<PAGE>
Registration No. 33-31711
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 7
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)
Delaware O4-2461439
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SUN LIFE EXECUTIVE PARK, WELLESLEY HILLS, MASSACHUSETTS 02181
(617) 237-6030
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Copies to:
BONNIE S. ANGUS, SECRETARY DAVID N. BROWN, ESQ.
SUN LIFE ASSURANCE COMPANY OF COVINGTON & BURLING
CANADA (U.S.) 1201 PENNSYLVANIA AVENUE N.W.
ONE SUN LIFE EXECUTIVE PARK P.O. BOX 7566
WELLESLEY HILLS, MASSACHUSETTS 02181 WASHINGTON, D.C. 20044
(617) 237-6030 (202) 662-5238
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Post-Effective Amendment No. 7 to
Registration Statement on Form S-2
Cross Reference Sheet Pursuant To
Regulation S-K, Item 501(b)
Form S-2 Item Number
and Caption Location in Prospectus; Caption
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1. Forepart of the Registration Cover Pages
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages; Table of Contents
Cover Pages of Prospectus
3. Summary Information, Risk Cover Pages (Summary); Expense
Factors and Ratio of Earnings to Summary
Fixed Charges
4. Use of Proceeds A Word About the Company, the
Variable Account, the Fixed Account
and the Mutual Funds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities to be Cover Pages; A Word About the
Registered Company, the Variable Account, the
Fixed Account and the Mutual Funds;
Purchase Payments and Contract Values
During Accumulation Period; Cash
Withdrawals, Withdrawal Charges
Market Value Adjustment and Loan
Provision; Other Contractual
Provisions
10. Interests of Named Experts and Not Applicable
Counsel
11. Information with Respect to the A Word About the Company, the
Registrant Variable Account, the Fixed Account
and the Mutual Funds; Other
Contractual Provisions; Additional
Information About the Company; The
Company's Directors and Executive
Officers; Legal Proceedings; Legal
Matters; Financial Statements
<PAGE>
Form S-2 Item Number
and Caption Location in Prospectus; Caption
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12. Incorporation of Certain Cover Pages
Information by Reference
13. Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
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PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1996.
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MAY 1, 1996
(PASTEUP LOGO)
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COMBINATION FIXED/VARIABLE
GROUP ANNUITY FOR QUALIFIED
AND NON-QUALIFIED
RETIREMENT PLANS
ISSUED IN CONNECTION WITH
SUN LIFE OF CANADA (U.S.)
VARIABLE ACCOUNT D
PROSPECTUS
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ISSUED BY
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
A WHOLLY-OWNED SUBSIDIARY OF SUN LIFE ASSURANCE COMPANY OF CANADA
*ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ANNUITY SERVICE CENTER
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
PRINCIPAL EXECUTIVE OFFICES:
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(617) 237-6030
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The master group deferred annuity contracts (the "Contracts") offered by
this Prospectus are designed for use in connection with employer, association
and other group retirement plans which may qualify as retirement programs under
Section 401 (including Section 401(k)), Section 403, Sections 408(c) or 408(k)
of the Internal Revenue Code and non-qualified group programs such as payroll
savings plans (collectively the "Plans"). The master group Contract may be
entered into by any employer, association or other bona fide group. The
Contracts provide that annuity payments will begin on a selected future date.
The Contracts provide for the accumulation of values on either a variable basis,
a fixed basis, or a fixed and variable basis and provide for fixed and variable
annuity payments as elected.
(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
MFS/SUN LIFE SERIES TRUST(1) (FOR QUALIFIED AND NON-QUALIFIED CONTRACTS), AND
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND, MFS-REGISTERED TRADEMARK- BOND
FUND, MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND, MASSACHUSETTS INVESTORS
TRUST, MASSACHUSETTS INVESTORS GROWTH STOCK FUND AND MFS-REGISTERED TRADEMARK-
GROWTH OPPORTUNITIES FUND (FOR QUALIFIED CONTRACTS UNDER TRUST/CUSTODIAL
ACCOUNTS ONLY). YOU SHOULD RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT THE
ANNUITY SERVICE MAILING ADDRESS SHOWN ABOVE.
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(1) When MFS/Sun Life Series Trust is used in connection with the Contracts
offered by this Prospectus it may be referred to as the "Compass" Series Trust.
<PAGE>
Each Participant under a Contract will receive a Certificate evidencing such
Participant's coverage under the Contract.
The entity which establishes this Contract on behalf of Participants will be
referred to in this Prospectus as the "Owner," even though certain retirement
programs will be set up with a trustee as legal owner of the assets. The Owner
of this Contract is responsible for providing all communications and
instructions concerning Participant Accounts to Sun Life Assurance Company of
Canada (U.S.) (the "Company"). It is important to understand that while the
Owner has the responsibility for transmitting such instructions for each
Participant, the Participant may be permitted or required to make certain
decisions and elections under this Contract, as specified by the Owner in the
plan, trust or other appropriate document. Thus, where this Contract provides
for selections and elections by the Owner, the Owner shall be solely responsible
for giving such instructions to the Company, but the Owner shall have the right
to determine whether Participants or others make such elections in the first
instance.
The Owner of a Contract may elect to have Contract values accumulate on a
fixed basis in the Fixed Account which pays interest at a fixed rate which is
guaranteed for a specific period (one (1), three (3), five (5) or seven (7)
years) or on a variable basis in the Variable Account, or divided among the
Fixed Account and the Variable Account.
If the Owner elects to have Contract values accumulated on a variable basis,
Purchase Payments are allocated to Sun Life of Canada (U.S.) Variable Account D
(the "Variable Account"), a separate account of the Company. The Variable
Account uses its assets to purchase, at their net asset value, shares in one or
more of the following mutual funds selected by the Owner from among a group of
mutual funds advised by Massachusetts Financial Services Company, a subsidiary
of the Company: MFS/Sun Life Series Trust; MFS-Registered Trademark- World
Governments Fund; MFS-Registered Trademark- Bond Fund; MFS-Registered Trademark-
Total Return Fund; Massachusetts Investors Trust; Massachusetts Investors Growth
Stock Fund; and MFS-Registered Trademark- Growth Opportunities Fund (the "Mutual
Fund(s)" or "Fund(s)"). IN THE CASE OF NON-TRUSTEED RETIREMENT PROGRAMS SUCH AS
SECTION 403(B) TAX-SHELTERED ANNUITIES AND NON-TAX-QUALIFIED DEFERRED
COMPENSATION AND PAYROLL SAVINGS PLANS, PURCHASE PAYMENTS ALLOCATED TO THE
VARIABLE ACCOUNT MAY BE ALLOCATED ONLY TO MFS/SUN LIFE SERIES TRUST. Each Mutual
Fund pays its investment adviser certain fees charged against the assets of the
Mutual Fund. The value of the variable portion, if any, of the Contract's
Accumulation Account, the value of each Participant's Account and the amount of
variable annuity payments will vary to reflect the investment performance of the
Mutual Fund(s) selected and the deduction of the contract charges described
under "How the Contract Charges Are Assessed" on page 25. (For more information
about the Mutual Funds, see "The Mutual Funds" on page 15.)
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. The Company will invest Purchase Payments made under the
Contract which are allocated to the Fixed Account in federal, state and
municipal obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments in accordance with the
requirements established by applicable state insurance laws regarding the nature
and quality of investments that may be made by life insurance companies (See
"The Fixed Account" on page 14). The Company will credit interest at a rate of
not less than four percent (4%) per year, compounded annually, to amounts
allocated to the Fixed Account under the Contracts and guarantee these amounts
at various interest rates (the "Guarantee Rate") for one (1), three (3), five
(5) or seven (7) years as elected by the Owner, subject to the imposition of any
applicable withdrawal charge, market value adjustment, or account administration
fee ("Account Fee"). The Company may not change an Initial or Subsequent
Guarantee Rate for the balance of the Guarantee Period; however, future
Guarantee Rates cannot be predicted and will be determined at the sole
discretion of the Company (subject to the minimum guarantee of four percent
(4%)). Fixed Accumulation Units in the Fixed Account will be credited to the
Contract's Accumulation Account. That part of the Contract relating to the Fixed
Account is registered under the Securities Act of 1933, but the Fixed Account is
not subject to the restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from Purchase Payments made for
these Contracts. However, if any part of a Participant's Account is surrendered,
the Company will, with certain exceptions,
2
<PAGE>
deduct from the amount requested a withdrawal charge (which may be deemed a
contingent deferred sales charge). This charge varies from a maximum of six
percent (6%) for Purchase Payments that have been in a Participant's Account for
less than two (2) years to zero (0) for Payments which have been in the
Participant's Account for seven (7) years. This charge is intended to reimburse
the Company for expenses relating to the distribution of the Contracts. A
portion of a Participant's Account may be withdrawn each year without any
withdrawal charge imposed by the Company, and after a Purchase Payment has been
held by the Company for seven (7) years it may be withdrawn without imposition
of any withdrawal charge by the Company. In addition, after a Participant's
Account has been established for twelve (12) years no withdrawal charges will be
imposed on any amounts withdrawn. Contracts which are used in connection with
tax-qualified retirement programs ("Qualified Contracts") also have a loan
provision (See "Withdrawal Charges" and "Loans" on pages 22 and 24,
respectively).
In addition, if Fixed Accumulation Units having a three (3), five (5), or
seven (7) year Guarantee Period are cancelled to effect a full surrender or
partial withdrawal, a Market Value Adjustment will be imposed. The Market Value
Adjustment will reflect the relationship between the Current Rate for a
Guarantee Period of the same duration as that of the amount being surrendered
and the Guarantee Rate applicable to the amount being surrendered. It also
reflects the time remaining in the Guarantee Period. Generally, if the Guarantee
Rate is lower than the applicable Current Rate, then the application of the
Market Value Adjustment will result in a lower payment upon surrender.
Similarly, if the Guarantee Rate is higher than the applicable Current Rate, the
application of the Market Value Adjustment will result in a higher payment upon
surrender. If the Current Rate and the Guarantee Rate are the same, then the
Market Value Adjustment is zero. IF A FULL SURRENDER IS REQUESTED WHEN THE
GUARANTEE RATE IS LOWER THAN THE APPLICABLE CURRENT RATE THE MARKET VALUE
ADJUSTMENT WILL IN EFFECT REDUCE THE AMOUNT OF INTEREST ALLOCATED TO A
PARTICIPANT'S ACCOUNT AND COULD RESULT IN A CASH WITHDRAWAL PAYMENT IN AN AMOUNT
IESS THAN TOTAL PURCHASE PAYMENTS (NET OF DEDUCTIONS FOR CONTRACT CHARGES). (SEE
"MARKET VALUE ADJUSTMENT" ON PAGE 23.)
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six (6) months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Contracts used with
Tax-Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 22).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Taxation of Annuities in General" on page 34).
For a discussion of cash withdrawal procedures see "Cash Withdrawals" on
page 21 of this Prospectus.
On each Account Anniversary and on surrender of the Participant's Account
for full value if it is not surrendered on an Account Anniversary, the Company
will deduct an annual account administration fee ("Account Fee") from the
Participant's Account. After the Annuity Commencement Date the Account Fee will
be deducted pro rata from each annuity payment made during the year. The amount
of the Account Fee varies from $25 to $12. These charges are to reimburse the
Company for administrative expenses related to the maintenance of the
Participant's Account (See "Account Fee" on page 25).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period at an annual rate ranging from 1.30% to 0.95% of the daily
net assets of the Variable Account for mortality and expense risks assumed by
the Company (See "Charges Against the Variable Account for Mortality and Expense
Risks" on page 26).
Total annualized Purchase Payments allocated to a Participant's Account for
the first Account Year must be at least $300 and are payable in amounts of at
least $25 per payment (See "Purchase Payments" on page 17).
3
<PAGE>
The Contracts provide that the Company may modify the withdrawal charges,
Account Fee, mortality and expense risk charges, the tables used in determining
the amount of the first monthly variable annuity payment and the formula used to
calculate the Market Value Adjustment, provided that such modification shall
apply only with respect to Participant's Accounts established after the
effective date of such modification (See "Modification" on page 33).
Premium taxes payable to any governmental entity will be charged against the
Participant's Account (See "Premium Taxes" on page 26).
Subject to certain conditions, and during the Accumulation Period, the Owner
may convert the value of a designated number of Fixed Accumulation Units then
credited to a Participant's Account into other Fixed Accumulation Units having
an equal aggregate value but having a different Guarantee Period or into
Variable Accumulation Units of particular Sub-Accounts having an equal aggregate
value, or convert the value of a designated number of Variable Accumulation
Units then credited to a Participant's Account into other Variable Accumulation
Units and/or Fixed Accumulation Units having an equal aggregate value.
Transfers/conversions involving Fixed Accumulation Units with three (3), five
(5) or seven (7) year Guarantee Periods will be subject to a Market Value
Adjustment (See "Conversion of Accumulation Units" on page 20).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Variable Annuity
Units of particular Sub-Accounts then credited to the Contract with respect to
the particular Payee, for other Variable Annuity Units, the value of which would
be such that the dollar amount of an annuity payment made on the date of the
exchange would be unaffected by the fact of the exchange (See "Exchange of
Variable Annuity Units" on page 30).
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Fund(s), but will follow voting instructions received from
persons having the right to give voting instructions. The Owner is the person
having the right to give voting instructions prior to the Annuity Commencement
Date. On or after the Annuity Commencement Date the Payee is the person having
such voting rights. Any shares attributable to the Company and Fund shares for
which no timely voting instructions are received will be voted by the Company in
the same proportion as the shares for which instructions are received from
persons having such right (See "Voting of Fund Shares" on page 32).
Under certain circumstances the Company may substitute shares of another
registered open-end investment company both for Fund shares already purchased by
the Variable Account and as the security to be purchased in the future. Also,
upon notice to the Owner, or the Payee during the annuity period, the Company
may modify the Contract if such modification: (i) is necessary to make the
Contract comply with any law or regulation issued by a governmental agency to
which the Company or the Variable Account is subject; or (ii) is necessary to
assure continued qualification of the Contract under the Internal Revenue Code
or other federal or state laws relating to retirement annuities or annuity
contracts; or (iii) is necessary to reflect a change in the operation of the
Variable Account or the Sub-Accounts; or (iv) provides additional Variable
Account and/or fixed accumulation options. Other than as described above, no
change in the terms and/or conditions of the Contract can be made without the
consent of the Owner, or the Payee, as the case may be (See "Substituted
Securities," "Change in Operation of Variable Account" and "Modification" on
page 33).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 32. Such reports, other than prospectuses, will not include the Company's
financial statements.
4
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commision
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements and exhibits thereto, and reference is
hereby made to such Registration Statements and exhibits for further information
relating to the Company and the Contracts. The Registration Statements and the
exhibits thereto may be inspected and copied, and copies can be obtained at
prescribed rates, in the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1995
heretofore filed by the Company with the Commission under the 1934 Act is
incorporated by reference in this Prospectus:
Any statement contained in a document incorporated by reference herein shall
be deemed modified or superseded hereby to the extent that a statement contained
in a later-filed document or herein shall modify or supersede such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in the Prospectus). Requests for such
document should be directed to Bonnie S. Angus, Secretary, Sun Life Assurance
Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181, telephone (617) 237-6030.
5
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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Definitions 8
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Expense Summary 10
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This Prospectus Is a Catalog of Facts 12
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Uses of the Contract 12
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A Word About the Company, the Variable Account, the Fixed Account and the Mutual Funds 12
The Company 12
The Variable Account 13
The Fixed Account 14
The Mutual Funds 15
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Purchase Payments and Contract Values During Accumulation Period 17
Purchase Payments 17
Accumulation Account and Participant's Account 18
Variable Accumulation Value 18
Fixed Accumulation Value 19
Conversion of Accumulation Units 20
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Cash Withdrawals, Withdrawal Charges, Market Value Adjustment and Loan Provision 21
Cash Withdrawals 21
Withdrawal Charges 22
Section 403(b) Annuities 22
Market Value Adjustment 23
Loans (Qualified Contracts Only) 24
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Death Benefit 24
Death Benefit Provided by the Contract 24
Election and Effective Date of Election 24
Payment of Death Benefit 25
Amount of Death Benefit 25
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How the Contract Charges Are Assessed 25
Account Fee 25
Premium Taxes 26
Charges Against the Variable Account for Mortality and Expense Risks 26
Withdrawal Charges 27
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Annuity Provisions 27
Annuity Commencement Date 27
Election--Change of Annuity Option 28
Annuity Options 28
Determination of Annuity Payments 29
Fixed Annuity Payments 29
Variable Annuity Payments 29
Variable Annuity Unit Value 30
Exchange of Variable Annuity Units 30
Annuity Payment Rates 30
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</TABLE>
6
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TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
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Other Contractual Provisions 30
Payment Limits 30
Owner 31
Change of Ownership 31
Designation and Change of Beneficiary 31
Voting of Fund Shares 32
Periodic Reports 32
Substituted Securities 33
Change in Operation of Variable Account 33
Splitting Units 33
Modification 33
Discontinuance of New Participants 34
Custodian 34
Right to Return Contract (Individual Retirement Accounts Only) 34
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Federal Tax Status 34
Introduction 34
Tax Treatment of the Company and the Variable Account 34
Taxation of Annuities in General 34
Qualified Retirement Plans 37
Pension and Profit-Sharing Plans 37
Tax-Sheltered Annuities 37
Individual Retirement Accounts 37
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Texas Optional Retirement Program 38
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Administration of the Contracts 38
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Distribution of the Contracts 38
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Additional Information About the Company 39
Selected Financial Data 39
Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Reinsurance 42
Reserves 42
Investments 42
Competition 43
Employees 43
Properties 43
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The Company's Directors and Executive Officers 43
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State Regulation 46
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Legal Proceedings 47
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Legal Matters 47
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Accountants 47
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Registration Statements 47
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Financial Statements 48
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Appendix A--Variable Accumulation Unit Value, Variable Annuity Unit Value and Variable Annuity Payment
Calculations 75
Appendix B--State Premium Taxes 76
Appendix C--Withdrawals, Surrenders, Withdrawal Charges and Market Value Adjustments 77
</TABLE>
7
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DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
Account Years and Account Anniversaries: The first Account Year shall be the
period of twelve (12) months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be twelve (12) month periods based upon such first day of the
calendar month which follows the calendar month of coverage. If, for example,
the Date of Coverage is in March, the first Account Year will be determined from
the Date of Coverage but will end on the last day of March in the following
year; all other Account Years and all Account Anniversaries will be measured
from April 1.
