's limitation on investing in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily function
of determining and monitoring the liquidity of Rule 144A securities and 4(2)
Paper. 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 the Variable Account to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these Rule 144A securities held in the Variable Account's portfolio. Subject to
the Variable Account's limitation on investments in illiquid investments, the
Variable Account may also invest in restricted securities that may not be sold
under Rule 144A, which presents certain risks. 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.
Short Sales
The Variable Account may seek to hedge investments or realize additional
gains through short sales. The Variable Account may make short sales, which are
transactions in which the Variable Account sells a security it does not own, in
anticipation of a decline in the market value of that security. To complete such
a transaction, the Variable Account must borrow the security to make delivery to
the buyer. The Variable Account then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Variable Account. Until the security is replaced, the Variable
Account is required to repay the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Variable Account also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. The Variable Account also will incur transaction costs in effecting short
sales.
The Variable Account will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Variable Account replaces the borrowed security. The Variable
Account will realize a gain if the price of the security declines between those
dates.
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The amount of any gain will be decreased, and the amount of any loss increased,
by the amount of the premium, dividends or interest the Variable Account may be
required to pay in connection with a short sale.
Whenever the Variable Account engages in short sales, it identifies liquid
and unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals the
current market value of the security sold short.
Short Sales Against the Box
The Variable Account may make short sales "against the box," i.e., when a
security identical to one owned by the Variable Account is borrowed and sold
short. If the Variable Account enters into a short sale against the box, it is
required to segregate securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into such securities) and
is required to hold such securities while the short sale is outstanding. The
Variable Account will incur transaction costs, including interest, in connection
with opening, maintaining, and closing short sales against the box.
Short Term Instruments
The Variable Account may hold cash and invest in cash equivalents, such as
short-term U.S. Government Securities, commercial paper and bank instruments.
Swaps and Related Derivative Instruments
The Variable Account may enter into interest rate swaps, currency swaps and
other types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps, collars
and floors. A swap is an agreement between two parties pursuant to which each
party agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency exchange
rates, security or commodity prices, the prices or rates of other types of
financial instruments or assets or the levels of specified indices. Under a
typical swap, one party may agree to pay a fixed rate or a floating rate
determined by reference to a specified instrument, rate or index, multiplied in
each case by a specified amount (the "notional amount"), while the other party
agrees to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment date, the obligations of parties are
netted, with only the net amount paid by one party to the other. All swap
agreements entered into by the Variable Account with the same counterparty are
generally governed by a single master agreement, which provides for the netting
of all amounts owed by the parties under the agreement upon the occurrence of an
event of default, thereby reducing the credit risk to which such party is
exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging purposes
and therefore may increase or decrease the Variable Account's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Variable Account is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Variable Account's investment objective and
policies.
For example, the Variable Account may enter into an interest rate swap in
order to protect against declines in the value of fixed income securities held
by the Variable Account. In such an instance, the Variable Account would agree
with a counterparty to pay a fixed rate (multiplied by a notional amount) and
the counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in the value
of the Variable Account's portfolio, the Variable Account would receive payments
under the swap that would offset, in whole or part, such diminution in value.
The Variable Account may also enter into swaps to modify its exposure to
particular markets or instruments, such as a currency swap between the U.S.
dollar and another currency which would have the effect of increasing or
decreasing the Variable Account's exposure to each such currency. The Variable
Account might also enter into a swap on a particular security, or a basket or
index of securities, in order to gain exposure to the underlying security or
securities, as an alternative to purchasing such securities.
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Such transactions could be more efficient or less costly in certain instances
than an actual purchase or sale of the securities.
The Variable Account may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time the
transaction is entered into and has no further payment obligations, while the
other party is obligated to pay an amount equal to the amount by which a
specified fixed or floating rate exceeds or is below another rate (multiplied by
a notional amount). Caps and floors, therefore, are also similar to options. A
collar is in effect a combination of a cap and a floor, with payments made only
within or outside a specified range of prices or rates. A swaption is an option
to enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the right, but
not the obligation, to enter into the underlying swap on the agreed-upon terms.
The Variable Account will maintain liquid and unencumbered assets to cover
its current obligations under swap and other over-the-counter derivative
transactions. If the Variable Account enters into a swap agreement on a net
basis (i.e., the two payment streams are netted out, with the Variable Account
receiving or paying, as the case may be, only the net amount of the two
payments), the Variable Account will maintain liquid and unencumbered assets
with a daily value at least equal to the excess, if any, of the Variable
Account's accrued obligations under the swap agreement over the accrued amount
the Variable Account is entitled to receive under the agreement. If the Variable
Account enters into a swap agreement on other than a net basis, it will maintain
liquid and unencumbered assets with a value equal to the full amount of the
Variable 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 underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Variable 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 Variable Account, the Variable Account must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
would decline, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, the Variable Account's risk of loss consists
of the net amount of payments that the Variable Account is contractually
entitled to receive. The Variable 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, but there can be no assurance that it will be able to do so.
The uses by the Variable Account of swaps and related derivative
instruments also involves the risks described under the caption "Special Risk
Factors--Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
Temporary Borrowings
The Variable Account may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio securities).
Temporary Defensive Positions
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to meet
anticipated redemption requests, a large portion or all of the assets of the
Variable Account may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities and
related repurchase agreements.
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Warrants
The Variable Account may invest in warrants. Warrants are securities that
give the Variable Account the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any rights
in the assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. These
factors can make warrants more speculative than other types of investments.
"When-Issued" Securities
The Variable Account may purchase securities on a "when-issued" or on a
"forward delivery" basis which means that the securities will be delivered to
the Variable Account at a future date usually 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. In general, the Variable Account does
not pay for such securities until received, and does not start earning interest
on the securities until the contractual settlement date. While awaiting delivery
of securities purchased on such bases, a Variable Account will identify liquid
and unencumbered assets equal to its forward delivery commitment.
Special Risk Factors--Options, Futures, Forwards, Swaps and Other Derivative
Transactions
Risk of Imperfect Correlation of Hedging Instruments With the Variable
Account's Portfolio: The Variable Account's ability effectively to hedge all or
a portion of its portfolio through transactions in derivatives, including
options, Futures Contracts, Options on Futures Contracts, Forward Contracts,
swaps and other types of derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Variable Account's portfolio. In the case of
derivative instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such derivatives. The use of derivatives
for "cross hedging" purposes (such as a transaction in a Forward Contract on one
currency to hedge exposure to a different currency) may involve greater
correlation risks. Consequently, the Variable Account bears the risk that the
price of the portfolio securities being hedged will not move in the same amount
or direction as the underlying index or obligation.
If the Variable Account purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Variable Account
would experience a loss which is not completely offset by the put option. It is
also possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Variable
Account has a position and the portfolio securities the Variable Account is
attempting to hedge, which could result in a loss on both the portfolio and the
hedging instrument. It should be noted that stock index 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 based on a
broad market index. This is due to the fact that 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. Nevertheless, where the Variable Account
enters into transactions in options or futures on narrowly-based indices for
hedging purposes, movements in the value of the index should, if the hedge is
successful, correlate closely with the portion of the Variable Account's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional risk
of imperfect correlation between movements in the price of the derivative 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 derivatives markets. In this regard,
trading by speculators in derivatives has in the
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past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such instruments.
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. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Variable Account is
subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the extent
of any loss suffered by the Variable Account in connection with such
transactions.