Accumulation Account: An account established for the Contract.
Accumulation Period: The period before the Annuity Commencement Date and during
the lifetime of the Participant.
Accumulation Unit: A unit of measure used in the calculation of the value of the
Accumulation Account and the Participant's Account. There are two types of
Accumulation Units: Variable Accumulation Units and Fixed Accumulation Units.
*Annuitant: The Participant named in each Certificate.
Annuity Commencement Date: The date on which the first annuity payment under
each Certificate is to be made.
*Annuity Option: The method for making annuity payments.
Annuity Unit: A unit of measure used in the calculation of the second and each
subsequent variable annuity payment from the Variable Account.
Application: The document signed by the Owner that serves as the Owner's
application to the Company for the Contract.
*Beneficiary: The person or entity having the right to the death benefit set
forth in each Certificate.
Certificate: The document for each Participant which evidences the coverage of
the Participant under the Contract.
Company: Sun Life Assurance Company of Canada (U.S.).
Current Rate: As of a particular date, the interest rate for a Guarantee Period
that would be credited on a compound annual basis on Payments allocated to the
Fixed Account on that date. The Current Rate for a particular Guarantee Period
is contained in a schedule of rates published by the Company from time to time,
but in no event is the Current Rate less than four percent (4%), compounded
annually.
Date of Coverage: The date on which the Participant's Account becomes effective.
Due Proof of Death: An original certified copy of an official death certificate,
an original certified copy of a decree of a court of competent jurisdiction as
to the finding of death, or any other proof satisfactory to the Company.
Fixed Account: The Fixed Account consists of all assets of the Company other
than those allocated to a separate account of the Company.
Fixed Annuity: An annuity with payments which do not vary as to dollar amount.
Guarantee Period: The number of years for which an Initial Guarantee Rate or
Subsequent Guarantee Rate is credited. This period may be one (1), three (3),
five (5) or seven (7) years, as elected by the Owner. There are two types of
Guarantee Periods: an Initial Guarantee Period and a Subsequent Guarantee
Period.
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* As specified in the Participant Enrollment Form, unless changed.
8
<PAGE>
Guarantee Rate: The rate of interest credited by the Company on a compound
annual basis during any Initial or Subsequent Guarantee Period on Payments
allocated to the Fixed Account.
Issue Date: The date on which the Contract becomes effective.
Net Loan Interest: Loan interest due the Company, less any interest credited by
the Company on the principal amount of the loan and any unpaid interest thereon.
Non-Qualified Contract: A Contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403 or 408 of the Internal Revenue Code.
*Owner: The employer, association or other bona fide group entitled to the
ownership rights stated in the Contract and in whose name or names the Contract
is issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c) or Section 408(k) of
the Internal Revenue Code to serve as legal owner of Plan assets, but the term
"Owner," as used herein, shall refer to the organization entering into the
Contract.
Participant: An eligible employee, member or other person named in the
Certificate who is entitled to benefits under the Plan as determined and
reported to the Company by the Owner.
Participant Enrollment Form: The document signed by each Participant that serves
as his or her application for enrollment under the Contract.
Participant's Account: An account established for each Participant to which net
Purchase Payments are credited in the form of Variable Accumulation Units and/or
Fixed Accumulation Units.
Payee: A recipient of annuity payments under the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
Plan: The retirement plan under which the Contract is issued.
Purchase Payment (Payment): An amount paid to the Company as consideration for
the benefits provided by the Contract.
Qualified Contract: A Contract used in connection with a retirement plan which
receives favorable federal income tax treatment under Sections 401, 403, 408(c)
or 408(k) of the Internal Revenue Code of 1986, as amended ("Code").
Receipt: Receipt by the Company at its Annuity Service Mailing Address shown on
the cover of this Prospectus.
Sub-Account: That portion of the Variable Account which invests in shares of a
specific Mutual Fund or a specific series of Compass Series Trust.
*Successor Beneficiary: The person or persons named to become the Beneficiary if
the Beneficiary is not alive.
Valuation Period: The period of time from one determination of Accumulation Unit
and Annuity Unit values to the next subsequent determination of these values.
Such determination shall be made as of the close of the New York Stock Exchange
on each day the Exchange is open for trading and on such other days on which
there is a sufficient degree of trading in the portfolio securities of the
Variable Account so that the values of the Variable Account's Accumulation Units
and Annuity Units might be materially affected.
Variable Account: A separate account of the Company consisting of assets set
aside by the Company, the investment performance of which is kept separate from
that of the general assets of the Company.
Variable Annuity: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
- ------------------------
* As specified in the Participant Enrollment Form, unless changed.
9
<PAGE>
EXPENSE SUMMARY
The purpose of the following table is to help Owners, Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Owners and/or Participants WHEN PAYMENTS ARE
ALLOCATED TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable
Account as well as of the Funds. The expense information for certain Funds has
been restated to reflect current fees. The information set forth should be
considered together with the narrative provided under the heading "How the
Contract Charges Are Assessed" in this Prospectus, and with the Funds'
prospectuses. In addition to the expenses listed below, premium taxes may be
applicable.
<TABLE>
<CAPTION>
MONEY HIGH CAPITAL GOVERNMENT
MARKET YIELD APPRECIATION SECURITIES
CONTRACT OWNER TRANSACTION EXPENSES SERIES SERIES SERIES SERIES
- ------------------------------------------------ --------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6%
3........................................... 5% 5% 5% 5%
4........................................... 4% 4% 4% 4%
5........................................... 3% 3% 3% 3%
6........................................... 2% 2% 2% 2%
7........................................... 1% 1% 1% 1%
8........................................... 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.50% 0.75% 0.75% 0.55%
Other Expenses.................................. 0.09% 0.12% 0.08% 0.08%
Total Fund Annual Expenses...................... 0.59% 0.87% 0.83% 0.63%
</TABLE>
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES MWG MFB MTR MIT MIG MGO
- ------------------------------------------------ ------- ---------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6% 6% 6%
3........................................... 5% 5% 5% 5% 5% 5%
4........................................... 4% 4% 4% 4% 4% 4%
5........................................... 3% 3% 3% 3% 3% 3%
6........................................... 2% 2% 2% 2% 2% 2%
7........................................... 1% 1% 1% 1% 1% 1%
8........................................... 0% 0% 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.90% 0.41% 0.39% 0.27% 0.31% 0.43%
Other Expenses(3)............................... 0.61% 0.59% 0.48% 0.43% 0.42% 0.44%
Total Fund Annual Expenses...................... 1.51% 1.00% 0.87% 0.70% 0.73% 0.87%
</TABLE>
(See footnotes on next page)
10
<PAGE>
- ------------------------------
(1) A portion of the Participant's Account 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 Annual Contract Fee ("Account Fee") and Mortality and Expense Risk Fees
("Asset Charge") decline based on total Purchase Payments credited to all
Participant's Accounts under a Contract in accordance with the following
schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ACCOUNT FEE ASSET CHARGE
- --------------------------------------- ----------------- -----------------
<C> <S> <C> <C>
$ up to 250,000 ............... $ 25 1.30%
250,000 to 1,499,999 ............... 18 1.25%
1,500,000 to 4,999,999 ............... 15 1.10%
5,000,000 and over ............... 12 0.95%
</TABLE>
During 1995, the average rate of the Asset Charge under all Contracts was
approximately 1.21%, and no Participant was assessed an Asset Charge of more
than 1.25%.
(3) Other expenses include annualized fees assessed under the Distribution Plans
adopted pursuant to Section 12(b) of the Investment Company Act of 1940 and
Rule 12b-1 thereunder (See the Funds' prospectuses). The Distribution Plans
commenced on the following dates: MTR and MWG, October 1,1989, MIT, January
2, 1991, and MFB, MIG and MGO, March 1, 1991.
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 Series..................................... $ 73 $ 104 $ 129 $ 221
High Yield Series....................................... 76 113 143 250
Capital Appreciation Series............................. 76 112 141 246
Government Securities Series............................ 74 106 131 225
MFS-Registered Trademark- World Governments Fund
(MWG)................................................. 83 135 180 323
MFS-Registered Trademark- Bond Fund (MFB)............... 77 117 150 264
MFS-Registered Trademark- Total Return Fund (MTR)....... 76 113 144 250
Massachusetts Investors Trust (MIT)..................... 74 108 135 233
Massachusetts Investors Growth Stock Fund (MIG)......... 75 109 136 236
MFS-Registered Trademark- Growth Opportunities Fund
(MGO)................................................. 76 113 143 250
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Series..................................... $ 19 $ 59 $ 102 $ 221
High Yield Series....................................... 22 68 116 250
Capital Appreciation Series............................. 22 67 114 246
Government Securities Series............................ 20 61 104 225
MFS-Registered Trademark- World Governments Fund
(MWG)................................................. 29 90 153 323
MFS-Registered Trademark- Bond Fund (MFB)............... 23 72 123 264
MFS-Registered Trademark- Total Return Fund (MTR)....... 22 68 116 250
Massachusetts Investors Trust (MIT)..................... 20 63 108 233
Massachusetts Investors Growth Stock Fund (MIG)......... 21 64 109 236
MFS-Registered Trademark- Growth Opportunities Fund
(MGO)................................................. 22 68 116 250
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
11
<PAGE>
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group deferred annuity
contract (the "Contract") which provides fixed benefits, variable benefits or a
combination of both as elected by the Owner. It describes its uses and
objectives, its benefits and costs, and the rights and privileges of the Owner
and the Participant. It also contains information about the Company, the
Variable Account, the Fixed Account and the Mutual Funds. It has been carefully
prepared in non-technical language to help you decide whether the purchase of a
Contract will fit the needs of your retirement plan. We urge you to read it
carefully and retain it for future reference. The Contract has appropriate
provisions relating to variable and fixed accumulation values and variable and
fixed annuity payments. A Variable Annuity and a Fixed Annuity have certain
similarities. Both provide that Purchase Payments, less certain deductions, will
be accumulated prior to the Annuity Commencement Date. After the Annuity
Commencement Date, annuity payments will be made to the Annuitant. The Company
assumes the mortality and expense risks under the Contract, for which it
receives certain amounts. The significant difference between a Variable Annuity
and a Fixed Annuity is that under a Variable Annuity, all investment risk is
assumed by the Owner and the Participant or Payee and the amounts of the annuity
payments vary with the investment performance of the Variable Account; under a
Fixed Annuity, the investment risk is assumed by the Company (except in the case
of early withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and
the amounts of the annuity payments do not vary. However, the Owner bears the
risk that the Guarantee Rate to be credited on amounts allocated to the Fixed
Account may not exceed the minimum guaranteed rate of four percent (4%) for any
Guarantee Period.
USES OF THE CONTRACT
The Contract is designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(c) or Section 408(k) of the Internal Revenue Code. Effective May
1,1990, no new Contracts will be issued for use in connection with deferred
compensation plans established pursuant to Section 457 of the Code. Certain
federal tax advantages are currently available to retirement plans which qualify
as (1) self-employed individuals' retirement plans under Section 401; (2)
corporate or association retirement plans under Section 401; (3) annuity
purchase plans sponsored by certain tax exempt organizations or public school
systems under Section 403(b); and (4) employer or association of employees
individual retirement accounts under Section 408(c) and SEP-IRAs under Section
408(k) (See "Federal Tax Status").
The Contract is also designed so that it may be used in connection with
non-tax-qualified deferred compensation and payroll savings plans.
A Contract is issued to the Owner covering all present and future
Participants. Each Participant receives a Certificate which evidences his or her
participation in the Plan established by the Owner. For the purposes of
determining benefits under the Plan, a Participant's Account is established for
each Participant.
A WORD ABOUT THE COMPANY,
THE VARIABLE ACCOUNT, THE FIXED ACCOUNT AND THE MUTUAL FUNDS
THE COMPANY
The Company is a stock life insurance corporation incorporated under the
laws of Delaware on January 12, 1970. Its Executive Office mailing address is
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, telephone
(617) 237-6030. 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. The Company's other subsidiaries are Massachusetts
Financial Services Company and Sun Capital Advisers, Inc., registered investment
advisers, Sun Investment Services Company, a registered broker-dealer and
investment adviser,
12
<PAGE>
Sun Benefit Services Company, Inc. which offers claims, administrative and
actuarial services, New London Trust, F.S.B., a federally chartered savings
bank, Sun Life Financial Services Limited, which provides off-shore
administrative services and Massachusetts Casualty Insurance Company, which
issues individual disability income policies.
The Company is a wholly-owned subsidiary of Sun Life Assurance Company of
Canada, 150 King Street West, Toronto, Ontario, Canada. Sun Life Assurance
Company of Canada is a mutual life insurance company incorporated pursuant to
Act of Parliament of Canada in 1865 and currently transacts business in all of
the Canadian provinces and territories, all states except New York, the District
of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong,
Bermuda and the Philippines (See "Additional Information About the Company").
THE VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that the variable annuity
payments (1) will reflect the investment performance of the Variable Account
with respect to amounts allocated to the Variable Account before the Annuity
Commencement Date, and (2) will reflect the investment performance of the
Variable Account after that date. Since the Variable Account is always fully
invested in Fund(s) shares, its investment performance reflects the investment
performance of the Fund(s). Values of Fund(s) shares held by the Variable
Account fluctuate and are subject to the risks of changing economic conditions
as well as the risks inherent in the ability of the Fund(s)' management to make
necessary changes in the Fund(s)' portfolios to anticipate changes in economic
conditions. Therefore, the Owner bears the entire investment risk that the basic
objectives of the Contract may not be realized, and that the adverse effects of
inflation may not be lessened and there can be no assurance that the aggregate
amount of variable annuity payments will equal or exceed the aggregate amount of
Purchase Payments made with respect to a particular Participant's Account for
the reasons described above or because of the premature death of a Payee.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of variable annuity payments made
during the lifetime of the Payee(s) will not be adversely affected by the actual
mortality experience of the Company or by the actual expenses incurred by the
Company in excess of expense deductions provided for in the Contract.
Sun Life of Canada (U.S.) Variable Account D (the "Variable Account") was
established by the Company on August 20,1985, pursuant to a resolution of its
Board of Directors. Under Delaware insurance law and the Contract, the income,
gains or losses of the Variable Account are credited to or charged against the
assets of the Variable Account without regard to the other income, gains or
losses of the Company. These assets are held in relation to the Contracts
described in this Prospectus and such other variable annuity contracts as may be
issued by the Company and designated by it as providing benefits which vary in
accordance with the investment performance of the Variable Account. Although the
assets maintained in the Variable Account will not be charged with any
liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of the Company.
The Variable Account meets the definition of a separate account under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Variable Account or of the Company by the
Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in Class A shares of a specific Mutual Fund or,
in the case of Compass Series Trust, in shares of a designated series of the
Fund. All amounts allocated to the Variable Account will be used to purchase
Fund(s) shares as designated by the Owner at their net asset value. Any and all
distributions made by the Fund(s) with respect to the shares held by the
Variable Account will be reinvested to purchase additional shares at their net
asset value. Deductions from the Variable Account for cash
13
<PAGE>
withdrawals, loans, annuity payments, death benefits, Account Fees, contract
charges against the assets of the Variable Account for the assumption of
mortality and expense risks and any applicable taxes will, in effect, be made by
redeeming the number of Fund(s) shares at their net asset value equal in total
value to the amount to be deducted. The Variable Account will be fully invested
in Fund(s) shares at all times.