In writing a covered call option on a security, index or futures contract,
the Variable Account also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. For example, where
the Variable Account covers a call option written on a stock index through
segregation of securities, such securities may not match the composition of the
index, and the Variable Account may not be fully covered. As a result, the
Variable Account could be subject to risk of loss in the event of adverse market
movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations in
the value of the Variable Account's portfolio. When the Variable Account writes
an option, it will receive premium income in return for the holder's purchase of
the right to acquire or dispose of the underlying obligation. In the event that
the price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in the
case of a put, the option will not be exercised and the Variable Account will
retain the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Variable Account's portfolio holdings or any increase in the cost of the
instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of
the holder to warrant exercise of the option, however, and the option is
exercised, the Variable Account will incur a loss which may only be partially
offset by the amount of the premium it received. Moreover, by writing an option,
the Variable Account may be required to forego the benefits which might
otherwise have been obtained from an increase in the value of portfolio
securities or other assets or a decline in the value of securities or assets to
be acquired. In the event of the occurrence of any of the foregoing adverse
market events, the Variable Account's overall return may be lower than if it had
not engaged in the hedging transactions. Furthermore, the cost of using these
techniques may make it economically infeasible for the Variable Account to
engage in such transactions.
Risks of Non-Hedging Transactions: The Variable Account may enter
transactions in derivatives for non-hedging purposes as well as hedging
purposes. Non-hedging transactions in such instruments involve greater risks and
may result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired. The
Variable Account will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be identified,
unless the option is covered in such other manner as may be in accordance with
the rules of the exchange on which, or the counterparty with which, the option
is traded and applicable laws and regulations. Nevertheless, the method of
covering an option employed by the Variable Account may not fully protect it
against risk of loss and, in any event, the Variable Account could suffer losses
on the option position which might not be offset by corresponding portfolio
gains. The Variable Account may also enter into futures, Forward Contracts or
swaps for non-hedging purposes. For example, the Variable Account may enter into
such a transaction as an alternative to purchasing or selling the underlying
instrument or to obtain desired exposure to an index or market. In such
instances, the Variable Account will be exposed to the same economic risks
incurred in purchasing or selling the underlying instrument or instruments.
However, transactions in futures, Forward Contracts or swaps may be leveraged,
which could expose the Variable Account to greater risk of loss than such
purchases or sales. Entering into trans-
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actions in derivatives for other than hedging purposes, therefore, could expose
the Variable Account to significant risk of loss if the prices, rates or values
of the underlying instruments or indices do not move in the direction or to the
extent anticipated.
With respect to the writing of straddles on securities, the Variable
Account incurs 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. Such
transactions, therefore, create an opportunity for increased return by providing
the Variable Account with two simultaneous premiums on the same security, but
involve additional risk, since the Variable Account may have an option exercised
against it regardless of whether the price of the security increases or
decreases.
Risk of a 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 the Variable 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 contract at any
specific time. In that event, it may not be possible to close out a position
held by the Variable Account, and the Variable 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 Variable Account has insufficient cash available to meet
margin requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse impact
on the Variable 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 option thereon
may 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. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved to the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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 establishment
of a futures, forward or swap position (certain of which may require no initial
margin deposits) 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. Where the
Variable Account enters into such transactions 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 or other
assets held by the Variable Account or decreases in the prices of securities or
other assets the Variable Account intends to acquire. Where the Variable Account
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Variable Account
to greater risk.
Potential Bankruptcy of a Clearinghouse or Broker: When the Variable
Account enters into transactions in exchange-traded futures or options, it is
exposed to the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Variable Account has effected the
transaction. In that event, the Variable Account might not be able to recover
amounts deposited as margin, or amounts owed to the Variable Account in
connection with its transactions, for an indefinite period of time, and could
sustain losses of a portion or all of such amounts. Moreover, the performance
guarantee of an exchange clearinghouse generally extends only to its members and
the Variable Account could sustain losses, notwithstanding such guarantee, in
the event of the bankruptcy of its broker.
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Trading and Position Limits: The exchanges on which futures 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). Further, the 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. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Variable Account.
Risks of Options on Futures Contracts: The amount of risk the Variable
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 security, index, currency or
Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and other Transactions Not Conducted On U.S. Exchanges: Transactions
in Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, 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 the Variable
Account. Further, 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 the Variable 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 in that market which will
not be reflected in the forward, futures or options market until the following
day, thereby making it more difficult for the Variable Account to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Variable Account in Futures
Contracts and exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and
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a trader of Forward Contracts could lose amounts substantially in excess of
their initial investments, due to the margin and collateral requirements
associated with such positions.
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
Variable Account's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Variable 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 the Variable
Account could be required to retain options purchased or written, or Forward
Contracts or swaps entered into, until exercise, expiration or maturity. This in
turn could limit the Variable 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 guarantee of
an exchange clearinghouse, and the Variable Account will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or security,
thereby restricting the Variable Account's ability to enter into desired hedging
transactions. The Variable Account will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and found
satisfactory by the Adviser.
Options on securities, options on stock 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 U.S. 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.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting
the Variable Account to liquidate open positions at a profit prior to exercise
or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
Policies on the use of futures and options on futures contracts: In order
to assure that the Variable Account will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Variable Account 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 Variable
Account's assets, after
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taking into account unrealized profits and unrealized losses on any such
contracts the Variable Account 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.
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APPENDIX F
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have the
same yield.
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
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the 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 some time 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.
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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.
Standard & Poor's Ratings Services
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 highest rated obligations 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 for the
obligor to meet its financial commitment on the obligation. 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 Standard & Poor's 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 a similar action
if 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 rating
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
F-2
<PAGE>
severe prepayment risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest terms, such as inverse
floaters.
Fitch IBCA
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.
Speculative Grade
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, 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 Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: 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
F-3
<PAGE>
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. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
F-4
<PAGE>
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
Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
COUS-13-5/98/.5M
<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, 1998;
2. Statements of Operations, Year Ended December 31, 1998;
3. Statements of Changes in Net Assets, Years Ended December 31,
1997 and 1998;
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, 1998 and 1997.
2. Statutory Statements of Operations, Years Ended December 31,
1998, 1997 and 1996.
3. Statutory Statements of Changes in Capital Stock and Surplus,
Years Ended December 31, 1998, 1997 and 1996.
4. Statutory Statements of Cash Flow, Years Ended December 31,
1998, 1997 and 1996.
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, 1998.
<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)
<PAGE>
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)
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; filed herewith.
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. (2)
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. (2)
- ---------------
(1) Incorporated by reference to matching exhibit numbers in Post-Effective
Amendment No. 24 to the Registrant's Registration Statement filed with the
SEC via EDGAR on March 6, 1998.
(2) Incorporated by reference to matching exhibit numbers in Post-Effective
Amendment No. 25 to the Registrant's Registration Statement filed with the
SEC via EDGAR on April 30, 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 Director Chairman and Member,
150 King Street West Boards of Managers
Toronto, Ontario
Canada M5H 1J9
Donald A. Stewart Chairman and Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
David D. Horn Director Member, Boards of
Strong Road Managers
New Vineyard, ME 04956
John S. Lane Director None
150 King Street West
Toronto, Ontario
Canada M5H 1J9
Richard B. Bailey Director None
63 Atlantic Avenue
Boston, MA 02116
M. Colyer Crum Director None
104 Westcliff Road
Weston, MA 02193
Angus A. MacNaughton Director None
950 Tower Lane
Metro Tower
Suite 1170
Foster City, CA 94404
Robert P. Vrolyk Vice President, Finance None
One Sun Life Executive and Actuary
Park
Wellesley Hills, MA 02481
James M. A. Anderson Vice President, None
One Sun Life Executive Park Investments
Wellesley Hills, MA 02481
<PAGE>
<CAPTION>
Name & Principal Positions & Offices Positions & Offices
Business Address with Insurance Company with Registrants
---------------- ---------------------- --------------------
<S> <C> <C>
S. Caesar Raboy Director None
One Sun Life Executive
Park
Wellesley Hills, MA 02481
C. James Prieur President and Director None
One Sun Life Executive
Park
Wellesley Hills, MA 02481
L. Brock Thomson Vice President None
One Sun Life Executive and Treasurer
Park
Wellesley Hills, MA 02481
Peter F. Demuth Vice President, None
One Sun Life Executive Chief Counsel and
Park Assistant Secretary
Wellesley Hills, MA 02481
Ellen B. King Secretary None
One Sun Life Executive
Park
Wellesley Hills, MA 02481
Cheryl Lamie Assistant Secretary None
One Sun Life Executive
Park
Wellesley Hills, MA 02481
</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 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,
and shows the state or
<PAGE>
other sovereign power under the laws of which each corporation 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
Sun Life Assurance Company of Canada Delaware 100%
(U.S.) Operations Holdings, Inc.
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.
Sun Life Information Services Ireland Limited Republic of Ireland 0%****
Massachusetts Financial Services Company Delaware 0%***
New London Trust, F.S.B. Federal Chartered 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%*****
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
<S> <C> <C>
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,.
*** 85% 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.
**** 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 Sun
Life Information Services Ireland Limited 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, 1999)
------------------------------------------------
<TABLE>
<CAPTION>
Number of
Contract Owners*
--------------------------------
Qualified Non-Qualified
Registrant Contracts Contracts
---------- --------- ---------
<S> <C> <C>
Money Market Variable Account 3,751 1,760
High Yield Variable Account 4,202 1,474
Capital Appreciation Variable Account 14,107 4,273
Government Securities Variable Account 4,640 1,539
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of
Contract Owners*
--------------------------------
Qualified Non-Qualified
Registrant Contracts Contracts
---------- --------- ---------
<S> <C> <C>
Global Governments Variable Account 2,879 1,085
Total Return Variable Account 12,598 3,674
Managed Sectors Variable Account 8,757 2,714
</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 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.
<PAGE>
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the corporation: (1) no
indemnification shall be made in respect of any claim, issue or matter as to
which the person seeking indemnification shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court of Chancery or such other court
shall deem proper; and (2) indemnification shall extend only to reasonable
expenses, including reasonable counsel's fees and disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this resolution whether or not that person continues to be
a member of the board of managers of any separate account of this corporation at
the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any person
otherwise entitled to indemnification. If a person meets the requirements of
this resolution with respect to some matters in a claim, action, suit, or
proceeding, but not with respect to others, he shall be entitled to
indemnification as to the former. Advances against liability and expenses may be
made by the corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.
(e) This resolution shall not exclude any other rights of
indemnification or other rights to which any member of the board of managers of
any separate account of the corporation may be entitled to by contract, vote of
the stockholders or as a matter of law. If any clause, provision or applications
of this resolution shall be determined to be invalid, the other clauses,
provisions or applications of this section shall not be affected but shall
remain in full force and effect. The provisions of this resolution shall be
applicable to claims, actions, suits or proceedings made or commenced after the
adoption hereof, whether arising from acts or omissions to act occurring before
or after the adoption hereof.
(f) Nothing contained in this resolution shall be construed to protect
any member of the board of managers of any separate account of the corporation
against any liability to any separate account, the corporation or its security
holders to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office."
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
<PAGE>
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 twelve series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Convertible Securities Fund, MFS Blue Chip
Fund, MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Large Cap Growth Fund, MFS Intermediate Income Fund and MFS
Charter Income Fund), MFS Series Trust III (which has three series: MFS High
Income Fund, MFS Municipal High Income Fund and MFS High Yield Opportunities
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 five series: MFS Total Return Fund, MFS
Research Fund, MFS International Opportunities Fund, MFS International Strategic
Growth Fund and MFS International Value Fund), MFS Series Trust VI (which has
three series: MFS Global Total Return Fund, MFS Utilities Fund and MFS Global
Equity Fund), MFS Series Trust VII (which has two series: MFS Global Governments
Fund and MFS Capital Opportunities Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust
IX (which has eight series: MFS Bond Fund, MFS Limited Maturity Fund, MFS
Municipal Limited Maturity Fund, MFS Research Bond Fund, MFS Intermediate
Investment Grade Bond Fund, MFS Mid Cap Value Fund, MFS Large Cap Value Fund and
MFS High Quality Bond Fund), MFS Series Trust X (which has seven series: MFS
Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund,
MFS International Growth Fund, MFS International Growth and Income Fund, MFS
Strategic Value Fund, MFS Small Cap Value Fund and MFS Emerging Markets Debt
Fund), MFS Series Trust XI (which has four series: MFS Union Standard Equity
Fund, Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund),
and MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund)
(the "MFS Funds"). The principal business address of each of the MFS Funds is
500 Boylston Street, Boston, Massachusetts 02116.
<PAGE>
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has ten series) and MFS Variable
Insurance Trust ("MVI") (which has fifteen 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, Global 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 U.S. All Cap 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.
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 known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond 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
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International 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
<PAGE>
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 Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, 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 27, Australia Square, 264 George
Street, Sydney, NSW2000, 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 27, Australia Square, 264 George
Street, 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.
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.
Massachusetts Investment Management Co., Ltd. ("MIMCO"), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose address
is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MFS Heritage Trust Company ("MFS Trust"), a New Hampshire-chartered
limited-purpose trust company whose current address is 650 Elm Street, Suite
404, Manchester, NH 03101, provides directed trustee services to retirement
plans.
United Funds Management LTD. ("UFM"), an Australian Company organized
under the Corporations Law of New South Wales, Australia whose current address
is Level 27, Australia Square 264-278, George St., Sydney, NSW2000, is an
investment manager and distributor of Australian superannuation unit trusts.
<PAGE>
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman and
Chief Executive Officer, Mr. Ballen is President and Chief Investment Officer,
Mr. Arnold Scott is a Senior Executive Vice President and Secretary, Mr. William
Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice Presidents
(Mr. Joseph W. Dello Russo is also Chief Financial Officer and Chief
Administrative Officer), (Mr. Parke is also Chief Equity Officer), 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, 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, Geoffrey L. Schechter, Vice
President of MFS, 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 Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the President and 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.
<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.
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.
<PAGE>
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.
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 D. Laupheimer is a Senior Vice President, 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.
MIL
Peter D. Laird is President and a Director, 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
Peter D. Laird is President and a Director, Thomas J. Cashman, 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.
<PAGE>
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.
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
Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott are
Directors, Joseph J. Trainor 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.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
MFS Trust
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E. Cavan,
Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr. Cavan is
President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk of MFS
Trust.
<PAGE>
UFM
The Directors of UFM are Thomas J. Cashman, Jr. and Susan Gosling.
Graham Lenzner is the Chairman and Thomas J. Murray is Chief Financial Officer,
Treasurer and Secretary.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
<TABLE>
<S> <C>
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)
</TABLE>
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, F, G and I and Sun Life (N.Y.) Variable Accounts A, B and C.
(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With Underwriter
------------------ ---------------------
<S> <C>
S. Caesar Raboy Director**
C. James Prieur Director**
Robert P. Vrolyk Director
James M. A. Anderson Director
L. Brock Thomson Vice President and Treasurer
Roy P. Creedon Secretary
Maura A. Murphy Assistant Secretary
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With Underwriter
------------------ ---------------------
<S> <C>
Donald E. Kaufman Vice President
Cynthia M. Orcutt Vice President
Laurie Lennox Vice President
Peter A. Marion Tax Officer
</TABLE>
- -----------------
* The principal business address of all directors and officers of the
principal underwriter except Ms. Lenox is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481. The principal business address of Ms.
Mancini and Ms. Lennox 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 02481, 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.