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 to the extent elected at the time of the
establishment of a Participant's Account or as subsequently changed. The Company
will invest the assets of the Fixed Account in those assets chosen by the
Company and allowed by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
The Company intends to invest Purchase Payments allocated to the Fixed
Account primarily in debt instruments, as follows: (1) Securities issued by the
United States Government or its agencies or instrumentalities, which issues may
or may not be guaranteed by the United States Government; (2) Debt securities
which have an investment grade, at the time of purchase, within the four highest
grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa),
Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service; (3) Other debt instruments, including but not limited
to, issues of or guaranteed by banks or bank holding companies and other
corporations, which obligations, although not rated by Moody's or Standard &
Poor's, are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and (4) Other
evidences of indebtedness secured by mortgages or deeds of trust representing
liens upon real estate. Notwithstanding the foregoing, the Company may also
invest a portion of the Fixed Account in below investment grade debt
instruments. Instruments rated Baa and/or BBB or lower normally involve a higher
risk of default and are less liquid than higher rated instruments. If the rating
of an investment grade debt security held by the Company is subsequently
downgraded to below investment grade, the decision to retain or dispose of the
security will be made based upon an individual evaluation of the circumstances
surrounding the downgrading and the prospects for continued deterioration,
stabilization and/or improvement.
The Company is not obligated to invest amounts allocated to the Fixed
Account according to any particular strategy, except as may be required by
applicable state insurance laws. Investment income from such Fixed Account
assets will be allocated between the Company and all contracts participating in
the Fixed Account, including the Contracts offered by this Prospectus, in
accordance with the terms of such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contract which cannot be changed
(except, as described under "Modification," with respect to Participants'
Accounts established after the effective date of such modification). In
addition, the Company guarantees that it will not increase charges for
maintenance of the Contracts, regardless of its actual expenses (except as
described under "Modification" with respect to Participants' Accounts
established after the effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks borne by the Company in connection
with contracts participating in the Fixed Account. The Company expects to derive
a profit from this compensation. The amount of such investment income allocated
to the Contracts will vary from Guarantee Period to Guarantee Period in the sole
discretion of the Company. However, the Company guarantees that it will credit
interest at a rate of not less than four percent (4%) per year, compounded
annually, to amounts allocated to the Fixed
14
<PAGE>
Account under the Contract. The Company may credit interest at a rate in excess
of four (4%) per year; however, the Company is not obligated to credit any
interest in excess of four percent (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. The Company's general investment strategy will be to invest
amounts allocated to the Fixed Account in investment-grade debt securities and
mortgages using immunization strategies with respect to the applicable Guarantee
Periods. This includes, with respect to investments and average terms of
investments, using dedication (cash flow matching) and/or duration matching to
minimize the Company's risk of not achieving the rates it is crediting under
Initial and Subsequent Guarantee Periods in volatile interest rate environments.
ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT lN SUBSEQUENT
GUARANTEE PERIODS IN EXCESS OF FOUR PERCENT (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
FOUR PERCENT (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 of a
Participant's Account will not be less than the amount of Purchase Payments
allocated to the Fixed Account, plus interest at the rate of four percent (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 charges, any applicable premium taxes, any amounts previously
surrendered or withdrawn, and any loans. If the Owner surrenders the Contract or
a Participant's Account is withdrawn, the amount available from the Fixed
Account will be reduced by any applicable withdrawal charge and any unpaid Net
Loan Interest, and may be increased or decreased by a market value adjustment
(See "Withdrawal Charges" and "Market Value Adjustment").
THE MUTUAL FUNDS
The Company will allocate each Purchase Payment to either the Variable
Account, the Fixed Account or both the Variable Account and the Fixed Account in
accordance with the instructions of the Owner. Purchase Payments allocated to
the Variable Account are used to purchase, at net asset value, shares of the
Mutual Fund(s) described below, as specified by the Owner. IN THE CASE OF
NON-TRUSTEED RETIREMENT PROGRAMS, SUCH AS SECTION 403(B) TAX-SHELTERED ANNUITIES
AND NON-QUALIFIED DEFERRED COMPENSATION AND PAYROLL SAVINGS PLANS, PURCHASE
PAYMENTS AILOCATED TO THE VARIABLE ACCOUNT MAY BE ALLOCATED ONLY TO SUB-ACCOUNTS
INVESTING IN SHARES OF ONE OR MORE SERIES OF MFS/SUN LIFE SERIES TRUST.
The Owner designates the Fund(s) to which Purchase Payments attributable to
the Contract are to be allocated. Allocation of Purchase Payments or transfer of
Participant's Account values from one Fund to another may be changed or effected
by the Owner pursuant to such terms and conditions as may be imposed by each
Fund, in addition to those set forth in the Contract.
The investment adviser of each of the Funds, Massachusetts Financial
Services Company ("MFS"), is paid fees by the Funds for its services. MFS, a
Delaware corporation, is a subsidiary of the Company. MFS also serves as
investment adviser to the other funds in the MFS Family of Funds and to
additional Variable Accounts established by the Company and its affiliated
companies in connection with other variable contracts. MFS Asset Management,
Inc., a subsidiary of MFS, provides investment advice to substantial private
clients. MFS and its predecessor organizations have a history of money
management
15
<PAGE>
dating from 1924. MFS operates as an autonomous organization and the obligation
of performance with respect to the investment advisory and underwriting
agreements is solely that of MFS. The Company undertakes no obligation in this
respect.
A summary of the investment objectives of each Fund is contained in the
description below. More detailed information may be found in the current
prospectuses of the Funds and their Statements of Additional Information. A
prospectus for each Fund must accompany this Prospectus and should be read in
conjunction herewith.
MFS/SUN LIFE SERIES TRUST1
MFS/Sun Life Series Trust (the "Series Trust") is composed of nineteen
independent portfolios of securities each of which has separate investment
objectives and policies. Shares of the Series Trust are issued in nineteen
series, each corresponding to one of the portfolios. Shares of four of these
series are available for investment by Owners of the Contracts offered by this
Prospectus. Each Sub-Account of the Variable Account invests exclusively in
shares of one such series. Additional portfolios may be added to the Series
Trust which may or may not be available for investment by the Variable Account.
Shares of the Series Trust will be sold only to separate accounts established by
the Company and its affiliates to fund benefits under variable life insurance
and variable annuity products. Certain risks involved in funding benefits under
both life insurance and annuity contracts are discussed in the prospectus of the
Series Trust under the caption "Management of the Series Fund."
(1) MONEY MARKET SERIES ("MMS") will seek maximum current income to the
extent consistent with stability of principal by investing exclusively in money
market instruments maturing in less than thirteen (13) months, including U.S.
government securities and repurchase agreements collateralized by such
securities, obligations of the larger banks, and prime commercial paper.
(2) HIGH YIELD SERIES ("HYS") will seek 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 which may include equity features. These securities
generally involve greater volatility of price and risk to principal and income
and less liquidity than securities in the higher rated categories. Any person
contemplating allocating Purchase Payments to the Sub-Account investing in
shares of the High Yield Series should review the risk disclosure in the Series
Trust prospectus carefully and consider the investment risks involved.
(3) CAPITAL APPRECIATION SERIES ("CAS") will seek capital appreciation by
investing in securities of all types, with a major emphasis on common stocks.
(4) GOVERNMENT SECURITIES SERIES ("GSS") will seek current income and
preservation of capital by investing in U.S. Government and Government-related
Securities.
MFS-REGISTERED TRADEMARK- WORLD GOVERNMENTS FUND ("MWG")
The objectives of MWG (a series of MFS Series Trust VII) are to seek not
only preservation, but also growth of capital, together with moderate current
income through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities, and, to a lesser extent, equity
securities.
MFS-REGISTERED TRADEMARK- BOND FUND ("MFB")
MFB (a series of MFS Series Trust IX) invests a major portion of its assets
in "investment grade" debt securities. Its primary investment objective is to
provide as high a level of current income as is believed to be consistent with
prudent investment risk. A secondary objective is to protect shareholders'
capital.
MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND ("MTR")
MTR (a series of MFS Series Trust V) has as its primary investment objective
to obtain above-average income consistent with what its management believes to
be prudent employment of capital. While current income is the primary objective,
the Fund believes that there also should be a reasonable opportunity for growth
of capital and income, since many securities offering a better-than-average
yield
- -------------
1 When MFS/Sun Life Series Trust is used in connection with the Contracts
offered by this Prospectus it may be referred to as the "Compass" Series
Trust.
16
<PAGE>
may also possess growth potential. Under normal market conditions, at least 25%
of the Fund's assets will be invested in fixed income securities and at least
40% and no more than 75% of the Fund's assets will be invested in equity
securities.
MASSACHUSETTS INVESTORS TRUST ("MIT")
The objectives of MIT are to provide reasonable current income and long-term
growth of capital and income. The Fund is believed to constitute a conservative
medium for that portion of capital which an investor wishes to have invested in
securities considered to be of high or improving investment quality. The assets
of the Fund are normally invested in common stocks or securities convertible
into common stocks. However, the Fund may hold its assets in cash or invest in
commercial paper, repurchase agreements or other forms of debt securities either
to provide reserves for future purchases of common stock or as a defensive
measure in certain economic environments.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND ("MIG")
MIG has as its investment objective to provide long-term growth of capital
and future income rather than current income. To achieve this objective it is
the policy of the Fund to keep its assets invested, except for working cash
balances, in the common stocks or securities convertible into common stocks, of
companies believed by the Fund's management to possess better-than-average
prospects for long-term growth. Emphasis is placed on the selection of
progressive, well-managed companies.
MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND ("MGO")
MGO (formerly MFS Capital Development Fund ("MCD")) has as its investment
objective to seek growth of capital. Dividend income, if any, is a consideration
incidental to the objective of capital growth. The Fund maintains a flexible
approach towards types of companies as well as types of securities, depending
upon the economic environment and the relative attractiveness of the various
securities markets. Generally emphasis is placed upon companies believed to
possess above average growth opportunities.
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address.
Completed application forms, together with the initial Purchase Payment, are
forwarded to the Company for acceptance. Upon acceptance, the Contract and
Certificate(s) are issued to the Owner and Participant(s), respectively, and the
initial Purchase Payment is then credited to the Participant's Account(s) in the
form of Accumulation Units. The initial Purchase Payment must be applied within
two (2) business days of receipt by the Company of a completed application. The
Company may retain the Purchase Payment for up to five (5) business days while
attempting to complete an incomplete application. If the application cannot be
made complete within five (5) business days, the prospective participant will be
informed of the reasons for the delay and the Purchase Payment will be returned
immediately unless the prospective participant specifically consents to the
Company's retaining the Purchase Payment until the application is made complete.
Thereafter, the Purchase Payment must be applied within two (2) business days.
Subsequent Purchase Payments are applied at the end of the Valuation Period
during which they are received by the Company.
The amount of Purchase Payments may vary; however, the Company will not
accept Purchase Payments to be allocated to a Participant's Account which, on an
annualized basis, are less than $300 for the first Account Year, and each
Purchase Payment must be at least $25. In addition, the prior approval of the
Company is required before it will accept a Purchase Payment which would cause
the value of a Participant's Account to exceed $1,000,000. lf the value of a
Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be accepted without the prior approval of the Company.
A Participant's Account shall be continued automatically in full force
during the lifetime of the Participant until the Annuity Commencement Date or
until the Participant's Account is withdrawn or the
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Contract is surrendered. Unless the Owner has surrendered the Contract or the
Participant's Account has been withdrawn, Purchase Payments may be made at any
time during the life of the particular Participant and before the particular
Participant's Annuity Commencement Date.
(2) ALLOCATION OF NET PURCHASE PAYMENTS
The net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable premium or similar tax. Each net Purchase
Payment will be allocated to either the Fixed Account or to Sub-Accounts of the
Variable Account or to both Sub-Accounts and the Fixed Account in accordance
with the allocation factors specified in the Participant Enrollment Form, or as
subsequently changed.
The allocation factors for new Payments between the Fixed Account and the
Variable Account and among the Sub-Accounts may be changed by the Owner at any
time by giving written notice of the change to the Company. Any change will take
effect with the first Purchase Payment received with or after receipt of notice
of the change by the Company and will continue in effect until subsequently
changed.
ACCUMULATION ACCOUNT AND PARTICIPANT'S ACCOUNT
The Company will establish an Accumulation Account for each Contract and
will maintain the Accumulation Account during the Accumulation Period. The
Contract's Accumulation Account value for any Valuation Period is equal to the
sum of the variable accumulation values, if any, plus the fixed accumulation
values, if any, of all Participants' Accounts under the Contract for that
Valuation Period.
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
(1) CREDITING VARIABLE 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 any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is received by the Company.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain the same from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below. For a hypothetical example of the calculation of the value of a
Variable Accumulation Unit, see Appendix A.
(3) VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Contract, if any, for any Valuation
Period is equal to the sum of the value of all Variable Accumulation Units
credited to all Participant's Accounts under the Contract for such Valuation
Period.
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
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(4) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result where
(a) is the net result of:
(1) the net asset value of a Fund share held in the Sub-Account
determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by the Fund issuing the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present
law).
(b) is the net asset value of a Fund share held in the Sub-Account
determined as of the end of the preceding Valuation Period; and
(c) is the risk charge factor determined by the Company for the Valuation
Period to reflect the charge for assuming the mortality and expense
risks.
FIXED ACCUMULATION VALUE
(1) INITIAL AND SUBSEQUENT GUARANTEE PERIODS
The Owner elects an Initial Guarantee Period of one (1), three (3), five
(5), or seven (7) years or any combination thereof. The period(s) elected will
determine the Initial Guarantee Rate(s) and the Purchase Payment or portion
thereof allocated to the particular Initial Guarantee Period (less any
surrenders, loans and applicable premium taxes, if any,) will earn interest at
the Initial Guarantee Rate during the Initial Guarantee Period.
Unless a Participant's Account is surrendered, a Subsequent Guarantee Period
will automatically commence at the end of an Initial Guarantee Period or another
Subsequent Guarantee Period. Each Subsequent Guarantee Period will be of the
same duration as the previous Initial or Subsequent Guarantee Period unless the
Owner elects, within the thirty (30) day period prior to the end of the previous
Initial or Subsequent Guarantee Period, a different Subsequent Guarantee Period
from among those Subsequent Guarantee Periods being offered by the Company at
such time. The Guarantee Rate for the Guarantee Period automatically applied in
these circumstances may be higher or lower than the Guarantee Rate for other
Guarantee Periods. The Owner will not receive prior written notice of the
Guarantee Rate for any Guarantee Period automatically applied and a Market Value
Adjustment will be applied to any amounts withdrawn from the Fixed Account
(except in the case of the death of the Participant prior to the Annuity
Commencement Date or annuitization over a period of at least five (5) years).
(2) 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 Participant's
Account in the form of Fixed Accumulation Units. Fixed Accumulation Units are
established and valued separately for the one (1), three (3), five (5) and seven
(7) year Guarantee Periods. The number of particular Fixed Accumulation Units to
be credited is determined by dividing the dollar amount allocated to a Guarantee
Period by the Fixed Accumulation Unit value of the particular type of Fixed
Accumulation Unit for the Valuation Period during which the Purchase Payment is
received by the Company.
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(3) FIXED ACCUMULATION UNIT VALUE
The Fixed Accumulation Unit value for each type of Fixed Accumulation Unit
is established at $10.00 for the first Valuation Period of the calendar month in
which a Purchase Payment is credited to the Participant's Account and will
increase for each successive Valuation Period as interest is accrued. All
Participants' Accounts established in a particular calendar month for a
particular Guarantee Period and at a particular Initial Guarantee Rate, as
specified in advance by the Company from time to time, will use the same series
of Fixed Accumulation Unit values throughout the Initial Guarantee Period.
At the end of the Initial Guarantee Period the Fixed Accumulation Units
credited to a Participant's 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
Subsequent Guarantee Period as interest is accrued at the Subsequent Guarantee
Rate which shall have been determined by the Company prior to the first day of
each Subsequent Guarantee Period.
(4) FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Fixed Accumulation
Units credited to the Participant's Account for such Valuation Period.
(5) INITIAL AND SUBSEQUENT GUARANTEE RATES
The Company periodically will establish applicable Initial and Subsequent
Guarantee Rates for the four Guarantee Periods. Current Rates may be changed by
the Company frequently or infrequently depending on interest rates available to
the Company and other factors as described below, but once established rates
will be guaranteed for the respective Guarantee Periods; however, Fixed
Accumulation Units will be subject to any applicable withdrawal charge and/or
Account Fee and may be subject to a market value adjustment on surrender or
withdrawal (See "Market Value Adjustment").
The Company will credit interest to the fixed portion of a Participant's
Account at a rate of not less than four percent (4%) per year, compounded
annually. Once the Initial or Subsequent Guarantee Rate applicable to a specific
Fixed Accumulation Unit is established by the Company, it may not be changed for
the balance of the Guarantee Period.
The Company has no specific formula for determining the rate of interest
that it will declare as an Initial or Subsequent Guarantee Rate, as these rates
will be reflective of interest rates available on the types of debt instruments
in which the Company intends to invest Purchase Payments allocated to the Fixed
Account (See "The Fixed Account"). In addition, the Company's management may
consider other factors in determining Initial or Subsequent Guarantee Rates for
a particular duration including: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors.
The Owner bears the risk that the Guarantee Rate to be credited on amounts
allocated to the Fixed Account may not exceed the minimum guaranteed rate of
four percent (4%) for any Guarantee Period.