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>
In imposing restrictions on withdrawals, we are relying on a
no-action letter dated November 28, 1988 from the staff of the SEC to the
American Council of Life Insurance, the requirements of which we have complied
with.
<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 22nd day of April, 1999.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
GLOBAL 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
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on April 22, 1999.
SUN LIFE ASSURANCE COMPANY OF
CANADA (U.S.)
C. JAMES PRIEUR*
---------------------------------
C. James Prieur
President
*By: EDWARD M. SHEA
---------------------------------
Name: Edward M. Shea
*Executed by Edward M. Shea on behalf of those
indicated pursuant to Power of Attorney filed
with Money Market Variable Account's
Post-Effective Amendment No. 26 (File No.
33-19628), filed with the Securities and
Exchange Commission on February 25, 1999.
<PAGE>
As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities with the Registrants and on April 22, 1999.
<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 with Post-Effective Amendment
No. 25 to Money Market Variable Account's
Registration Statement filed with the
Securities and Exchange Commission via EDGAR
on April 30, 1998.
<PAGE>
As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities with the Registrants and on April 22, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
DONALD A. STEWART* Chairman and Director
- -----------------------------
Donald A. Stewart
C. JAMES PRIEUR President and Director (Principal Executive Officer)
- -----------------------------
C. James Prieur
ROBERT P. VROLYK Vice President, Finance and Actuary (Principal Financial
- ----------------------------- & Accounting Officer)
Robert P. Vrolyk
RICHARD B. BAILEY* Director
- -----------------------------
Richard B. Bailey
M. COLYER CRUM* Director
- -----------------------------
M. Colyer Crum
DAVID D. HORN* Director
- -----------------------------
David D. Horn
JOHN S. LANE* Director
- -----------------------------
John S. Lane
ANGUS A. MACNAUGHTON* Director
- -----------------------------
Angus A. MacNaughton
S. CAESAR RABOY* Director
- -----------------------------
S. Caesar Raboy
</TABLE>
*By: EDWARD M. SHEA
---------------------------------
Name: Edward M. Shea
Executed by Edward M. Shea on behalf of those
indicated pursuant to Powers of Attorney filed
with Money Market Variable Account's
Post-Effective Amendment No. 26 (File No.
33-19628), filed with the Securities and
Exchange Commission on February 25, 1999.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
11(b) Master Administrative Services Agreement, dated March 1,
1997, as amended.
13 Consent of Deloitte & Touche, LLP.
17 Financial Data Schedules.
</TABLE>
EXHIBIT NO. 99.11(b)
MASTER ADMINISTRATIVE SERVICES AGREEMENT
MASTER ADMINISTRATIVE SERVICES AGREEMENT dated this 1st day of March, 1997, as
amended effective April 1, 1999, by and among Massachusetts Financial Services
Company, a Delaware corporation (the "Administrator"), and each of the funds (or
trusts acting on behalf of their series) identified from time to time on Exhibit
A hereto (each a "Fund" and collectively the "Funds").
W I T N E S S E T H:
WHEREAS, the Funds have entered into Investment Advisory Agreements with the
Administrator (the "Advisory Agreements") pursuant to which the Administrator
provides investment advisory services to the Funds;
WHEREAS, the Advisory Agreements recite that the Administrator will bear certain
expenses associated with the provision of investment advisory services and that
the Funds will bear their own expenses, including expenses of legal counsel to
the Funds, expenses connected with the execution, recording and settlement of
the Funds' portfolio security transactions and expenses of calculating the
Funds' net asset values;
WHEREAS, the Administrator, at its expense, has provided a variety of
administrative services to the Funds for the benefit of the Funds and their
shareholders; and
WHEREAS, the Funds desire to retain the Administrator to render certain legal,
financial administration and other administrative services to the Funds in the
manner and on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto and hereinafter set forth, the parties covenant and agree as
follows:
1. Administrative Services. Subject to the limitations set forth in the second
paragraph of Section 3 of this Agreement, the Administrator shall render to each
Fund the financial administration services set forth on Exhibit B hereto (the
"Financial Administration Services"), the legal services set forth on Exhibit C
hereto (the "Legal Services") and the other administrative services set forth on
Exhibit D hereto ("Other Administrative Services") (the Financial Administration
Services, Legal Services and Other Administrative Services are collectively
referred to as the "Administrative Services").
<PAGE>
The Administrative Services provided by the Administrator to each Fund
may not include all Administrative Services required by the Fund, due to a
number of considerations, including, without limitation, the Administrator's
level of work flow, staffing and resources, the specialized or unique nature of
the Administrative Services and the relative priorities of such Administrative
Services. The Administrator may, on behalf of each Fund, arrange for or engage
outside legal counsel, accounting or auditing firm or any other outside service
provider or vendor (collectively, "third party vendors") to perform
Administrative Services for the Fund, and the Fund will bear the expense of any
such third party vendors; provided however, that the Administrator shall
promptly inform the Fund's governing board in the event any third party vendor
is engaged to perform Administrative Services for a Fund on a basis that is
expected to generate significant expenses for a Fund.
2. Maintenance of Books and Records. With respect to the provision of
Administrative Services, the Administrator will preserve for each Fund that is
registered as a registered investment company with the Securities and Exchange
Commission (the "SEC") all records required to be maintained as prescribed by
the rules and regulations of the SEC in the manner and for the time periods
prescribed by such rules. The Administrator agrees that all such records shall
be the property and under the control of each Fund for which they are maintained
and shall be made available, within five business days of any request therefor,
to the Fund's Board of Trustees or auditors during regular business hours at the
Administrator's offices. In the event of termination of this Agreement for any
reason, all such records shall be returned, without charge, promptly to the
appropriate Fund, free from any claim or retention of rights by the
Administrator, except that the Administrator may retain copies of such records.
3. Administrative Fee. Each Fund shall pay the Administrator a fee as agreed to
from time to time and as set forth in Exhibit E hereto (the "Administrative
Fee"). The Administrative Fee shall be accrued for each calendar day and the sum
of the daily fee accruals shall be paid monthly to the Administrator on the
second to last business day of each calendar month. If this Agreement becomes
effective or terminates before the end of any calendar month, the Administrative
Fee for the period from the effective date to the end of such calendar month or
from the beginning of such calendar month to the date of termination, as the
case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
The governing board of each Fund will, on an annual basis, review the
services provided, the Administrator's costs in providing such services, amounts
paid to third party vendors pursuant to the arrangement described in Section 1
and the amount paid by the Fund to the Administrator pursuant to this Agreement
(including the extent to which such amount is greater or lesser than the
Administrator's costs in
- 2 -
<PAGE>
providing such services) and such other information as such board may reasonably
request.
4. Scope of Administrative Services; Regulatory and Business and Industry
Practice Developments. The Administrative Services to be furnished by the
Administrator include only those services required by a Fund or which are being
furnished by the Administrator at March 1, 1997. In the event that, subsequent
to March 1, 1997, because of regulatory developments, or new or modified
business or industry practices, the Fund requires services in addition to the
Administrative Services, at the request of the Fund, the Administrator will
consider furnishing such additional services, with compensation for such
additional services to be agreed upon with respect to each such occasion as it
arises.
5. Non-Exclusivity. The services of the Administrator to the Funds hereunder are
not to be deemed exclusive and the Administrator shall be free to render similar
services to others.
6. Standard of Care. Neither the Administrator, nor any of its directors,
officers, stockholders, agents or employees, shall be liable or responsible to
any Fund or its shareholders for any error of judgment, mistake of law or any
loss arising out of any act or omission in the performance by the Administrator
of its duties under this Agreement, except for liability resulting from (a)
willful misfeasance, (b) bad faith, (c) in the case of Financial Administration
Services, negligence, and, in the case of Legal Services and Other
Administrative Services, gross negligence, in each case on the Administrator's
part or (d) from reckless disregard by the Administrator of its obligations and
duties under this Agreement.
7. Term, Termination, Amendment and Assignment. This Agreement shall begin on
the date first written above and shall continue indefinitely. The Agreement may
be terminated at any time, without payment of any penalty, by the Board of
Directors/Trustees which oversees the Fund upon sixty (60) days' written notice
to the Administrator. This Agreement may be terminated by the Administrator with
respect to any Fund at any time upon sixty (60) days' written notice to the
Fund. This Agreement may be amended at any time by a written agreement executed
by each party hereto and may be assigned with respect to any Fund only with the
written consent of the Fund and the Administrator.
8. Miscellaneous.
a. Captions. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
- 3 -
<PAGE>
b. Governing Law. The provisions of this Agreement shall be construed and
interpreted in accordance with the domestic substantive laws of The
Commonwealth of Massachusetts, without giving effect to any conflicts or
choice of laws rule or provision that would result in the application of
the domestic substantive laws of any other jurisdiction.
c. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
d. Joinder of Funds. In the event that additional funds are created from
time to time which desire to retain the Administrator to provide them
with Administration Services pursuant to this Agreement, the
Administrator and the additional fund may jointly amend Schedule A hereto
to add the additional fund, and the additional fund shall thereafter be
deemed a "Fund" for all purposes of this Agreement. The consent of the
other parties to this Agreement shall not be required to amend Schedule A
hereto.
e. Scope of Fund's Obligations. A copy of the Declaration of Trust of each
Fund (or trust of which the Fund is a series) organized as a
Massachusetts business trust (each a "Trust"), is on file with the
Secretary of State of The Commonwealth of Massachusetts. The
Administrator acknowledges that the obligations of or arising out of this
Agreement are not binding upon any of a Trust's trustees, officers,
employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust in accordance with its
proportionate interest thereunder and hereunder. If this Agreement is
executed by the Trust on behalf of one or more series of the Trust, the
Administrator further acknowledges that the assets and liabilities of
each series of the Trust are separate and distinct and that the
obligations of or arising out of this Agreement are binding solely upon
the assets or property of the series on whose behalf the Trust has
executed this Agreement. The Administrator also agrees that the
obligations of each Fund hereunder shall be several and not joint, in
accordance with its proportionate interest hereunder, and agrees not to
proceed (by way of claim, set-off or otherwise) against any Fund for the
obligations of another Fund.
- 4 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affiliated, as of the date first written above.
On behalf of the MFS Family
of Funds, MFS Closed-End
Funds and MFS Institutional
Funds listed on Exhibit A
hereto
By: ARNOLD D. SCOTT
---------------------------------
Arnold D. Scott
Trustee
On behalf of the MFS/Sun
Life Series Trust and
Compass Products listed on
Exhibit A hereto
By: JOHN D. MCNEIL
---------------------------------
John D. McNeil
Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By: JEFFREY L. SHAMES
---------------------------------
Jeffrey L. Shames
Chairman
- 5 -
<PAGE>
Exhibit A
Funds
I. MFS Family of Funds
MFS Series Trust I:
MFS Managed Sectors Fund
MFS Cash Reserve Fund
MFS Global Asset Allocation Fund
MFS Strategic Growth Fund
MFS Research Growth and Income Fund
MFS Equity Income Fund
MFS Core Growth Fund
MFS Convertible Securities Fund
MFS Blue Chip Fund
MFS New Discovery Fund
MFS Science and Technology Fund
MFS Research International Fund
MFS Series Trust II:
MFS Emerging Growth Fund
MFS Large Cap Growth Fund
MFS Intermediate Income Fund
MFS Charter Income Fund
MFS Series Trust III:
MFS High Income Fund
MFS Municipal High Income Fund
MFS High Yield Opportunities Fund
MFS Series Trust IV:
MFS Money Market Fund
MFS Government Money Market Fund
MFS Municipal Bond Fund
MFS Mid Cap Growth Fund
MFS Series Trust V:
MFS Total Return Fund
MFS Research Fund
MFS International Opportunities Fund
MFS International Strategic Growth Fund
MFS International Value Fund
MFS Asia Pacific Fund
MFS Series Trust VI:
MFS Global Total Return Fund
MFS Utilities Fund
MFS Global Equity Fund
MFS Series Trust VII:
MFS Global Governments Fund
- 6 -
<PAGE>
MFS Capital Opportunities Fund
MFS Series Trust VIII:
MFS Strategic Income Fund
MFS Global Growth Fund
MFS Series Trust IX:
MFS Bond Fund
MFS Limited Maturity Fund
MFS Municipal Limited Maturity Fund
MFS Research Bond Fund
MFS Intermediate Investment Grade Bond Fund
MFS Series Trust X:
MFS Government Mortgage Fund
MFS/Foreign & Colonial Emerging Markets Equity Fund
MFS International Growth Fund
MFS International Growth and Income Fund
MFS Strategic Value Fund
MFS Small Cap Value Fund
MFS Emerging Markets Debt Fund
MFS Municipal Series Trust:
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
MFS Municipal Income Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
Massachusetts Investors Growth Stock Fund
MFS Government Limited Maturity Fund
Massachusetts Investors Trust
- 7 -
<PAGE>
II. MFS Closed-End Funds
MFS Municipal Income Trust
MFS Multimarket Income Trust
MFS Government Markets Income Trust
MFS Intermediate Income Trust
MFS Charter Income Trust MFS Special Value Trust
III. MFS Institutional Funds
MFS Institutional Trust:
MFS Institutional Emerging Equities Fund
MFS Institutional Global Fixed Income Fund
MFS Institutional Emerging Markets Debt Fund
MFS Institutional International Equity Fund
MFS Institutional Mid Cap Growth Equity Fund
MFS Institutional Research Fund
MFS Institutional Core Fixed Income Fund
MFS Institutional Core Equity Fund
MFS Institutional Large Cap Growth Fund
MFS Institutional High Yield Fund
MFS Series Trust XI:
MFS Union Standard Equity Fund
Vertex All Cap Fund
Vertex Contrarian Fund
Vertex U.S. All Cap Fund
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Value Series
MFS Research Series
MFS Growth With Income Series
MFS Total Return Series
MFS Utilities Series
MFS High Income Series
MFS World Governments Series
MFS Bond Series
MFS Limited Maturity Series
MFS Money Market Series
MFS/Foreign & Colonial Emerging Markets Equity Series
MFS New Discovery Series
MFS Growth Series
IV. MFS/Sun Life Series Trust
MFS Capital Appreciation Series
MFS Conservative Growth Series
MFS Government Securities Series
MFS World Governments Series
MFS High Yield Series
MFS Managed Sectors Series
MFS Money Market Series
- 8 -
<PAGE>
MFS Total Return Series
MFS Utilities Series
MFS World Growth Series
MFS Zero Coupon Series 2000
MFS Research Series
MFS World Asset Allocation Series
MFS World Total Return Series
MFS Emerging Growth Series
MFS International Growth and Income Series
MFS International Growth Series
MFS/Foreign & Colonial Emerging Markets Equity Series
MFS Capital Opportunities Series
MFS Research Growth and Income Series
MFS Bond Series
MFS Equity Income Series Massachusetts Investors Growth Stock Series
MFS New Discovery Series
MFS Research International Series
MFS Strategic Income Series
V. Compass Products
MFS Capital Appreciation Variable Account
MFS Government Securities Variable Account
MFS World Governments Variable Account
MFS High Yield Variable Account
MFS Managed Sectors Variable Account
MFS Money Market Variable Account
MFS Total Return Variable Account
- 9 -
<PAGE>
Exhibit B
Financial Administration Services
The Administrator shall perform the following Financial Administration
Services for each Fund:
A. General Services.
1. Prepare such financial information of the Fund as is reasonably
necessary for reports to shareholders of the Fund, reports to the Fund's
governing board and officers, and reports to appropriate regulatory
authorities including, without limitation, prospectuses, shareholder
reports, shareholder notices, proxy statements and other periodic
reports and render statements or copies of records as from time to time
are reasonably requested by the Fund.