CONVERSION OF ACCUMULATION UNITS
During the Accumulation Period the Owner may, upon written request received
by the Company, convert the value of a designated number of Fixed Accumulation
Units then credited to a Participant's Account into other Fixed Accumulation
Units having an equal aggregate value but having a different Guarantee Period or
into Variable Accumulation Units of particular Sub-Accounts having an equal
aggregate value, or convert the value of a designated number of Variable
Accumulation Units then credited to the Participant's Account into other
Variable Accumulation Units and/or Fixed Accumulation Units having an equal
aggregate value. These transfers/conversions shall, however, be subject to the
following conditions: (1) not more than twelve (12) conversions may be made in
any Account Year; and (2) the value of Accumulation Units converted may not be
less than $1,000 unless all of the Fixed Accumulation Units and/or all of the
Variable Accumulation Units of a particular Sub-Account credited to the
Participant's Account are being converted. IN ADDITION, TRANSFERS/CONVERSIONS
INVOLVING FIXED ACCUMULATION UNITS WITH THREE (3), FIVE (5) OR SEVEN (7) YEAR
GUARANTEE PERIODS WILL BE SUBJECT TO A
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MARKET VALUE ADJUSTMENT (SEE "MARKET VALUE ADJUSTMENT" ON PAGE 23), AND
TRANSFERS/CONVERSIONS INVOLVING VARIABLE ACCUMULATION UNITS SHALL BE SUBJECT TO
SUCH TERMS AND CONDITIONS AS MAY BE IMPOSED BY EACH FUND. The conversion will be
made using the Accumulation Unit values for the Valuation Period during which
the request for conversion is received by the Company. Under current tax law
there will not be any tax liability to the Owner if the Owner makes a conversion
of Accumulation Units.
CASH WITHDRAWALS, WITHDRAWAL CHARGES, MARKET VALUE ADJUSTMENT
AND LOAN PROVISION
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Participant, the Owner may elect to receive a cash withdrawal payment from
the Company. Any such election shall specify the amount of the withdrawal and
will be effective on the date that it is received by the Company. For
withdrawals in excess of $5,000, the signature of the Owner must 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. This requirement may be
waived by the Company. In some cases, for example requests by a corporation,
partnership, agent or fiduciary, the Company will require additional
documentation of a customary nature.
The Owner may request a full surrender or a partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee and any applicable withdrawal
charge and/or unpaid Net Loan Interest, plus or minus any applicable Market
Value Adjustment. A request for a partial withdrawal will result in the
cancellation of Accumulation Units with an aggregate value equal to the dollar
amount requested, and the Participant will receive the specified amount, less
any applicable Account Fee and any withdrawal charge and/or unpaid Net Loan
Interest and plus or minus any applicable Market Value Adjustment. If a partial
withdrawal is requested which would leave a Participant's Account value of less
than the Account Fee, then such partial withdrawal will be treated as a full
surrender. Partial withdrawals may be restricted by the maximum loan limitation.
The Account Fee and any applicable withdrawal charge and/or unpaid Net Loan
Interest will be deducted from the Participant's Account before the application
of the Market Value Adjustment.
UNLESS INSTRUCTED TO THE CONTRARY, the Company will cancel Fixed
Accumulation Units and Variable Accumulation Units of the particular
Sub-Accounts in the same proportion that the total value of Fixed Accumulation
Units and Variable Accumulation Units of the particular Sub-Accounts then
credited to the Participant's Account bear to the value of the Participant's
Account at the end of the Valuation Period during which the election becomes
effective. Since Fixed Accumulation Units with a three (3), five (5) or seven
(7) year Guarantee Period are subject to a Market Value Adjustment in addition
to any applicable withdrawal charge, an Owner electing a cash withdrawal payment
should carefully consider whether Fixed Accumulation Units and/or Variable
Accumulation Units should be cancelled to provide the requested payment.
The Company, upon request, will advise the Owner or Participant of the
amounts that would be payable in the event of a full surrender or partial
withdrawal.
Any cash withdrawal payment will be paid within seven (7) days from the date
the election becomes effective, except as the Company may be permitted to defer
such payment in accordance with the Investment Company Act of 1940 and
applicable state insurance law. Deferral of amounts withdrawn from the Variable
Account is currently permissible only (1) for any period (a) during which the
New York Stock Exchange is closed other than customary week-end and holiday
closings, or (b) during which trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission, (2) for any
period during which an emergency exists as a result of which (a) disposal of
securities held by the Fund(s) is not reasonably practicable, or (b) it is not
reasonably practicable to determine the value of the net assets of the Fund(s)
or (3) for such other periods as the Securities and
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Exchange Commission may by order permit for the protection of security holders.
The Company reserves the right to defer the payment of amounts withdrawn from
the Fixed Account for a period not to exceed six (6) months from the date
written request for such withdrawal is received by the Company.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Section 401,
Section 403, Section 408(c) and Section 408(k) of the Internal Revenue Code,
reference should be made to the terms of the particular retirement plan for any
limitations or restrictions on cash withdrawals. For special restrictions
applicable to withdrawals from Contracts used with Tax-Sheltered Annuities
established pursuant to Section 403(b) of the Internal Revenue Code, see
"Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified or Non-Qualified Contract offered
by this Prospectus also may result in a tax penalty. The tax consequences of a
cash withdrawal payment under both Qualified and Non-Qualified Contracts should
be carefully considered (See "Federal Tax Status").
WITHDRAWAL CHARGES
If a cash withdrawal payment is made, a withdrawal charge may be assessed by
the Company. Up to ten percent (10%) of Purchase Payments credited to a
Participant's Account for less than seven (7) years may be withdrawn in any
Account Year on a non-cumulative basis without the imposition of a withdrawal
charge. Amounts withdrawn from a Participant's Account in excess of ten percent
(10%) will be subject to a withdrawal charge assessed against Purchase Payments
credited to the Participant's Account (not against the accumulated value of the
Participant's Account) as follows:
<TABLE>
<CAPTION>
NUMBER OF
YEARS PAYMENTS IN
PARTICIPANT'S ACCOUNT WITHDRAWAL CHARGE
- --------------------------- -------------------------
<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 0%
</TABLE>
To effect a full surrender or partial withdrawal, the oldest previously
unliquidated Payment will be deemed to have been liquidated first, then the next
oldest and so forth. Once all Payments have been withdrawn, additional amounts
withdrawn will be attributed to accumulated value.
No withdrawal charge is imposed upon amounts withdrawn from a Participant's
Account to provide a death benefit or to purchase an annuity (provided that the
payment under the Annuity Option elected is over a period of at least five (5)
years), nor is any withdrawal charge imposed upon amounts withdrawn after a
Participant's Account has been established for twelve (12) years, irrespective
of when a Purchase Payment or a cash withdrawal payment is made. Also no
withdrawal charge is imposed upon the conversion of Accumulation Units. HOWEVER,
EXCEPT IN THE CASE OF DEATH OR ANNUITIZATION, ALL WITHDRAWALS FROM THE FIXED
ACCOUNT OF AMOUNTS WITH A THREE (3), FIVE (5) OR SEVEN (7) YEAR GUARANTEE PERIOD
ARE SUBJECT TO A MARKET VALUE ADJUSTMENT AS DESCRIBED BELOW IN ADDITION TO ANY
APPLICABLE WITHDRAWAL CHARGES.
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed six percent (6%) of the aggregate Purchase Payments
made to a Participant's Account. The Company may, upon notice to the Owner,
modify the withdrawal charges provided that such modification shall apply only
to Participants' Accounts established after the effective date of such
modification.
For illustrative examples of withdrawals, surrenders, withdrawal charges and
the market value adjustment, see Appendix C.
SECTION 403(B) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for these Contracts to
receive tax deferred treatment, the Contract
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<PAGE>
must provide that cash withdrawals of amounts attributable to salary reduction
contributions (other than withdrawals of Accumulation Account value as of
December 31, 1988 ("Pre-1989 Account Value")) may be made only when the Contract
Owner attains age 59 1/2, separates from service with the employer, dies or
becomes disabled (within the meaning of Section 72(m)(7) of the Code). These
restrictions apply to any growth or interest on or after January 1, 1989 on
Pre-1989 Account Value, salary reduction contributions made on or after January
1, 1989, and any growth or interest on such contributions ("Restricted Account
Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Owner must have an
immediate and heavy bona fide financial need and lack other resources reasonably
available to satisfy the need. Hardship withdrawals (as well as certain other
premature withdrawals) will be subject to a ten percent (10%) tax penalty, in
addition to any withdrawal charge applicable under the Contract (See "Federal
Tax Status").
Under the terms of a particular Section 403(b) plan, the Owner may be
entitled to transfer all or a portion of the Accumulation Account value to one
or more alternative funding options. Contract Owners should consult the
documents governing their plan and the person who administers the plan for
information as to such investment alternatives.
In imposing these restrictions on withdrawals, the Company is relying upon a
no-action letter dated November 28, 1988 from the staff of the Securities and
Exchange Commission to the American Council of Life Insurance, the requirements
for which have been complied with by the Company.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
MARKET VALUE ADJUSTMENT
Any cash withdrawal from the Fixed Account of amounts with a three (3), five
(5) or seven (7) year Guarantee Period will be subject to a Market Value
Adjustment ("MVA"), except in the case of payment of a guaranteed death benefit,
or in the event of annuitization over a payout period of at least five (5)
years. The MVA will be applied to the amount being withdrawn after deduction of
any applicable Account Fee, withdrawal charge and/or unpaid Net Loan Interest.
The MVA will reflect the relationship between the Current Rate for the
Guarantee Period of the amount being surrendered and the Guarantee Rate
applicable to the amount being surrendered. It also reflects the time remaining
in the Guarantee Period. Generally, if the Guarantee Rate is lower than the
applicable Current Rate, then the application of the MVA will result in a lower
payment upon surrender. Similarly, if the Guarantee Rate is higher than the
applicable Current Rate, the application of the MVA will result in a higher
payment upon surrender. If the Current Rate and the Guarantee Rate are the same,
then the MVA is zero.
The Market Value Adjustment is determined by the application of the
following formula:
.75 (A-B) x C/12 where:
A = interest rate being credited to the amount being surrendered
(Guarantee Rate);
B = the rate the Company has established at the time of surrender on
allocations to Initial or Subsequent Guarantee Periods with the same
Guarantee Period as that of the amount being surrendered (Current Rate);
and
C = the months remaining in the Guarantee Period of the amount being
surrendered.
For example, assume Purchase Payments are allocated to the Fixed Account for
a Guarantee Period of five (5) years and the Guarantee Rate is five percent (5%)
per year. Assume at the end of three (3) years this amount is surrendered. If
the Current Rate for five (5) years is four percent (4%), then the amount
payable after application of the MVA will increase. On the other hand, if the
Current Rate is higher than the Guarantee Rate, for example, six percent (6%),
the application of the MVA will cause a decrease in the amount payable upon
surrender.
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Since current yields are based in part upon the investment yields available
to the Company, the effect of the MVA will be closely related to the levels of
such yields. It is possible, therefore, that should such yields increase
significantly from the time Purchase Payments are allocated to the Fixed
Account, with the application of the MVA, Account Fee, withdrawal charges and/or
unpaid Net Loan Interest the amount payable upon surrender could be less than
the original Purchase Payment.
The Company may, upon notice to the Owner, modify the MVA formula, provided
that such modification shall apply only to Participants' Accounts established
after the effective date of such modification.
See Appendix C for additional illustrations of the application of the MVA.
LOANS (QUALIFIED CONTRACTS ONIY)
Loans will be permitted (to the extent permitted by Plans) 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 may be subject
to the Market Value Adjustment described above. A negative Market Value
Adjustment will result in a higher effective loan interest rate. 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 established by the Company. The
latter rate is the maximum fixed interest rate established by state regulatory
authorities. Generally, loans must be repaid within five (5) 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 unpaid Net Loan Interest. Partial withdrawals may be
restricted by the maximum loan limitation.
The tax consequences of a loan from the Contract (or the pledge of the
Contract as collateral for a loan) should be carefully considered (See "Federal
Tax Status").
Additional information regarding loans under Qualified Contracts will be
provided by the Company upon request.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
In the event of the death of the Participant prior to the Annuity
Commencement Date, the Company will pay a death benefit to the Beneficiary. If
there is no designated Beneficiary living on the date of death of the
Participant, the Company will, upon receipt of Due Proof of Death of both the
Participant and the designated Beneficiary, pay the death benefit in one sum to
the estate of the Participant. If the death of the Participant occurs on or
after the Annuity Commencement Date, no death benefit will be payable under the
Contract except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Owner may elect to have the value of the Participant's Account applied
under one or more Annuity Options to effect a Variable Annuity or a Fixed
Annuity or a combination of both for the Beneficiary as Payee after the death of
the Participant. If no election of a method of settlement of the death benefit
by the Owner is in effect on the date of death of the Participant, the
Beneficiary may elect (a) to receive the death benefit in the form of a cash
payment; or (b) to have the value of the Participant's Account applied under one
or more of the Annuity Options (on the Annuity Commencement Date described under
"Payment of Death Benefit") to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee. Either election described
above may be made by filing with the Company a written election in such form as
the Company may require. Any election of a method of settlement of the death
benefit by the Owner (or by the Participant, as permitted by the Plan) will
become effective on the date it is received by the Company. Any election of a
method of settlement of the death benefit by the Beneficiary will become
effective on the later of: (a) the date the election is received by the Company;
or (b) the date due proof of the death of
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<PAGE>
the Participant and any required release or consent from any inheritance taxing
authority or surviving spouse, if applicable, is received by the Company. If an
election by the Beneficiary is not received by the Company within sixty (60)
days following the date due proof of the death of the Participant and any
required release or consent is received by the Company, the Beneficiary will be
deemed to have elected a cash payment as of the last day of the sixty (60) day
period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any limitations or restrictions on the election
of a method of settlement and payment of the death benefit.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven (7) days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one sum to
the estate of the deceased Participant, payment will be made within seven (7)
days of the date due proof of the death of the Participant and the Beneficiary
is received by the Company. If settlement under one or more of the Annuity
Options is elected by the Owner with respect to the Participant's Account, the
Annuity Commencement Date will be the first day of the second calendar month
following the date due proof of the death of the Participant and the
Beneficiary, if any, is received by the Company. In the case of an election by
the Beneficiary, the Annuity Commencement Date will be the first day of the
second calendar month following the effective date of the election. An Annuity
Commencement Date later than that described above may be elected by an Owner or
a Beneficiary subject to certain restrictions (See "Annuity Commencement Date").
AMOUNT OF DEATH BENEFIT
The death benefit is equal to the greater of the value of the Participant's
Account or total Purchase Payments made with respect to the Participant's
Account, minus the sum of all withdrawals and loans. The death benefit will be
reduced by any unpaid Net Loan Interest. No Market Value Adjustment will be
applied to amounts derived from the Fixed Account. The Accumulation Unit values
used in determining the amount of the death benefit will be the values for the
Valuation Period during which due proof of the death of the Participant is
received by the Company if settlement is elected by the Owner (or the
Participant, if permitted by the Plan) under one or more of the Annuity Options
or, if no election by the Owner is in effect, either the values for the
Valuation Period during which an election by the Beneficiary either becomes
effective or is deemed effective, or the values for the Valuation Period during
which due proof of the death of both the Participant and the designated
Beneficiary is received by the Company if the amount of the death benefit is to
be paid in one sum to the deceased Participant's estate.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for administrative
expenses and, if applicable, for premium taxes; (2) as charges against the
assets of the Variable Account for the assumption of mortality and expense
risks; and (3) as withdrawal charges (contingent deferred sales charges). In
addition, certain deductions are made from the assets of the Fund(s) for
investment management fees and expenses. These fees and expenses are described
in the Funds' prospectuses and Statements of Additional Information.
ACCOUNT FEE
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") to
reimburse it for administrative expenses relating to the Contract and the
Participant's Account. If the Participant's Account is surrendered for its full
value on other than the Account Anniversary, the Account Fee will be deducted in
full at the time of such surrender. The Account Fee will be deducted in equal
amounts from the Fixed Account and each Sub-Account in which the Participant has
Accumulation Units at the time of such deduction. On the Annuity
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<PAGE>
Commencement Date, the value of the Participant's Account will be reduced by a
proportionate amount of the Account Fee to reflect the time elapsed between the
last Account Anniversary and the day before the Annuity Commencement Date. After
the Annuity Commencement Date, the Account Fee will be deducted pro rata from
each annuity payment made during the year.
The amount of the Account Fee assessed against each Participant's Account is
based on total Purchase Payments credited to all Participants' Accounts under a
Contract in accordance with the following schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ACCOUNT FEE
- ---------------------------- ---------------
<S> <C>
$ up to 250,000 $ 25
250,000 to 1,499,999 18
1,500,000 to 4,999,999 15
5,000,000 and over 12
</TABLE>
The level of Purchase Payments credited to all Participants' Accounts under
a Contract is reviewed semi-annually and the Account Fee to be assessed against
Participants' Accounts during the next six (6) month period is determined. Once
Purchase Payments credited to all Participants' Accounts under a Contract reach
a level which produces a lower Account Fee, the Account Fee applicable to
existing Participants' Accounts under the Contract will not be increased
irrespective of subsequent withdrawals from Participants' Accounts under the
Contract. The Contract provides that the Company may modify the Account Fee
provided that such modification shall apply only with respect to Participants'
Accounts established after the effective date of such modification (See
"Modification"). The Company does not expect to make a profit from the Account
Fee.
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes (See Appendix B). It is currently the policy of the Company to deduct the
tax from the amount applied to provide an annuity at the time annuity payments
commence; however, the Company reserves the right to deduct such taxes when
incurred.
CHARGES AGAINST THE VARIABLE ACCOUNT FOR MORTALITY AND EXPENSE RISKS
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
Company assumes this mortality risk by virtue of annuity rates incorporated into
the Contract which cannot be changed except with respect to Participants'
Accounts established after the effective date of such change, as provided in the
section of this Prospectus entitled "Modification." The expense risk assumed by
the Company is the risk that the administrative charges provided in the Contract
may be insufficient to cover the actual total administrative expenses incurred
by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin. The amount of this deduction is based on all
Variable Accumulation Units credited to a Participant's Account or on all
Variable Annuity Units credited to a Participant's Account, as the case may be.
The rate of this deduction varies and is based on total Purchase Payments
credited to all Participants' Accounts under a Contract in accordance with the
following schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ASSET CHARGE
- ---------------------------- -----------------
<S> <C>
$ up to 250,000 1.30%
250,000 to 1,499,999 1.25%
1,500,000 to 4,999,999 1.10%
5,000,000 and over 0.95%
</TABLE>
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<PAGE>
The level of Purchase Payments credited to all Participants' Accounts under
a Contract is reviewed semi-annually and the asset charge for the next six (6)
month period is determined. The rate of this deduction may be changed
semi-annually by the Company but in no event may it exceed 1.30% on an annual
basis except as provided in the section of this Prospectus entitled
"Modification." Once Purchase Payments credited to all Participants' Accounts
under a Contract reach a level which produces a lower asset charge, the asset
charges applicable to existing Participants' Accounts under the Contract will
not be increased irrespective of subsequent withdrawals from Participants'
Accounts under the Contract. The Company does not believe it is feasible to
identify precisely that portion of the deduction applicable to either the
mortality risk or expense risk, but estimates that a reasonable allocation would
be 0.80% for the mortality risk at all asset charge levels, and 0.50%, 0.45%,
0.30% or 0.15% for the expense risk with respect to the asset charges described
above. If the deduction is insufficient to cover the actual cost of the
mortality and expense risk undertaking, the Company will bear the loss.
Conversely, if the deduction proves more than sufficient, the excess will be
profit to the Company and would be available for any proper corporate purpose
including, among other things, payment of distribution expenses. The Company
will recoup its expected costs associated with registering and distributing the
Contracts by the assessment of the withdrawal charges (contingent deferred sales
charges). However, the withdrawal charges may prove to be insufficient to cover
actual distribution expenses. If this is the case, the deficiency will be met
from the Company's general corporate funds which may include amounts derived
from the mortality and expense risk charges. For the year ended December 31,
1995, mortality and expense risk charges were the only expenses of the Variable
Account.
The Contract provides that the Company may modify the asset charges;
however, such modification shall apply only with respect to Participants'
Accounts established after the effective date of such modification (See
"Modification").
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (contingent deferred sales charge), when applicable, will be
used to cover certain expenses relating to the sale of the Contract, including
commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and acquisition expenses. Gross
commissions paid on the sale of these contracts are not more than 5.5% of the
Purchase Payments (See "Cash Withdrawals" and "Withdrawal Charges").
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Owner (or by the Participant, if permitted by the Plan) at the
time the Participant's Account is established. This date may be changed from
time to time by the Owner by written notice to the Company, provided that notice
of each change is received by the Company at least thirty (30) days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least thirty (30) days after the date notice of the
change is received by the Company; (2) the first day of a month; and (3) not
later than the first day of the first month following the Participant's 85th
birthday, unless otherwise restricted in the case of a Qualified Contract by the
particular retirement plan or by applicable law. In most situations, current law
requires that the Annuity Commencement Date under a Qualified Contract be no
later than April 1 following the year the Annuitant reaches age 70 1/2, and the
terms of the particular retirement plan may impose additional limitations. The
Annuity Commencement Date may also be changed by an election of an Annuity
Option as described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one of the
options described below. No withdrawal charge or Market Value Adjustment will be
applied: (1) if annuitization occurs after the twelfth (12th) Account
Anniversary; or (2) provided that payment is over a period of at least five (5)
years. The asset charge applied after annuity payments begin will be the same as
that in effect for the Participant's
27
<PAGE>
Account on the Annuity Commencement Date. NO PAYMENTS MAY BE REQUESTED UNDER THE
CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY COMMENCEMENT DATE
AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE AVAILABLE UNDER THE
ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus will be issued in connection
with retirement plans which meet the requirements of Section 401 (including
Section 401(k)), Section 403, Section 408(c) or Section 408(k) of the Internal
Revenue Code as well as non-qualified deferred compensation and payroll savings
plans, reference should be made to the terms of the particular Plan for any
limitations or restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Participant and prior to the Annuity Commencement
Date, the Owner (or the Participant, if permitted by the Plan) may, subject to
the age limitation on period certain or fixed periods, elect one or more of the
Annuity Options described below, or such other settlement option as may be
agreed to by the Company, for the Annuitant as Payee. The Owner may also change
any election, but written notice of any election or change of election must be
received by the Company at least thirty (30) days prior to the Annuity
Commencement Date. If no election is in effect on the 30th day prior to the
Annuity Commencement Date, Annuity Option B, for a Life Annuity with 120 monthly
payments certain will be deemed to have been elected.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to the Fixed Account and the Sub-Accounts.
In the event the election does not so specify, then the portion of the adjusted
value of the Participant's Account to be applied to the Fixed Account and the
Sub-Accounts will be determined on a pro rata basis from the composition of the
Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Owner or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The Owner may
surrender the Contract prior to the Annuity Commencement Date; however, any
applicable surrender charge will be deducted from the cash withdrawal payment
and a Market Value Adjustment, if appropriate, will be applied.
Annuity Options A, B and C are available to provide either a Fixed Annuity
or a Variable Annuity. Annuity Options D and E are available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary. It
would be possible for only one variable annuity payment to be made under this
option if the Payee died before the due date of the second variable annuity
payment, two if the Payee died before the due date of the third variable annuity
payment, etc.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
sixty (60), one hundred twenty (120), one hundred eighty (180) or two hundred
forty (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. In the event of the death of the Payee under this option,
the Contract provides that in
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<PAGE>
certain circumstances, the discounted value of the remaining payments, if any,
will be calculated and paid in one sum. The discounted value for variable
annuity payments will be based on interest compounded annually at the assumed
interest rate of four percent (4%).
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of election of this option of the number of each type of Annuity Unit
credited to the Contract with respect to the Payee and fixed monthly payments,
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.
It would be possible for only one variable annuity payment to be made under this
option if the Payee and the designated person died before the due date of the
second variable annuity payment, two if they died before the due date of the
third variable annuity payment, etc.
*Annuity Option D. Fixed Payments for a Specified Period Certain: Fixed
monthly payments for a specified period of time, as elected. In the event of the
death of the Payee under this option, the Contract provides that in certain
circumstances, the discounted value of the remaining payments, if any, will be
calculated and paid in one sum. The discounted value, if any, will be based on
the interest rate initially used in determining the amount of each payment.
*Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times as may be agreed
upon with the Company and will continue until the amount held by the Company
with interest is exhausted. The final payment will be for the balance remaining
and may be less than the amount of each preceding payment. Interest will be
credited yearly on the amount remaining unpaid at a rate which shall be
determined by the Company from time to time but which shall not be less than
four percent (4%) per year compounded annually. The rate so determined may be
changed at any time and as often as may be determined by the Company, provided,
however, that the rate may not be reduced more frequently than once during each
calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the value
of the Participant's Account for the Valuation Period which ends immediately
preceding the Annuity Commencement Date, reduced by any applicable premium or
similar taxes, a proportionate amount of the Account Fee to reflect the time
elapsed between the last Account Anniversary and the day before the Annuity
Commencement Date and any applicable withdrawal charge and/or unpaid Net Loan
Interest and plus or minus any applicable Market Value Adjustment.
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 four percent (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.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the Contract which are
based on an assumed interest rate of four percent (4%) per year, unless these
rates are changed (See "Modification"). All variable annuity payments other than
the first are determined by means of Annuity Units credited to the Contract with
respect to the particular Payee. The number of Annuity Units to be credited in
respect of a particular Sub-Account is determined by dividing that portion of
the first variable annuity payment attributable to that Sub-Account by the
Annuity Unit value of that Sub-Account for the Valuation Period which ends
immediately
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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<PAGE>
preceding the Annuity Commencement Date. The number of Annuity Units of each
particular Sub-Account credited to the Contract with respect to the particular
Payee 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
Sub-Account credited to the Contract with respect to the particular Payee by the
Annuity Unit value for the particular Sub-Account for the Valuation Period which
ends immediately preceding the due date of each subsequent payment. If the net
investment return on the assets of the Variable Account is the same as the
assumed interest rate of four percent (4%) per year, variable annuity payments
will remain level. If the net investment return exceeds the assumed interest
rate variable annuity payments will increase and, conversely, if it is less than
the assumed interest rate the payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate of four percent (4%) per
year used to establish the Annuity Payment Rates found in the Contract. The
factor is 0.99989255 for a one day Valuation Period.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Variable
Annuity Units of particular Sub-Accounts then credited to the Contract with
respect to the particular Payee into other Variable Annuity Units, the value of
which would be such that the dollar amount of an annuity payment made on the
date of the exchange would be unaffected by the fact of the exchange. No more
than twelve (12) exchanges may be made within each Account Year.
Exchanges may be made only within the Variable Account. Exchanges will be
made using the Annuity Unit values for the Valuation Period during which any
request for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains unisex annuity payment rates for each Annuity Option
described in this Prospectus. 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 four percent (4%); and (b) the monthly Fixed Annuity
payment, when this payment is based on the minimum guaranteed interest rate of
four percent (4%) per year. These rates may be changed by the Company with
respect to Participants' Accounts established after the effective date of such
change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B, and C is the 1971
Individual Annuitant Mortality Table with ages reduced by one year for Annuity
Commencement Dates occurring during the 1980's, two years for Annuity
Commencement Dates occurring during the 1990's, etc.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
Purchase Payments credited to a Participant's Account on an annualized basis
for the first Account Year must total at least $300 and must be payable in
amounts of at least $25 per Payment. These
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<PAGE>
minimums may, however, be waived by the Company. In addition, the prior approval
of the Company is required before it will accept a Purchase Payment which would
cause the value of a Participant's Account to exceed $1,000,000. If the value of
a Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be accepted without the prior approval of the Company. Purchase Payments may be
made annually, semi-annually, quarterly, monthly or on any other frequency
acceptable to the Company. The Owner may increase or decrease the amount of
Purchase Payments or change the frequency of payment. The Owner is not obligated
to continue Purchase Payments in the amount or frequency elected. There are no
penalties for failure to continue to make Purchase Payments. While the Contract
and the Participant's Account are in force, Purchase Payments may be made at any
time prior to the Annuity Commencement Date.
OWNER
The Contract shall belong to the Owner. All Contract rights and privileges
may be exercised by the Owner without the consent of the Participant or the
Beneficiary or any other person, except as the Owner may have provided under the
Plan or other appropriate documents. Such rights and privileges may be
exercised, with respect to a particular Participant, only during the lifetime of
the Participant and prior to the Annuity Commencement Date, except as otherwise
provided in the Contract. Each Participant becomes the Payee on and after the
Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the
Participant.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Participant or Beneficiary; (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; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement,
deferred compensation or other programs for which the Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Participant and prior to the last remaining
Participant's 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 a Participant Enrollment Form will
remain in effect until changed. The interest of any Beneficiary is subject to
the particular Beneficiary surviving the Participant.
Subject to the rights of an irrevocably designated Beneficiary, the Owner
(or the Participant, as permitted by the Plan) may change or revoke the
designation of a Beneficiary at any time while the Participant 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
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<PAGE>
date on which the beneficiary designation or revocation was signed by the Owner
or the Participant, as applicable, but the change or revocation 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 or revocation.
Reference should be made to the terms of the particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Fund(s), but will follow voting instructions received from
persons having the right to give voting instructions. The Owner is the person
having the right to give voting instructions prior to the Annuity Commencement
Date. On or after the Annuity Commencement Date the Payee is the person having
such voting rights. Any shares attributable to the Company and Fund shares for
which no timely voting instructions are received will be voted by the Company in
the same proportion as the shares for which instructions are received from
Owners and Payees.
Owners of Contracts held pursuant to Plans may be subject to other voting
provisions of the particular Plan and of the Investment Company Act of 1940.
Employees who contribute to Plans which are funded by the Contracts are entitled
to instruct the Owners as to how to instruct the Company to vote the Fund(s)
shares attributable to their contributions. Such Plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the Plans. If no voting instructions are received
from any such person with respect to a particular Participant's Account, the
Owner may instruct the Company as to how to vote the number of Fund shares for
which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under Plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners or others to instruct the voting of Fund shares. Except as
the Variable Account or the Company has actual knowledge to the contrary, the
instructions given by Owners and Payees will be valid as they affect the
Variable Account, the Company and any others having voting instruction rights
with respect to the Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each Owner and each Payee having
the right to give voting instructions at least ten (10) days prior to each
meeting of the shareholders of the particular Fund. The number of particular
Fund shares as to which each such person is entitled to give instructions will
be determined by the Company on a date not more than ninety (90) days prior to
each such meeting. Prior to the Annuity Commencement Date, the number of
particular Fund shares as to which voting instructions may be given to the
Company is determined by dividing the value of all of the Variable Accumulation
Units of the particular Sub-Account credited to the Contract's Accumulation
Account by the net asset value of one particular Fund share as of the same date.
On or after the Annuity Commencement Date, the number of particular Fund shares
as to which such instructions may be given by a Payee is determined by dividing
the reserve held by the Company in the particular Sub-Account for the Contract
with respect to the particular Payee by the net asset value of a particular Fund
share as of the same date. After the Annuity Commencement Date, the number of
the particular Fund shares as to which a Payee is entitled to give voting
instructions will generally decrease due to the decrease in the reserve.
PERIODIC REPORTS
The Company will send the Owner and the Participant, at least once during
each Account and/or Contract Year, a statement showing the number, type and
value of Accumulation Units or Annuity Units credited to the Contract or the
Participant's Account as the case may be, which statement shall be accurate as
of a date not more than two (2) months previous to the date of mailing. In
addition, every person having voting rights will receive such reports or
prospectuses concerning the Variable Account and the particular Fund(s) as may
be required by the Investment Company Act of 1940 and the
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Securities Act of 1933. The Company will also send such statements reflecting
transactions in the Contract's Accumulation Account and each Participant's
Account as may be required by applicable laws, rules and regulations.
SUBSTITUTED SECURITIES
Shares of any of the particular Funds may not always be available for
purchase by the Sub-Accounts of the Variable Account or the Company may decide
that further investment in any such Fund's shares is no longer appropriate in
view of the purposes of the Variable Account. In either event, shares of another
registered open-end investment company may be substituted both for Fund shares
already purchased by the Variable Account and/or as the security to be purchased
in the future provided that these substitutions have been approved by the
Securities and Exchange Commission. In the event of any substitution pursuant to
this provision, the Company may make appropriate endorsement to the Contract to
reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Fund shares
held by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the
Securities and Exchange Commission. In the event of any change in the operation
of the Variable Account pursuant to this provision, the Company may make
appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Fixed Accumulation Units, Annuity Units or any of them. In
effecting any such change of unit values, strict equity will be preserved and no
change will have a material effect on the benefits or other provisions of the
Contract.
MODIFICATION
Upon notice to the Owner, or to the Payee(s) during the annuity period, the
Contract may be modified by the Company if such modification: (i) is necessary
to make the Contract or the Variable Account comply with any law or regulation
issued by a governmental agency to which the Company or the Variable Account is
subject; or (ii) is necessary to assure continued qualification of the Contract
under the Internal Revenue Code or other federal or state laws relating to
retirement annuities or annuity contracts; or (iii) is necessary to reflect a
change in the operation of the Variable Account or the Sub-Account(s) (See
"Change in Operation of Variable Account"); or (iv) provides additional Variable
Account and/or fixed accumulation options. In the event of any such
modification, the Company may make appropriate endorsement to the Contract to
reflect such modification.
In addition, upon notice to the Owner the Contract may be modified by the
Company to change the withdrawal charges, Account Fees, mortality and expense
risk charges, the tables used in determining the amount of the first monthly
Variable Annuity and Fixed Annuity payments and the formula used to calculate
the Market Value Adjustment provided that such modification shall apply only to
Participant Accounts established after the effective date of such modification.
In order to exercise its modification rights in these particular instances, the
Company must notify the Owner of such modification in writing. The notice shall
specify the effective date of such modification which must be at least sixty
(60) days following the date of mailing of the notice of modification by the
Company. All of the charges and the annuity tables which are provided in the
Contract prior to any such modification will remain in effect permanently,
unless improved by the Company, with respect to Participant Accounts established
prior to the effective date of such modification.