2. Facilitate audits of accounts by the Fund's independent public
accountants or by any of the auditors employed or engaged by the Fund or
by any regulatory body with jurisdiction over the Fund. Coordinate with,
and monitor the performance of, the custodian banks retained by the Fund
to perform the necessary custodial services for the Fund including,
without limitation, the safekeeping of the funds and securities.
3. Negotiate contracts for computing the Fund's net asset value per share,
and, if applicable, its public offering price and/or its daily dividend
rates and money market yields and other investment performance
quotations, in accordance with sub-paragraph C below, and notify the
Fund and such other persons as the Fund may reasonably request of the
net asset value per share, the public offering price and/or its daily
dividend rates and money market yields and other investment performance
quotations.
B. Valuation of Securities. The Administrator shall ensure that the value of the
Fund's securities is computed in accordance with governing law, rules and
regulations, the Fund's governing instruments and subject to the oversight and
direction of the Fund's governing body. The Administrator may use one or more
external pricing services in computing the value of a Fund's securities,
including broker/dealers, provided that the Fund's governing body or an
individual designated by the Fund's governing body has approved the use of such
pricing services.
- 10 -
<PAGE>
C. Computation of Net Asset Value, Public Offering Price, Daily Dividend Rates
and Performance Quotations. The Administrator shall assure that the Fund's net
asset value, net income, public offering price, dividend rates and money market
yields, if applicable, and other investment performance quotations are
calculated in a manner and at such time or times as the Fund shall direct and in
accordance with governing law, rules and regulations and the Fund's governing
instruments and subject to the oversight and direction of the Fund's governing
board.
D. Other Financial Administration Services. In addition, the Administrator shall
provide the following Financial Administration Services:
(1) Provide Treasurers or Assistant Treasurers to serve as officers of the
Fund;
(2) Coordinate the meetings of the Audit Committees, assure that meetings
are scheduled and that agendas are prepared; participate in meetings of
the Audit Committee;
(3) Review contracts and negotiate fees for the Fund for services such as
independent audit fees, custodian fees, transfer agent fees and the fees
of other service providers to the Fund;
(4) Oversee the preparation of accounting records required to be maintained
by the Fund. Assure that any audit of Fund records is coordinated and
completed timely;
(5) Direct the preparation of Fund Financial Statements and Footnotes.
Assure that all statements and disclosures are in accordance with
generally accepted accounting principles and that disclosures meet
current regulatory or accounting requirements;
(6) Assure that all distributions of the Fund meet the distribution and
excise tax requirements to assure qualification and to minimize taxes
paid by the Fund;
(7) Establish the tax policies and procedures for the Fund; maintain
procedures and policies with respect to tax matters; maintain tax
accounting records of the Fund; complete or review tax returns and
excise tax forms for the Fund; assist in preparing the 1099-DIV
information delivered to shareholders;
(8) Complete materials for the governing board of the Fund, including
materials for board meetings and in connection with the renewal of
investment advisory and distribution contracts;
- 11 -
<PAGE>
(9) Direct the accrual of Fund expenses; review and approve all invoices
submitted to the Fund; and
(10) Perform or arrange for the performance of all other Financial
Administration Services required of the Fund.
- 12 -
<PAGE>
Exhibit C
Legal Services
The Administrator shall provide the following Legal Services to each Fund:
A. Organizational Matters and Initial Registration. The Administrator shall
perform the following functions relating to the organization and initial
registration of the Fund:
o Draft and file with appropriate regulatory authorities the Fund's charter
documents;
o Draft, negotiate and file with appropriate regulatory authorities the
Fund's service contracts;
o Prepare and file the Fund's registration statement or other similar
registration documentation with appropriate regulatory authorities (the
"Registration Statement") and negotiate with such regulatory authorities;
and
o Otherwise arrange for and oversee registration and qualification of the
Fund's shares.
B. Ongoing Regulatory Filings, Reports and Meetings. The Administrator shall
perform the following functions relating to ongoing regulatory filings, reports
and meetings of the Fund:
o Prepare and file with appropriate regulatory authorities amendments to
the Fund's Registration Statement;
o Prepare and file with appropriate regulatory authorities supplements to
the Fund's prospectus and statement of additional information;
o Design and write documents or materials required to be prepared by or on
behalf of the Fund for distribution to shareholders of the Fund, the
Fund's governing board and officers and any governmental officers or
commissions as required of the Fund and not otherwise provided for under
this Agreement including, without limitation, prospectuses, shareholder
reports, shareholder notices and proxy statements;
- 13 -
<PAGE>
o Prepare and file or oversee preparation and review and provide legal
guidance on the Fund's annual, semi-annual and other periodic reports;
o Prepare and file or oversee preparation and provide legal guidance on the
Fund's tax filings and reports;
o Prepare and file with appropriate regulatory authorities the Fund's proxy
statement and negotiate with such regulatory authorities;
o Prepare and file with appropriate regulatory authorities various reports
in order to maintain the Fund's status in good standing;
o Arrange for shareholders' meetings;
o Prepare the Fund's representatives who will attend shareholder meetings
and all necessary materials in connection with such meetings including,
without limitation, a written script for such meetings, shareholder
minutes and any follow-up documents; and
o Attend shareholder meetings.
C. Securities Trading and Investment Practices. The Administrator shall perform
the following functions relating to the Fund's securities trading and investment
practices:
o Review and negotiate private placement and municipal securities offering
documentation and provide legal guidance on transfer restrictions;
o Provide guidance on legal considerations relating to the purchase of
foreign securities;
o Draft and negotiate documentation necessary to permit the Fund to engage
in a variety of derivative and securities trading practices and provide
legal guidance with respect to these practices;
o Negotiate the Fund's line of credit documentation; and
o Provide legal guidance on applicable laws regulating the types and levels
of ownership of securities by the Fund.
D. Regulated Activities. Applicable securities laws regulate numerous aspects of
the Fund's business, including such matters as the Fund's: prospectus
disclosure; investment activities; affiliated transactions; investment in senior
securities; sales,
- 14 -
<PAGE>
redemptions and exchanges; distribution of income and capital gains;
distribution of Fund shares; board composition; code of ethics; fidelity bond;
custodial services; and investment advisory and distribution contracts. The
Administrator will provide the Fund with legal guidance with respect to these
matters and to the general application of securities laws to the Fund's
business.
- 15 -
<PAGE>
E. Tax Considerations. The Administrator shall perform the following functions
relating to the application of tax rules to the Fund:
o Provide legal guidance with respect to the application of tax rules to
the Fund and analyze from a tax perspective new types of securities
purchased by the Fund, new investment practices engaged in by the Fund
and new investment products or practices adopted by the Fund; and
o Draft and/or review sections of the Fund's prospectus describing the tax
consequences of an investment in the Fund.
F. Board Considerations. The Administrator shall perform the following functions
with respect to the Fund's governing board:
o Provide advice concerning applicable rules governing the composition of
the Fund's governing board;
o Coordinate, prepare materials for and attend board and committee meetings
and coordinate any follow up issues; and
o Provide guidance and prepare materials on legal issues relevant to the
Fund's business.