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<PAGE>
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving thirty (30) days' prior written notice to the Owner,
may limit or discontinue the acceptance of new Participant Enrollment Forms
under a Contract. Such limitation or discontinuance shall have no effect on
rights or benefits with respect to any Participant's Account established prior
to the effective date of such limitation or discontinuance.
CUSTODIAN
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Fund shares at net asset value in connection with amounts
allocated to the particular Sub-Account in accordance with the instructions of
the Owner and redeem Fund shares at net asset value for the purpose of meeting
the contractual obligations of the Variable Account, paying charges relative to
the Variable Account or making adjustments for annuity reserves held in the
Variable Account.
RIGHT TO RETURN CONTRACT (INDIVIDUAL RETIREMENT ACCOUNTS ONLY)
Under the Employee Retirement Income Security Act of 1974 ("ERlSA") an Owner
establishing an Individual Retirement Account must be furnished with a
disclosure statement containing certain information about the Contract and
applicable legal requirements. This statement must be furnished on or before the
date the Individual Retirement Account is established. If the Owner is furnished
with such disclosure statement before the seventh (7th) day preceding the date
the Individual Retirement Account is established, the Owner will not have any
right of revocation. If the disclosure statement is furnished after the seventh
(7th) day preceding the establishment of the Individual Retirement Account, then
the Owner may revoke the Contract any time within seven (7) days after the Issue
Date. Upon such revocation, the Company will refund all Purchase Payments made
by the Owner.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use by employer,
association and other group retirement plans under the provisions of Sections
401 (including Section 401(k)), 403, 408(c) and 408(k) of the Internal Revenue
Code (the "Code"), as well as certain non-qualified retirement plans, such as
payroll savings plans. The ultimate effect of federal income taxes on the
Contract's Accumulation Account and the Participant's Account, on annuity
payments and on the economic benefit to the Owner, the Participant, the
Annuitant, the Payee or the Beneficiary may depend upon the type of Plan for
which the Contract is purchased and a number of different factors. 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. Also, because the Internal Revenue Code, as amended, is not
in force in the Commonwealth of Puerto Rico, some references herein will not be
applicable to Contracts issued in Puerto Rico. Any person contemplating the
purchase of a Contract should consult a qualified tax adviser. THE COMPANY DOES
NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE OR LOCAL, OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Account is not separately taxable as a regulated investment company or otherwise
as a taxable entity separate from the Company. Under existing federal income tax
laws, the income and capital gains of the Variable Account, to the extent
applied to increase reserves under the Contracts, are not taxable to the
Company.
TAXATION OF ANNUITIES IN GENERAL
Generally, no taxes are imposed on the increases in the value of a Contract
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
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<PAGE>
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 where the Annuity Commencement Date occurs within
one year of the Date of Coverage. 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 the Contract offered by this
Prospectus, 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 ten percent (10%)
penalty tax for early withdrawal is not applicable.
The Code is unclear in its application to a group annuity contract where the
Owner is distinct from the individuals with respect to whom the Contract
benefits are accumulated (the Participants). The following discussion is the
Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
For Contracts offered by this Prospectus (other than Contracts issued in
exchange for contracts issued prior to August 14, 1982, as described above), in
the case of a Non-Qualified Contract a partial cash withdrawal (that is, a
withdrawal of less than the entire value of the Participant's Account) must be
treated first as a withdrawal from the increase in the Participant's Account's
value over the Contract's cost basis. The amount of the withdrawal so allocable
will be includible in the Participant's income. Similarly, if a Participant
receives a loan under a Contract or if part or all of a Participant's Account 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 Participant'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 Participant's 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 certificates or other
non-qualified deferred annuity contracts that are issued by the Company to the
same Participant during any calendar year will be treated as a single annuity
contract. Therefore, the proceeds of a withdrawal from, or assignment or pledge
of, one or more such contracts or certificates will be fully includible in the
Participant's income to the extent of the aggregate excess of the accumulation
account values over the cost bases of all such contracts or certificates 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 Participant's cost basis in the
Contract bears to the Payee's expected return under the Contract. The remainder
of the payment is taxable.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the cost basis in the Contract. If the Payee
survives for his full life expectancy, and thereby recovers the entire basis in
the Contract, any subsequent annuity payment after basis recovery will be fully
taxable as income. Conversely, if the Payee dies prior to recovering the entire
basis, he will be allowed a deduction on his final income tax return 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 ten percent (10%) penalty, except in the
circumstances described below. This ten percent (10%) penalty also affects
certain annuity payments. In a situation where this penalty applies, the
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<PAGE>
recipient's tax for the tax year in which the amount is received shall be
increased by an amount equal to ten percent (10%) of the portion of the amount
which is includible in the recipient's gross income. The circumstances in which
this penalty will not apply are distributions which are: (a) made upon the death
of the Participant; or (b) allocable to Purchase Payments made before August 14,
1982. Further, in the case of Contracts issued prior to January 18, 1985, the
ten percent (10%) 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 (10) 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.
In the case of Non-Qualified Contracts, if the Participant dies before the
Annuity Commencement Date the entire value of the Participant's Account must be
either (1) distributed within five (5) years after the date of death of the
Participant, or (2) distributed over some period not greater than the expected
life of the designated Beneficiary, with annuity payments beginning within one
(1) year after the date of death of the Participant. If a Payee dies on or after
the Annuity Commencement Date and before the entire Participant's Account 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.
These distribution requirements will not apply where the Beneficiary is the
spouse of the Participant; rather, in such a case, the Contract may be continued
in the name of the spouse as Participant or Payee. In the case of Contracts
issued prior to January 18, 1985, these rules regarding distributions upon the
death of the Participant or the Annuitant will not apply. In the case of
Contracts issued after April 22, 1987, a change in the Participant would be
treated as the death of the Participant. Distributions required due to the death
of the Participant will not be subject to the ten percent (10%) penalty on
premature distributions. A purchaser of a Qualified Contract should refer to the
terms of the applicable retirement plan and contact a tax adviser regarding
distribution requirements upon the death of the Participant.
A transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant 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 ten percent (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 Participant or Payee),
are not taxable until distributed from the plan to which they are rolled over.
In general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more. Owners, Participants, 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 Participant 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 the Participant or Payee 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 Participant 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 Participant or Payee can choose
not to have amounts withheld as described above for Non-Qualified Contracts and
Qualified Contracts issued for use with individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
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The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for income tax purposes. The Company
believes that each series of the Series Fund complies with the regulations.
The preamble to the regulations states that the Service may promulgate
guidelines under which a variable contract will not be treated as an annuity for
tax purposes if the owner has excessive control over the investments underlying
the contract. It is not known whether such guidelines, if in fact promulgated,
would have retroactive effect. If guidelines are promulgated, the Company will
take any action (including modification of the Contract or the Variable Account)
necessary to comply with the guidelines.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers and
certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as "Tax-
Sheltered Annuities." Purchasers of the Qualified Contracts for such purposes
should seek qualified advice as to eligibility, limitations on permissible
amounts of Purchase Payments and tax consequences of distributions.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension Plans
and Employer/Association of Employees Established Individual Retirement Account
Trusts, known as an Individual Retirement Account ("IRA"). These IRA's are
subject to limitations on the amount that may be contributed, the persons who
may be eligible, and on the time when distributions may commence. In addition,
certain distributions from some other types of retirement plans may be placed on
a tax-deferred basis in an IRA. Contracts are offered by this Prospectus for IRA
Trusts, but not for IRA's established as "Individual Retirement Annuities" under
Section 408(b) of the Code. Sale of the Contracts for use with IRA's may be
subject to special requirements imposed by the Internal Revenue Service.
Purchasers of the Contracts for such purposes will be provided with such
supplementary information as may be required by the Internal Revenue Service or
other appropriate agency, and will have the right to revoke the Contract under
certain circumstances as described in the section of this Prospectus entitled
"Right to Return Contract."
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TEXAS OPTIONAL RETIREMENT PROGRAM
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution the State of Texas will contribute a specified amount
to the participant's retirement account. If a participant does not commence the
second year of participation in the plan as a "faculty member" as defined in
Title 110B of the State of Texas Statutes, the Company will return the state's
contribution. If a participant does begin a second year of participation, the
employer's first year contributions will then be applied as a Purchase Payment
under the Qualified Contract, as will the employer's subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise the
right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, the Participant's Accounts, and the Variable Account. These functions
include, among other things, maintaining the books and records of the Variable
Account and the Sub-Accounts, and maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number,
type of Contract issued to each Owner, the status of the Contract's Accumulation
Account and each Participant's Account and other pertinent information necessary
to the administration and operation of the Contracts.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the General Distributor. The
Contracts will be distributed by Clarendon Insurance Agency, Inc. ("Clarendon"),
500 Boylston Street, Boston, Massachusetts 02116, the General Distributor, a
wholly-owned subsidiary of MFS. Clarendon is registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 as a broker-dealer
and is a member of the National Association of Securities Dealers, Inc.
Clarendon also acts as the general distributor of other individual and group
combination fixed/variable annuity contracts issued by the Company and its
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and
variable life insurance contracts issued by the Company. Commissions and other
distribution compensation will be paid by the Company and will not be more than
5.5% of Purchase Payments. During 1993, 1994 and 1995 approximately $664,230,
$639,969, and $431,302, respectively, was paid to and retained by Clarendon in
connection with the distribution of the Contracts.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page 56.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits and other revenue $ 1,095,646 $ 1,200,143 $1,772,745 $ 908,933 $ (151,073)
Net investment income and realized gains (losses) 366,063 334,896 243,796 209,087 162,031
----------- ----------- ---------- ---------- ----------
1,461,709 1,535,039 2,016,541 1,118,020 10,958
----------- ----------- ---------- ---------- ----------
Benefits and Expenses
Policyholder benefits 1,238,603 1,312,721 1,786,919 921,180 (161,110)
Other expenses 176,660 209,819 240,440 232,221 168,689
----------- ----------- ---------- ---------- ----------
1,415,263 1,522,540 2,027,359 1,153,401 7,579
----------- ----------- ---------- ---------- ----------
Operating Gain (Loss) 46,446 12,499 (10,818) (35,381) 3,379
Interest on Surplus Notes (31,813) (31,150) (26,075) (18,000) (12,500)
Equity in Income of Subsidiaries 59,875 62,629 62,640 49,009 42,702
Federal Income Tax Expense (38,593) (42,521) (22,491) (4,000) (13,615)
----------- ----------- ---------- ---------- ----------
Net Income (Loss) $ 35,915 $ 1,457 $ 3,256 $ (8,372) $ 19,966
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Assets $12,499,683 $10,137,822 $9,199,090 $7,494,407 $6,405,599
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Surplus Notes $ 650,000 $ 335,000 $ 335,000 $ 265,000 $ 180,000
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
See Note 1 to financial statements for the effect of the reinsurance agreements
on net income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
ASSETS
For management purposes it is the Company's practice to segment its general
account to facilitate the matching of assets and liabilities; however, all
general account assets stand behind all general account liabilities. A majority
of the Company's assets are income producing investments. Particular attention
is paid to the quality of these assets.
The Company's bond holdings consist of a diversified portfolio of both
public and private issues. It is the Company's policy to acquire only investment
grade securities. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Company's bond
portfolio remains high. At December 31, 1995, 2.3% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2"). Net
unrealized gains on below investment grade bonds were $2,133,727 at December 31,
1995. Bond write downs resulting from intrinsic impairments amounted to
$3,500,000 during 1995.
The Company holds real estate primarily because such investments
historically have offered better yields over the long-term than fixed income
investments. Real estate investments are used to enhance the yield of products
with long-term liability durations. Properties for which market value is lower
than cost
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<PAGE>
adjusted for depreciation (book value) are reported at market value. During
1995, the change in the difference between the market value and book value for
properties reported at market value was $3,583,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$1,066,911,000 at December 31, 1995, representing 25.3% of cash and invested
assets. At December 31, 1994, mortgage loans represented 28.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company as a rule invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1995, 0.77% of the Company's portfolio was 60
days or more in arrears, compared to the most recent industry delinquency ratio
published by the American Council of Life Insurance of 2.35%. The expense in the
year for the provision for losses and for losses on foreclosures was $4,133,000.
In 1994, the Company entered into a leveraged lease agreement under which a
fleet of rail cars was leased for a term of 9.75 years. The investment is
classified as other invested assets in the attached balance sheet.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1995 the Company had
outstanding mortgage commitments of $13,100,000 which will be funded during
1996.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Company was $792,452,000 at December
31, 1995. The Company issued surplus notes during 1995 totalling $315,000,000 to
an affiliate, Sun Canada Financial Co. The Company repaid $335,000,000 of
surplus notes to its parent in 1996. During 1994, the Company reduced its
carrying value of MCIC, a wholly-owned subsidiary, by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus. The Company's management considers its surplus position to be
adequate.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Income from operations before surplus note interest, equity in income of
subsidiaries and federal income taxes increased by $33,947,000 from $12,499,000
in 1994 to $46,446,000 in 1995. Reinsurance agreements with the parent had the
effect of decreasing net income by $31,327,000 in 1994 as compared to increasing
net income by $9,637,000 in 1995. The increase in net income associated with the
reinsurance agreements is due to the lack of surplus strain associated with the
assumption of new contracts issued. No contracts issued in 1994 or thereafter
have been assumed by the Company. It is the acquisition costs of new contract
issues which caused the loss from the reinsurance agreements in prior years.
Prior to reinsurance, net income from operations decreased by $7,017,000 from
$43,826,000 in 1994 to $36,809,000 in 1995. Realized losses on investments and
amortization of the interest maintenance reserve decreased by $2,315,000
primarily due to fewer writedowns in the group pension product line. Operating
expenses increased by $5,261,000 from $32,231,000 in 1994 to $37,492,000 in
1995, reflecting increased expenses allocated from the parent and increased
salaries due to additional staffing. The remaining decrease in net income in
1995 as compared to 1994 of approximately $4,071,000 reflects the strain
associated with the Company's market value adjusted annuity product, partially
offset by profits associated with the maturing block of individual and group
fixed annuities.
Total income decreased by approximately $73,330,000 from $1,535,039,000 in
1994 to $1,461,709,000 in 1995. Revenues from reinsurance transactions decreased
by $4,307,000 reflecting the assumed block of business being closed as of
December 31, 1993. Premiums and annuity considerations on a pre-reinsurance
basis decreased by $7,728,000 reflecting decreased group pension lottery sales
of $22,084,000 offset
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<PAGE>
by increased annuitizations of $14,356,000. Fixed annuity deposits decreased by
$26,091,000 as interest rates remained at low levels. Sales of group pension
guaranteed investment contracts increased by $49,229,000 reflecting the transfer
of the parent's agents' pension fund from the parent to the Company. Net
transfers from the separate accounts decreased by $80,758,000 reflecting the
decline in interest rates. Pre-reinsurance net investment income increased by
$2,219,000 reflecting an increase in the Company's invested asset base. Realized
losses and amortization of the interest maintenance reserve decreased by
$2,315,000. Other income decreased by $16,711,000 from $33,377,000 in 1994 to
$16,666,000 reflecting a decrease in the surplus transfer from the separate
accounts. Mortality and expense risk charges increased by $8,616,000 as a result
of market appreciation in the separate accounts.
Benefits and expenses decreased by approximately $107,277,000 from
$1,522,540,000 in 1994 to $1,415,263,000 in 1995. Reinsurance had the effect of
decreasing benefits and expenses by $45,272,000, primarily from lower
commissions due to no assumption of new contract issues. Prior to reinsurance,
benefits and expenses decreased by approximately $62,004,000. The change in the
liability for annuity and other deposit funds increased by $83,094,000 as a
result of fewer maturities of contracts for which the guarantee periods have
expired, and increased sales of group pension guaranteed investment contracts
described above. The change in reserves decreased by $16,694,000 reflecting the
decrease in group pension lottery sales. Annuity and other deposit fund
withdrawals decreased by $8,424,000 reflecting fewer maturities. Transfers to
the non-unitized separate account decreased by $124,285,000 from $455,688,000 in
1994 to $331,403,000 reflecting fewer sales and transfers from unitized separate
accounts of individually marketed fixed annuities as a result of the decline in
interest rates. Operating expenses increased by $5,261,000 reflecting the
increased expenses described above.
1994 COMPARED TO 1993
Income from operations before surplus note interest, equity in income of
subsidiaries and federal income taxes was $12,499,000 in 1994 versus a loss of
$10,818,000 in 1993. The increase in income is a result of reinsurance
agreements with the parent which decreased income from operations by
approximately $31,327,000 in 1994 and $54,567,000 in 1993. The relatively flat
change in income before reinsurance results from a combination of factors:
realized losses on investments decreased by $6,237,000; mortality and expense
risk charges increased by $9,357,000; general expenses increased by $8,061,000
and approximately $6,000,000 of additional surplus strain (selling costs and
reserves required on new business in excess of the premium) was incurred
reflecting the increased volume of new sales.
Total revenues decreased by $481,502,000 from $2,016,541,000 in 1993 to
$1,535,039,000 in 1994. Revenues from reinsurance transactions decreased by
$690,973,000, from $959,536,000 in 1993 to $268,563,000 in 1994. 1993 revenues
include the termination of the reinsurance agreement under which the Registrant
reinsured with its parent 100% of certain fixed annuity contracts. Before the
impact of the reinsurance agreements, total revenues increased by $209,471,000
in 1994. Sales of individually marketed fixed annuities increased by
$389,745,000 as a result of improved interest rates and product enhancements.
This was offset by decreased sales of group pension deposit contracts of
$271,913,000, reflecting management's decision to limit sales due to the
volatility of interest rates and changes in the competitive marketplace.
Realized losses on investments decreased, reflecting fewer mortgage writedowns
in 1994. Mortality and expense risk charges increased, reflecting the increase
in separate account net assets.
Benefits and expenses decreased by $504,819,000 from $2,027,359,000 in 1993
to $1,522,540,000 in 1994. Reinsurance had the effect of increasing benefits and
expenses by $299,890,000 in 1994 as compared to $1,014,103,000 in 1993. As noted
above, the 1993 results include the termination of the reinsurance agreement
with the parent under which 100% of certain fixed annuity contracts were
reinsured. Before the impact of reinsurance, benefits increased by $209,394,000.
Before reinsurance, the liability for annuity and other deposit funds and
actuarial reserves decreased as a result of lower sales of group pension deposit
contracts and increased surrender activity. Annuity and other deposit fund
withdrawals increased as a result of increased surrenders of fixed annuities for
which interest rate guarantee periods have expired. Transfers to the
non-unitized separate account increased reflecting the increase in fixed annuity
sales described above. Prior to reinsurance, commissions increased by
$35,497,000 reflecting increased sales of individual combination fixed/variable
annuity contracts. General expenses increased due to an increase in
41
<PAGE>
the amount allocated from the parent under the service agreement, and costs of
selling and administration associated with the increased sales and inforce block
of individually marketed fixed/variable annuity contracts. Federal income tax
expense increased as net operating loss carry forwards were utilized in 1993.
LIQUIDITY
The Company's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment principal
and sales of investments. The Company's cash outflow is primarily to meet death
and other maturing insurance and annuity contract obligations, to pay out on
contract terminations, to fund investment commitments and to pay normal
operating expenses and taxes. Cash outflows are met from the normal net cash
inflows.
The Company segments its business internally and matches projected cash
inflows and outflows within each segment. Targets for money market holdings are
established for each segment, which in the aggregate meet the day to day cash
needs of the Company. If greater liquidity is required, government issued bonds,
which are highly liquid, are sold to provide the necessary funds. Government and
publicly traded corporate bonds comprise 65.9% of the Company's long-term bond
holdings.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
REINSURANCE
The Company has agreements with its parent company which provide that the
parent company will reinsure the mortality risks of the individual life
insurance contracts sold by the Company. Under these agreements basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1995 had the effect of decreasing net income from operations by
$2,184,000.
Effective January 1, 1991 the Company entered into an agreement with the
parent company under which 100% of certain fixed annuity contracts issued by the
Company were reinsured. This agreement was terminated effective December 31,
1993.
Effective January 1, 1991 the Company entered into an agreement with the
parent company under which certain individual life insurance contracts issued by
the parent were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with the parent
which provides that the parent will reinsure the mortality risks in excess of
$500,000 per policy for the individual life insurance contracts assumed by the
Company in the reinsurance agreement described above. Death benefits are
reinsured on a yearly renewable term basis. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in an amount equal to the
reserves assumed.
The Company also has executed a reinsurance agreement with an unaffiliated
company which provides reinsurance of certain individual life insurance
contracts on a modified coinsurance basis and under which all deficiency
reserves are ceded.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements these reserves are determined in accordance with statutory
regulations which are generally accepted accounting principles for the Company.
INVESTMENTS
Of the Company's total assets of $12.5 billion at December 31, 1995, 58.5%
consisted of unitized and non-unitized separate account assets, 22.8% were
invested in bonds and similar securities, 8.5% in mortgages, 1.1% in
subsidiaries, 0.7% in real estate, and the remaining 8.4% in cash and other
assets.
42
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. There are approximately 1,750 stock, mutual and
other types of insurers in the life insurance business in the United States.
According to the most recent Best's Review, Life-Health Edition, as of December
31, 1994 the Company ranked 46th among all life insurance companies in the
United States based upon total assets. Its parent company, Sun Life Assurance
Company of Canada, ranked 19th. Best's Insurance Reports, Life-Health Edition,
1995, assigned the Company and the parent company its highest classification,
A++, as of December 31, 1994. Standard & Poor's and Duff & Phelps have assigned
the Company and the parent company their highest ratings for claims paying
ability, AAA. These ratings should not be considered as bearing on the
investment performance of the Series Fund shares held in the Sub-Accounts of the
Variable Account. However, the ratings are relevant to the Company's ability to
meet its general corporate obligations under the Contracts.
EMPLOYEES
The Company and Sun Life Assurance Company of Canada have entered into a
Service Agreement which provides that the latter will furnish the Company, as
required, with personnel as well as certain services and facilities on a cost
reimbursement basis. As of December 31, 1995 the Company had 255 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and its Annuity Service Center in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to its parent, Sun
Life Assurance Company of Canada, and certain unrelated parties for lease terms
not exceeding five years.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of the Company are listed below,
together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present
business occupations). Except as otherwise indicated, the directors and officers
of the Company who are associated with Sun Life Assurance Company of Canada
and/or its subsidiaries have been associated with Sun Life Assurance Company of
Canada for more than five years either in the position shown or in other
positions.
JOHN D. MCNEIL, 62, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; President and a Director of Sun Growth Variable
Annuity Fund, Inc.; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman and a Member of the Boards of Managers 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; and a
Director of Shell (Canada) Limited and Canadian Pacific, Ltd.
JOHN R. GARDNER, 58, President and Director (1986*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada, and
Sun Life Insurance and Annuity Company of New York; and a Director of
Massachusetts Financial Services Company, Massachusetts Casualty Insurance
Company and Sun Life Financial Services Limited.
- ---------
* Year Elected Director
43
<PAGE>
DAVID D. HORN, 54, Senior Vice President and General Manager and Director (1970,
1985*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Chairman and President and a Director of Sun
Investment Services Company; Senior Vice President and a Director of Sun Life
Insurance and Annuity Company of New York; Vice President and a Director of Sun
Growth Variable Annuity Fund, Inc.; President and a Director of Sun Benefit
Services Company, Inc., Sun Canada Financial Co., and Sun Life Financial
Services Limited; a Director of Sun Capital Advisers, Inc.; Chairman and a
Director of Massachusetts Casualty Insurance Company; a Trustee of MFS/ Sun Life
Series Trust; and a Member of the Boards of Managers 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.
ANGUS A. MACNAUGHTON, 64, Director (1985*)
Metro Tower, Suite 1170,
950 Tower Lane
Foster City, California 94404
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Stelco, Inc. and Varian Associates, Inc.
JOHN S. LANE, 61, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Investment Services Company, Sun Capital Advisers,
Inc. and Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 69, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds. Prior to October
1, 1991, he was Chairman and a Director of Massachusetts Financial Services
Company.
A. KEITH BRODKIN, 60, Director (1990*)
500 Boylston Street
Boston, Massachusetts 02116
He is Chairman and a Director of Massachusetts Financial Services Company; a
Director of Sun Life Insurance and Annuity Company of New York; and a
Director/Trustee and/or Officer of the Funds in the MFS Family of Funds.
M. COLYER CRUM, 63, Director (1986*)
Harvard Business School
Soldiers Field Road
Boston, Massachusetts 02163
He is a Professor at the Harvard Business School; and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Merrill Lynch Ready Assets Trust, Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Natural Resources Trust, Merrill Lynch
U.S. Treasury
- ---------
* Year Elected Director
44
<PAGE>
Money Fund, MuniVest California Insured Fund, Inc., MuniVest Florida Fund, Inc.,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniYield Florida Insured Fund, MuniYield Insured
Fund II, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund III, Inc. and MuniYield
Pennsylvania Fund.
ROBERT A. BONNER, 51, Vice President, Pensions (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Pensions for the United States of Sun Life Assurance
Company of Canada.
ROBERT E. MCGINNESS, 54, Vice President and Counsel (1983)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President and Counsel for the United States of Sun Life Assurance
Company of Canada; Vice President and Counsel and a Director of Sun Investment
Services Company and Sun Benefit Services Company, Inc.; Assistant Secretary and
a Director of New London Trust, F.S.B.; and a Director of Massachusetts Casualty
Insurance Company.
C. JAMES PRIEUR, 45, Vice President, Investments (1993)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Investments for the United States of Sun Life
Assurance Company of Canada; Vice President, Investments of Sun Investment
Services Company and Sun Life Insurance and Annuity Company of New York; and a
Director of Sun Capital Advisers, Inc., New London Trust, F.S.B. and Sun Canada
Financial Co.
S. CAESAR RABOY, 59, Vice President, Individual Insurance (1991)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Individual Insurance for the United States of Sun Life
Assurance Company of Canada; Vice President of Sun Life Insurance and Annuity
Company of New York; and Vice President and a Director of Sun Life Financial
Services Limited. Prior to 1990 he was President and Chief Operating Officer of
Connecticut Mutual Life Insurance Company.
ROBERT P. VROLYK, 43, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance for the United States of Sun Life Assurance
Company of Canada; Vice President, Controller and Actuary of Sun Life Insurance
and Annuity Company of New York; a Director of Massachusetts Casualty Insurance
Company; and Vice President and a Director of Sun Canada Financial Co.
BONNIE S. ANGUS, 54, Secretary (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Secretary for the United States of Sun Life Assurance
Company of Canada; and Secretary of Sun Investment Services Company, Sun Benefit
Services Company, Inc., MFS/Sun Life Series Trust, Sun Growth Variable Annuity
Fund, Inc., Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable Account, World
Governments Variable Account, Total Return Variable Account, Managed Sectors
Variable Account, Sun Life Insurance and Annuity Company of New York, Sun
Capital Advisers, Inc., New London Trust, F.S.B., Sun Life Financial Services
Limited and Sun Canada Financial Co.
45
<PAGE>
L. BROCK THOMSON, 54, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Investment
Services Company, Sun Capital Advisers, Inc., Sun Benefit Services Company, Inc.
and Sun Life Insurance and Annuity Company of New York; and Assistant Treasurer
of Massachusetts Casualty Insurance Company.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1995
totalled $812,410. The allocated compensation of the named executive officers is
as follows:
<TABLE>
<CAPTION>
ALLOCATED COMPENSATION
------------------------- OTHER ALLOCATED
NAME/POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------------------------- ---- -------- ------- ----------------
<S> <C> <C> <C> <C>
John D. McNeil 1995 $ 76,854 $29,344
Chairman 1994 $ 59,189 $12,284
1993 $ 16,655 $ 3,482
David D. Horn 1995 $176,800 $52,728 $ 5,787
Senior Vice President 1994 $ 68,985 $22,995
and General Manager 1993 $ 64,818 $22,160
Robert A. Bonner, 1995 $134,227 $24,824 $ 9,892
Vice President, Pensions 1994 $111,632 $15,706
1993 $ 97,160 $18,877
C. James Prieur, 1995 $ 95,416 $36,650
Vice President, Investments 1994 $ 82,918 $17,398
1993 $ 80,621 $20,155
Robert K. Leach, 1995 $138,500 $25,371
Vice President, Individual Annuities 1994 $132,248 $13,500
1993 $125,000 $13,500
</TABLE>
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Messrs. Crum and MacNaughton receive compensation in the amount of
$5,000 per year, plus $800 for each meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life Assurance Company of Canada,
150 King Street West, Toronto, Ontario, Canada M5H 1J9.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
46
<PAGE>
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles, and proposed legislation to prohibit the use of
gender in determining insurance and pension rates and benefits.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Variable Account.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contracts and
the validity of the form of the Contracts have been passed upon by David D.
Horn, Esq., Senior Vice President and General Manager of the Company. Covington
& Burling, Washington, D.C., has advised the Company on certain legal matters
concerning federal securities laws applicable to the issue and sale of the
Contracts and federal income tax laws applicable to the Contracts.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended December
31, 1995 and the financial statements of the Company for the years ended
December 31, 1995, 1994 and 1993 included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this Prospectus. This Prospectus does not
contain all the information set forth in the registration statements and the
exhibits
47
<PAGE>
filed as part of the registration statements, to all of which reference is
hereby made for further information concerning the Variable Account, the Fixed
Account, the Company, the Series Fund, the Contract and the Certificates.
Statements found in this Prospectus as to the terms of the Contracts, the
Certificates and other legal instruments are summaries, and reference is made to
such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Series Fund shares held in the Sub-Accounts of the Variable
Account. The Variable Account value of the interests of Owners, Participants,
Annuitants, Payees and Beneficiaries under the Contracts is affected primarily
by the investment results of the Series Fund. The financial statements of the
Variable Account reflect units outstanding and expenses incurred under the
Contracts and other contracts participating in the Variable Account which impose
certain contract charges that are different from those imposed under the
Contracts.