G. Miscellaneous/Extraordinary Events. The Administrator shall perform the
following miscellaneous functions for the Fund:
o Provide legal guidance with respect to litigation brought by the Fund and
against the Fund and negotiate litigation settlements and pre-litigation
settlements and work-out arrangements;
o Obtain the required documentation to be filed in connection with any
lawsuits against the Fund and provide information or expertise on
administrative matters affecting such litigation;
o Provide legal guidance on alternative distribution structures for the
Fund's shares (such as the adoption of a multiple class structure);
o Review all contracts concerning the acquisition of other investment
companies or the liquidation of the Fund, draft, negotiate and file
various documentation required in connection therewith, provide guidance
on the manner such transactions should be structured to comply with
applicable law and obtain legal opinions and regulatory authority rulings
necessary for such transactions to comply with applicable law;
- 16 -
<PAGE>
o Seek formal guidance from regulatory authorities concerning the
application of various regulations to the Fund and seek exemptive relief
where appropriate; and
o Provide or arrange for all other Legal Services required of the Fund and
not otherwise provided for under this Agreement other than the services
of any counsel retained to represent the members of the governing boards
of the funds who are not "interested persons" of the Administrator or its
affiliates, as such term is defined in the Investment Company Act of
1940.
- 17 -
<PAGE>
Exhibit D
OTHER ADMINISTRATIVE SERVICES
The Administrator shall provide the following Other Administrative
Services to each Fund:
(1) Arrange for persons or other entities to serve as transfer agent,
registrar or dividend disbursing agent as required by the Fund;
(2) Arrange for a line of credit in the event of an unanticipated
redemption of shares;
(3) Arrange for consideration by the Board of appropriate or necessary
insurance coverage for the Fund;
(4) Subject to Section 4 hereof, perform or arrange for all compliance
functions required of the Fund;
(5) Prepare, and arrange for the printing and mailing of, any
necessary investment communications;
(6) Arrange for the printing and mailing of any documents or written
materials required to be prepared by or on behalf of the Fund
including, without limitation, stock certificates, prospectuses,
shareholder reports, shareholder notices, proxy statements and
reports to governmental officers and commissions;
(7) Arrange for any other printing, production and delivery services
required of the Fund and not otherwise provided for under this
Agreement;
(8) Provide a system of internal controls adequate to carry-out the
business of the Fund and arrange for the annual report on internal
controls of the Fund and its agents;
(9) Review the Fund's disclosure documents to ensure that disclosures
and policies conform to the Fund's actual operation; and
(10) Provide for the calculation and timely disbursement of appropriate
regulatory authority registration fees.
- 18 -
<PAGE>
Exhibit E
ADMINISTRATIVE FEE
The Administrative Fee shall be an amount, computed as set forth below,
designed to reimburse the Administrator for its actual costs (excluding costs of
staffing so-called residual matters as set forth in Exhibit #2 to Exhibit H to
the Memorandum to the Trustees of the Funds from Stephen E. Cavan and Joseph W.
Dello Russo dated September 23, 1996 (Offshore Board) or October 1, 1996
(Compass, Crimson, Institutional Products and Red Boards)) for providing the
Financial Administration Services and Legal Services (the "Actual Costs") for
providing such services for a calendar year computed pursuant to the principles
set forth in such Exhibit H, subject to such changes in those principles as may
be agreed to from time to time by the Funds and the Administrator (the "Approved
Budgeted Costs"). In computing its Actual Costs, the Administrator will follow
the cost allocation principles set forth in the Deloitte & Touche LLP Report of
Independent Consultant dated November 29, 1996 under the caption "Review of MFS
Cost Reimbursement Methodologies", subject to such changes as may be agreed to
from time to time by the Funds and the Administrator.
The Approved Budgeted Costs shall be an amount from time to time agreed
to by the Funds and the Administrator with respect to a calendar year, provided
that, until Approved Budgeted Costs for a year are agreed to, the Approved
Budgeted Costs and Administrative Fee for the prior year shall remain in effect.
Subject to the adjustments required by the next paragraph, the
Administrative Fee with respect to a calendar year shall be computed by
allocating the Approved Budgeted Costs for that year among the Funds based on
each Fund's average daily net assets for its then-current fiscal year at rates
determined from time to time by the Funds and the Administrator.
In the event that the aggregate amount of all Administrative Fees
received by the Administrator with respect to a calendar year at any time equals
105% of the amount of the Approved Budgeted Costs for that year, no further
payments of Administrative Fees shall be made by the Funds to the Administrator
with respect to that year. In the event that the aggregate amount of the
Administrative Fees received by the Administrator with respect to a calendar
year is less than the amount of the Approved Budgeted Costs for that year, the
Administrator shall not be entitled to recovery of this shortfall during the
current calendar year; however, the amount of such shortfall will be taken into
account when establishing the Administrative Fee for following calendars years.
In the event that the aggregate amount of the Administrative Fees received by
the Administrator with respect to a calendar year is greater than the
Administrator's Actual Costs for that year, such excess fees shall be
- 19 -
<PAGE>
applied as a credit against the Administrative Fees payable by the Funds
hereunder with respect to the subsequent calendar year.
The Administrator will provide the Funds with such information as may
reasonably be required to review the Administrator's Actual Costs as of June 30
and December 31 in each year.
- 20 -
EXHIBIT NO. 99.13
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 4, 1999 appearing in the annual report to contract owners for the year
ended December 31, 1998, and to the use of our report dated February 5, 1999
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
Deloitte & Touche LLP
Boston, Massachusetts
April 22, 1999
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99
<NUMBER-OF-SHARES-REDEEMED> (377)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (15222)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3514
<AVERAGE-NET-ASSETS> 185968
<PER-SHARE-NAV-BEGIN> 19.37
<PER-SHARE-NII> 0.92
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.67
<EXPENSE-RATIO> 0.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> GOVERNMENT SECURITIES VARIABLE ACCOUNT COMPASS IIIB
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 168537
<INVESTMENTS-AT-VALUE> 177322
<RECEIVABLES> 1687
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 179011
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 298
<TOTAL-LIABILITIES> 298
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 169928
<SHARES-COMMON-STOCK> 1532
<SHARES-COMMON-PRIOR> 1319
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8785
<NET-ASSETS> 178713
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12077
<OTHER-INCOME> 0
<EXPENSES-NET> (3512)
<NET-INVESTMENT-INCOME> 8565
<REALIZED-GAINS-CURRENT> 2697
<APPREC-INCREASE-CURRENT> 1043
<NET-CHANGE-FROM-OPS> 12305
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 473
<NUMBER-OF-SHARES-REDEEMED> (260)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (15222)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3514
<AVERAGE-NET-ASSETS> 185968
<PER-SHARE-NAV-BEGIN> 11.23
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.23
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.00
<EXPENSE-RATIO> 0.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> HIGH YIELD VARIABLE ACCOUNT COMPASS 3
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 155416
<INVESTMENTS-AT-VALUE> 145274
<RECEIVABLES> 2887
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 18
<TOTAL-ASSETS> 148180
<PAYABLE-FOR-SECURITIES> 225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 246
<TOTAL-LIABILITIES> 471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 157551
<SHARES-COMMON-STOCK> 665
<SHARES-COMMON-PRIOR> 2042
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9842)
<NET-ASSETS> 147709
<DIVIDEND-INCOME> 378
<INTEREST-INCOME> 17318
<OTHER-INCOME> 0
<EXPENSES-NET> (3822)
<NET-INVESTMENT-INCOME> 13874
<REALIZED-GAINS-CURRENT> 981
<APPREC-INCREASE-CURRENT> (13784)
<NET-CHANGE-FROM-OPS> 1071
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 89
<NUMBER-OF-SHARES-REDEEMED> (633)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (54824)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3872
<AVERAGE-NET-ASSETS> 181240
<PER-SHARE-NAV-BEGIN> 24.15
<PER-SHARE-NII> 1.78
<PER-SHARE-GAIN-APPREC> (2.30)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.63
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> HIGH YIELD VARIABLE ACCOUNT COMPASS 3B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 155416
<INVESTMENTS-AT-VALUE> 145274
<RECEIVABLES> 2887
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 18
<TOTAL-ASSETS> 148180
<PAYABLE-FOR-SECURITIES> 225
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 246
<TOTAL-LIABILITIES> 471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 157551
<SHARES-COMMON-STOCK> 971
<SHARES-COMMON-PRIOR> 2042
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9842)
<NET-ASSETS> 147709
<DIVIDEND-INCOME> 378
<INTEREST-INCOME> 17318
<OTHER-INCOME> 0
<EXPENSES-NET> (3822)
<NET-INVESTMENT-INCOME> 13874
<REALIZED-GAINS-CURRENT> 981
<APPREC-INCREASE-CURRENT> (13784)
<NET-CHANGE-FROM-OPS> 1071
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21
<NUMBER-OF-SHARES-REDEEMED> (1091)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (54824)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3872
<AVERAGE-NET-ASSETS> 181240
<PER-SHARE-NAV-BEGIN> 12.79
<PER-SHARE-NII> 0.93
<PER-SHARE-GAIN-APPREC> (1.18)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.54
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MONEY MARKET VARIABLE ACCOUNT COMPASS III
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 132927
<INVESTMENTS-AT-VALUE> 132927
<RECEIVABLES> 162
<ASSETS-OTHER> 13
<OTHER-ITEMS-ASSETS> 8
<TOTAL-ASSETS> 133110
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 216
<TOTAL-LIABILITIES> 216
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132894
<SHARES-COMMON-STOCK> 1370
<SHARES-COMMON-PRIOR> 1160
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 132894
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6505
<OTHER-INCOME> 0
<EXPENSES-NET> (2233)
<NET-INVESTMENT-INCOME> 4272
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4272
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 529
<NUMBER-OF-SHARES-REDEEMED> (319)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20447
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2237
<AVERAGE-NET-ASSETS> 119208
<PER-SHARE-NAV-BEGIN> 14.64
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.15
<EXPENSE-RATIO> 0.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MONEY MARKET VARIABLE ACCOUNT COMPASS IIIB
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 132927
<INVESTMENTS-AT-VALUE> 132927
<RECEIVABLES> 162
<ASSETS-OTHER> 13
<OTHER-ITEMS-ASSETS> 8
<TOTAL-ASSETS> 133110
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 216
<TOTAL-LIABILITIES> 216
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132894
<SHARES-COMMON-STOCK> 3141
<SHARES-COMMON-PRIOR> 1104
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 132894
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6505
<OTHER-INCOME> 0
<EXPENSES-NET> (2233)
<NET-INVESTMENT-INCOME> 4272
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4272
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2506
<NUMBER-OF-SHARES-REDEEMED> (469)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20447
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2237
<AVERAGE-NET-ASSETS> 119208
<PER-SHARE-NAV-BEGIN> 10.86
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.26
<EXPENSE-RATIO> 0.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> MANAGED SECTORS VARIABLE ACCOUNT 3
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 100485
<INVESTMENTS-AT-VALUE> 125775
<RECEIVABLES> 196
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 7
<TOTAL-ASSETS> 125979
<PAYABLE-FOR-SECURITIES> 583
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 178
<TOTAL-LIABILITIES> 761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99928
<SHARES-COMMON-STOCK> 988
<SHARES-COMMON-PRIOR> 1258
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25290
<NET-ASSETS> 125218
<DIVIDEND-INCOME> 499
<INTEREST-INCOME> 168
<OTHER-INCOME> 0
<EXPENSES-NET> (2597)
<NET-INVESTMENT-INCOME> (1930)
<REALIZED-GAINS-CURRENT> 1901
<APPREC-INCREASE-CURRENT> 12245
<NET-CHANGE-FROM-OPS> 12216
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 149
<NUMBER-OF-SHARES-REDEEMED> (419)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3479
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2606
<AVERAGE-NET-ASSETS> 121799
<PER-SHARE-NAV-BEGIN> 45.10
<PER-SHARE-NII> (0.78)
<PER-SHARE-GAIN-APPREC> 5.70
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 50.02
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> MANAGED SECTORS VARIABLE ACCOUNT 3B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 100485
<INVESTMENTS-AT-VALUE> 125775
<RECEIVABLES> 196
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 7
<TOTAL-ASSETS> 125979
<PAYABLE-FOR-SECURITIES> 583
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 178
<TOTAL-LIABILITIES> 761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 99928
<SHARES-COMMON-STOCK> 2542
<SHARES-COMMON-PRIOR> 2156
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25290
<NET-ASSETS> 125218
<DIVIDEND-INCOME> 499
<INTEREST-INCOME> 168
<OTHER-INCOME> 0
<EXPENSES-NET> (2597)
<NET-INVESTMENT-INCOME> (1930)
<REALIZED-GAINS-CURRENT> 1901
<APPREC-INCREASE-CURRENT> 12245
<NET-CHANGE-FROM-OPS> 12216
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 726
<NUMBER-OF-SHARES-REDEEMED> (341)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3479
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2606
<AVERAGE-NET-ASSETS> 121799
<PER-SHARE-NAV-BEGIN> 14.47
<PER-SHARE-NII> (0.24)
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.07
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> TOTAL RETURN VARIABLE ACCOUNT COMPASS III
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 286076
<INVESTMENTS-AT-VALUE> 318044
<RECEIVABLES> 6928
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 13
<TOTAL-ASSETS> 324987
<PAYABLE-FOR-SECURITIES> 3841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 341
<TOTAL-LIABILITIES> 4182
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 288838
<SHARES-COMMON-STOCK> 2943
<SHARES-COMMON-PRIOR> 4024
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31967
<NET-ASSETS> 320805
<DIVIDEND-INCOME> 4109
<INTEREST-INCOME> 9366
<OTHER-INCOME> (35)
<EXPENSES-NET> (6715)
<NET-INVESTMENT-INCOME> 6725
<REALIZED-GAINS-CURRENT> 47028
<APPREC-INCREASE-CURRENT> (22772)
<NET-CHANGE-FROM-OPS> 30981
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> (676)
<NUMBER-OF-SHARES-REDEEMED> (406)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3899
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2390
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6724
<AVERAGE-NET-ASSETS> 320739
<PER-SHARE-NAV-BEGIN> 29.71
<PER-SHARE-NII> 0.62
<PER-SHARE-GAIN-APPREC> 2.38
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 32.71
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> TOTAL RETURN VARIABLE ACCOUNT COMPASS III2
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 286076
<INVESTMENTS-AT-VALUE> 318044
<RECEIVABLES> 6928
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 13
<TOTAL-ASSETS> 324987
<PAYABLE-FOR-SECURITIES> 3841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 341
<TOTAL-LIABILITIES> 4182
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 288838
<SHARES-COMMON-STOCK> 6702
<SHARES-COMMON-PRIOR> 5260
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31967
<NET-ASSETS> 320805
<DIVIDEND-INCOME> 4109
<INTEREST-INCOME> 9366
<OTHER-INCOME> (35)
<EXPENSES-NET> (6715)
<NET-INVESTMENT-INCOME> 6725
<REALIZED-GAINS-CURRENT> 47028
<APPREC-INCREASE-CURRENT> (22772)
<NET-CHANGE-FROM-OPS> 30981
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2228
<NUMBER-OF-SHARES-REDEEMED> (786)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3899
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</TABLE>