-------------------
48
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENT OF CONDITION-- December 31, 1995
<TABLE>
<CAPTION>
ASSETS:
<S> <C> <C> <C>
Investments in mutual funds: Shares Cost Value
--------- ----------- -----------
Massachusetts Investors Trust ("MIT") Class A............................. 3,629,884 $43,486,191 $46,120,453
Massachusetts Investors Growth Stock Fund ("MIG") Class A................. 1,173,222 12,820,030 12,475,226
MFS Total Return Fund ("MTR") Class A..................................... 3,677,956 47,993,051 53,002,899
MFS Growth Opportunities Fund ("MGO") Class A............................. 367,412 4,232,507 4,387,425
MFS Bond Fund ("MFB") Class A............................................. 434,601 5,703,794 5,944,295
MFS World Governments Fund ("MWG") Class A................................ 358,314 4,260,049 3,948,001
MFS/Sun Life Series Trust:
Capital Appreciation Series ("CAS")..................................... 1,269,482 32,530,523 40,607,989
Government Securities Series ("GSS").................................... 2,088,889 26,163,429 27,970,638
High Yield Series ("HYS")............................................... 1,006,828 8,497,102 8,984,149
Money Market Series ("MMS")............................................. 15,405,623 15,405,623 15,405,623
----------- -----------
$201,092,299 $218,846,698
-----------
-----------
Receivable from sponsor..................................................... 5,729
-----------
Net Assets.................................................................................... $218,852,427
-----------
-----------
</TABLE>
NET ASSETS:
<TABLE>
<CAPTION>
Applicable to Owners of
Deferred Variable Annuity Contracts Reserve for
----------------------------------- Variable
Units Unit Value Value Annuities Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MIT-Level 2......................................... 1,325,017 $ 27.3250 $36,202,094 $ -- $36,202,094
MIT-Level 3......................................... 317,412 27.4530 8,715,982 -- 8,715,982
MIT-Level 4......................................... 59,347 20.2434 1,202,163 -- 1,202,163
MIG-Level 2......................................... 382,429 24.7411 9,462,536 -- 9,462,536
MIG-Level 3......................................... 108,010 27.2709 2,945,253 -- 2,945,253
MIG-Level 4......................................... 4,837 14.0215 67,437 -- 67,437
MTR-Level 2......................................... 1,642,626 24.6454 40,488,815 -- 40,488,815
MTR-Level 3......................................... 423,134 22.4119 9,486,873 -- 9,486,873
MTR-Level 4......................................... 177,310 17.0639 3,026,994 -- 3,026,994
MGO-Level 2......................................... 172,600 22.1108 3,828,228 -- 3,828,228
MGO-Level 3......................................... 21,847 23.6784 519,204 -- 519,204
MGO-Level 4......................................... 2,467 15.7472 39,993 -- 39,993
MFB-Level 2......................................... 157,192 18.8771 2,994,312 -- 2,994,312
MFB-Level 3......................................... 78,816 19.0533 1,514,573 -- 1,514,573
MFB-Level 4......................................... 90,684 15.7119 1,435,411 -- 1,435,411
MWG-Level 2......................................... 128,962 20.9399 2,700,434 -- 2,700,434
MWG-Level 3......................................... 67,461 18.4915 1,247,567 -- 1,247,567
CAS-Level 2......................................... 834,945 29.6896 24,786,659 3,600 24,790,259
CAS-Level 3......................................... 362,964 31.5010 11,432,718 8,988 11,441,706
CAS-Level 4......................................... 143,089 30.6364 4,383,554 -- 4,383,554
GSS-Level 2......................................... 726,698 18.6493 13,552,680 3,550 13,556,230
GSS-Level 3......................................... 309,543 18.1016 5,604,429 7,843 5,612,272
GSS-Level 4......................................... 494,152 17.8082 8,800,574 -- 8,800,574
HYS-Level 2......................................... 213,240 19.9142 4,247,181 2,778 4,249,959
HYS-Level 3......................................... 99,034 18.5003 1,831,992 6,299 1,838,291
HYS-Level 4......................................... 160,381 18.0475 2,895,978 -- 2,895,978
MMS-Level 2......................................... 530,592 14.7249 7,809,820 2,917 7,812,737
MMS-Level 3......................................... 265,443 13.6727 3,628,600 -- 3,628,600
MMS-Level 4......................................... 296,406 13.3780 3,964,398 -- 3,964,398
----------- ----------- -----------
Net Assets............................................................... $218,816,452 $ 35,975 $218,852,427
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements
49
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENT OF OPERATIONS-- Year Ended December 31, 1995
<TABLE>
<CAPTION>
MIT MIG MTR MGO MFB MWG CAS
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............ $ 4,367,323 $1,692,275 $ 4,891,152 $ 544,559 $ 477,330 $ 492,801 $ 824,528
Mortality and expense risk
charges........................... 503,462 156,589 630,156 55,879 72,081 56,494 417,327
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net investment income.............. $ 3,863,861 $1,535,686 $ 4,260,996 $ 488,680 $ 405,249 $ 436,307 $ 407,201
----------- ----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES):
Realized gains (losses) on
investment transactions:
Proceeds from sales.............. $13,315,306 $8,443,270 $17,901,707 $2,492,162 $2,648,808 $3,936,047 $7,444,828
Cost of investments sold......... 14,791,257 9,068,816 16,582,625 2,279,924 2,854,569 4,042,982 5,769,332
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gains (losses).... $(1,475,951) $(625,546) $ 1,319,082 $ 212,238 $(205,761) $(106,935) $1,675,496
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net unrealized appreciation
(depreciation) on investments:
End of year...................... $ 2,634,262 $ (344,804 ) $ 5,009,848 $ 154,918 $ 240,501 $ (312,048 ) $8,077,466
Beginning of year................ (8,478,315) (2,462,728 ) (1,426,594) (463,526 ) (733,726 ) (687,020 ) 222,915
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized
appreciation.................. $11,112,577 $2,117,924 $ 6,436,442 $ 618,444 $ 974,227 $ 374,972 $7,854,551
----------- ----------- ----------- ----------- ----------- ----------- -----------
Realized and unrealized
gains....................... $ 9,636,626 $1,492,378 $ 7,755,524 $ 830,682 $ 768,466 $ 268,037 $9,530,047
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCREASE IN NET ASSETS FROM
OPERATIONS.......................... $13,500,487 $3,028,064 $12,016,520 $1,319,362 $1,173,715 $ 704,344 $9,937,248
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
GSS HYS MMS
Sub-Account Sub-Account Sub-Account Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............ $1,602,217 $ 562,268 $ 928,269 $16,382,722
Mortality and expense risk
charges........................... 301,393 93,507 197,658 2,484,546
----------- ----------- ----------- -----------
Net investment income.............. $1,300,824 $ 468,761 $ 730,611 $13,898,176
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES):
Realized gains (losses) on
investment transactions:
Proceeds from sales.............. $4,866,494 $2,052,134 $10,639,920 $73,740,676
Cost of investments sold......... 4,638,994 1,916,157 10,639,920 72,584,576
----------- ----------- ----------- -----------
Net realized gains (losses).... $ 227,500 $ 135,977 $ -- $ 1,156,100
----------- ----------- ----------- -----------
Net unrealized appreciation
(depreciation) on investments:
End of year...................... $1,807,209 $ 487,047 $ -- $17,754,399
Beginning of year................ (733,359 ) (111,528 ) -- (14,873,881)
----------- ----------- ----------- -----------
Change in unrealized
appreciation.................. $2,540,568 $ 598,575 $ -- $32,628,280
----------- ----------- ----------- -----------
Realized and unrealized
gains....................... $2,768,068 $ 734,552 $ -- $33,784,380
----------- ----------- ----------- -----------
INCREASE IN NET ASSETS FROM
OPERATIONS.......................... $4,068,892 $1,203,313 $ 730,611 $47,682,556
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements
50
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MIG
Sub-Account
MIT -----------
Sub-Account
------------------------ Year Ended
December
Year Ended December 31, 31,
------------------------ -----------
1995 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income.......................................................... $ 3,863,861 $ 4,140,890 $ 1,535,686
Net realized gains (losses).................................................... (1,475,951) (1,439,862) (625,546)
Net unrealized gains (losses).................................................. 11,112,577 (3,564,329) 2,117,924
----------- ----------- -----------
Increase (decrease) in net assets from operations.......................... $13,500,487 $ (863,301) $ 3,028,064
----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................................................... $ 8,532,635 $10,094,923 $ 2,266,231
Net transfers between Sub-Accounts and Fixed Account......................... 361,226 (414,057) (105,149)
Withdrawals, surrenders, annuitizations and account fees..................... (15,381,023) (6,373,758) (7,865,153)
----------- ----------- -----------
Net accumulation activity.................................................. $(6,487,162) $ 3,307,108 $(5,704,071)
----------- ----------- -----------
Annuitization Activity:
Adjustments to annuity reserve............................................... $ (61) $ (2) $ --
----------- ----------- -----------
Net annuitization activity................................................. $ (61) $ (2) $ --
----------- ----------- -----------
Increase (decrease) in net assets from participant transactions.......... $(6,487,223) $ 3,307,106 $(5,704,071)
----------- ----------- -----------
Increase (decrease) in net assets...................................... $ 7,013,264 $ 2,443,805 $(2,676,007)
NET ASSETS:
Beginning of year.............................................................. 39,106,975 36,663,170 15,151,233
----------- ----------- -----------
End of year.................................................................... $46,120,239 $39,106,975 $12,475,226
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
MFB
Sub-Account
MGO -----------
Sub-Account
------------------------ Year Ended
December
Year Ended December 31, 31,
------------------------ -----------
1995 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income.......................................................... $ 488,680 $ 318,763 $ 405,249
Net realized gains (losses).................................................... 212,238 165,154 (205,761)
Net unrealized gains (losses).................................................. 618,444 (725,298) 974,227
----------- ----------- -----------
Increase (decrease) in net assets from operations.......................... $ 1,319,362 $ (241,381) $ 1,173,715
----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................................................... $ 738,132 $ 809,298 $ 1,080,197
Net transfers between Sub-Accounts and Fixed Account......................... 65,501 111,333 (246,836)
Withdrawals, surrenders, annuitizations and account fees..................... (2,349,180) (1,360,155) (2,353,371)
----------- ----------- -----------
Net accumulation activity.................................................. $(1,545,547) $ (439,524) $(1,520,010)
----------- ----------- -----------
Increase (decrease) in net assets from participant transactions........ $(1,545,547) $ (439,524) $(1,520,010)
----------- ----------- -----------
Increase (decrease) in net assets.................................... $ (226,185) $ (680,905) $ (346,295)
NET ASSETS:
Beginning of year.............................................................. 4,613,610 5,294,515 6,290,591
----------- ----------- -----------
End of year.................................................................... $ 4,387,425 $ 4,613,610 $ 5,944,296
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
MTR
Sub-Account
------------------------
Year Ended December 31,
------------------------
1994 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income.......................................................... $ 1,353,998 $ 4,260,996 $ 1,645,231
Net realized gains (losses).................................................... (529,599) 1,319,082 1,515,039
Net unrealized gains (losses).................................................. (2,264,598) 6,436,442 (5,264,479)
----------- ----------- -----------
Increase (decrease) in net assets from operations.......................... $(1,440,199) $12,016,520 $(2,104,209)
----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................................................... $ 4,254,961 $10,735,986 $14,323,755
Net transfers between Sub-Accounts and Fixed Account......................... 231,366 (1,537,141) (637,240)
Withdrawals, surrenders, annuitizations and account fees..................... (6,618,883) (20,142,315) (11,750,450)
----------- ----------- -----------
Net accumulation activity.................................................. $(2,132,556) $(10,943,470) $ 1,936,065
----------- ----------- -----------
Annuitization Activity:
Adjustments to annuity reserve............................................... $ -- $ (46) $ 5
----------- ----------- -----------
Net annuitization activity................................................. $ -- $ (46) $ 5
----------- ----------- -----------
Increase (decrease) in net assets from participant transactions.......... $(2,132,556) $(10,943,516) $ 1,936,070
----------- ----------- -----------
Increase (decrease) in net assets...................................... $(3,572,755) $ 1,073,004 $ (168,139)
NET ASSETS:
Beginning of year.............................................................. 18,723,988 51,929,678 52,097,817
----------- ----------- -----------
End of year.................................................................... $15,151,233 $53,002,682 $51,929,678
----------- ----------- -----------
----------- ----------- -----------
MWG
Sub-Account
------------------------
Year Ended December 31,
------------------------
1994 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income.......................................................... $ 406,661 $ 436,307 $ 268,342
Net realized gains (losses).................................................... (307,105) (106,935) (196,908)
Net unrealized gains (losses).................................................. (500,450) 374,972 (594,857)
----------- ----------- -----------
Increase (decrease) in net assets from operations.......................... $ (400,894) $ 704,344 $ (523,423)
----------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................................................... $ 1,647,469 $ 734,888 $ 1,131,912
Net transfers between Sub-Accounts and Fixed Account......................... (301,547) (164,387) (327,638)
Withdrawals, surrenders, annuitizations and account fees..................... (1,813,087) (3,698,312) (911,652)
----------- ----------- -----------
Net accumulation activity.................................................. $ (467,165) $(3,127,811) $ (107,378)
----------- ----------- -----------
Increase (decrease) in net assets from participant transactions........ $ (467,165) $(3,127,811) $ (107,378)
----------- ----------- -----------
Increase (decrease) in net assets.................................... $ (868,059) $(2,423,467) $ (630,801)
NET ASSETS:
Beginning of year.............................................................. 7,158,650 6,371,468 7,002,269
----------- ----------- -----------
End of year.................................................................... $ 6,290,591 $ 3,948,001 $ 6,371,468
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
STATEMENTS OF CHANGES IN NET ASSETS-- continued
<TABLE>
<CAPTION>
MMS
CAS GSS HYS Sub-Account
Sub-Account Sub-Account Sub-Account ----------
---------------------- ---------------------- ----------------------
Year Ended
Year Ended Year Ended Year Ended December
December 31, December 31, December 31, 31,
---------------------- ---------------------- ---------------------- ----------
1995 1994 1995 1994 1995 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income....................... $ 407,201 $2,518,162 $1,300,824 $1,138,419 $ 468,761 $ 505,212 $ 730,611
Net realized gains.......................... 1,675,496 1,643,270 227,500 365,174 135,977 316,716 --
Net unrealized gains (losses)............... 7,854,551 (5,591,434) 2,540,568 (2,398,370) 598,575 (1,073,843) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net assets from
operations............................. $9,937,248 $(1,430,002) $4,068,892 $ (894,777) $1,203,313 $ (251,915) $ 730,611
---------- ---------- ---------- ---------- ---------- ---------- ----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................ $6,689,889 $6,973,119 $4,655,684 $5,484,373 $1,495,744 $1,557,743 $2,671,551
Net transfers between Sub-Accounts and
Fixed Account............................ (596,568) 810,553 (1,355,901) (2,034,565) 826,665 (164,108) (436,424)
Withdrawals, surrenders, annuitizations
and account fees......................... (6,314,794) (3,260,724) (4,593,776) (4,659,943) (1,672,150) (1,292,785) (7,181,160)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net accumulation activity............... $ (221,473) $4,522,948 $(1,293,993) $(1,210,135) $ 650,259 $ 100,850 $(4,946,033)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Annuitization Activity:
Annuity payments and account fees......... $ (7,119) $ (6,567) $ (4,220) $ (4,615) $ (2,442) $ (2,388) $ (222)
Adjustments to annuity reserve............ 1,782 (391) (152) (103) (49) (199) (15)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net annuitization activity.............. $ (5,337) $ (6,958) $ (4,372) $ (4,718) $ (2,491) $ (2,587) $ (237)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net assets from
participant transactions............. $ (226,810) $4,515,990 $(1,298,365) $(1,214,853) $ 647,768 $ 98,263 $(4,946,270)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net assets... $9,710,438 $3,085,988 $2,770,527 $(2,109,630) $1,851,081 $ (153,652) $(4,215,659)
NET ASSETS:
Beginning of year........................... 30,905,081 27,819,093 25,198,549 27,308,179 7,133,147 7,286,799 19,621,394
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year................................. $40,615,519 $30,905,081 $27,969,076 $25,198,549 $8,984,228 $7,133,147 $15,405,735
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
Total
------------------------
Year Ended
December 31,
------------------------
1994 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income....................... $ 495,394 $13,898,176 $12,791,072
Net realized gains.......................... -- 1,156,100 1,531,879
Net unrealized gains (losses)............... -- 32,628,280 (21,977,658)
---------- ----------- -----------
Increase (decrease) in net assets from
operations............................. $ 495,394 $47,682,556 $(7,654,707)
---------- ----------- -----------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received................ $3,509,838 $39,600,937 $49,787,391
Net transfers between Sub-Accounts and
Fixed Account............................ 874,020 (3,189,014) (1,851,883)
Withdrawals, surrenders, annuitizations
and account fees......................... (6,139,245) (71,551,234) (44,180,682)
---------- ----------- -----------
Net accumulation activity............... $(1,755,387) $(35,139,311) $ 3,754,826
---------- ----------- -----------
Annuitization Activity:
Annuity payments and account fees......... $ (224) $ (14,003) $ (13,794)
Adjustments to annuity reserve............ (21) 1,459 (711)
---------- ----------- -----------
Net annuitization activity.............. $ (245) $ (12,544) $ (14,505)
---------- ----------- -----------
Increase (decrease) in net assets from
participant transactions............. $(1,755,632) $(35,151,855) $ 3,740,321
---------- ----------- -----------
Increase (decrease) in net assets... $(1,260,238) $12,530,701 $(3,914,386)
NET ASSETS:
Beginning of year........................... 20,881,632 206,321,726 210,236,112
---------- ----------- -----------
End of year................................. $19,621,394 $218,852,427 $206,321,726
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account D (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on August 20, 1985 as a funding vehicle for the variable portion
of group combination fixed/variable annuities. The Variable Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a unit investment trust.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account is invested in shares of a specific mutual fund or series thereof
selected by contract owners from among available mutual funds (the "Funds")
advised by Massachusetts Financial Services Company (MFS), a wholly-owned
subsidiary of the Sponsor.
52
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
NOTES TO FINANCIAL STATEMENTS -- continued
(2) SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATIONS
Investments in the Funds are recorded at their net asset value. Realized gains
and losses on sales of shares of the Funds are determined on the identified cost
basis. Dividend income and capital gain distributions received by the
Sub-Accounts are reinvested in additional Fund shares and are recognized on the
ex-dividend date.
Exchanges between Sub-Accounts requested by contract owners are recorded in the
new Sub-Account upon receipt of the redemption proceeds.
FEDERAL INCOME TAX STATUS
The operations of the Variable Account are part of the operations of the Sponsor
and are not taxed separately; the Variable Account is not taxed as a regulated
investment company. The Sponsor qualifies for the federal income tax treatment
granted to life insurance companies under Subchapter L of the Internal Revenue
Code. Under existing federal income tax law, investment income and capital gains
earned by the Variable Account on contract owner reserves are not subject to
tax.
(3) CONTRACT CHARGES
A mortality and expense risk charge is deducted from the Variable Account at
the end of each valuation period for the mortality and expense risks assumed by
the Sponsor. These deductions are transferred periodically to the Sponsor. The
rate of this deduction varies based on total purchase payments credited to all
participants' accounts under a contract as follows:
<TABLE>
<CAPTION>
Mortality
and Expense
Level Purchase Payments Risk Charge
- ---------- ------------------------- ------------
<C> <S> <C>
1 $ up to $250,000 1.30%
2 250,000 to 1,499,999 1.25%
3 1,500,000 to 4,999,999 1.10%
4 5,000,000 and over 0.95%
</TABLE>
Since 1987 the Sponsor has reduced the Level 1 mortality and expense risk charge
to 1.25% and, therefore, has been accounting for all Level 1 units as Level 2
units.
Each year on the account anniversary, an account administration fee ("Account
Fee") is deducted from the participant's account to cover administrative
expenses relating to the contract and the participant's account. The amount of
the fee varies from $12 to $25 and is based on total purchase payments credited
to all participants' accounts under a contract. After the annuity commencement
date the account fee is deducted pro rata from each annuity payment made during
the year.
The Sponsor does not deduct a sales charge from purchase payments. However, a
withdrawal charge (contingent deferred sales charge) may be deducted to cover
certain expenses relating to the sale of the contract. In no event shall the
aggregate withdrawal charges exceed 6% of the purchase payments made under the
contract.
53
<PAGE>
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant
Mortality Table and an assumed interest rate of 4%. Required adjustments to the
reserve are accomplished by transfers to or from the Sponsor.
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units Transfered Units Withdrawn,
Units Outstanding Between Sub-Accounts Surrendered and Units Outstanding
Beginning of Year Units Purchased and Fixed Account Annuitized End of Year
---------------------- -------------------- -------------------- -------------------- -----------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
---------------------- -------------------- -------------------- -------------------- -----------------------
Sub-Accounts 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
- ------------- ---------- ---------- --------- --------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MIT-Level 2 1,302,429 1,274,349 304,799 402,322 2,239 (119,786) (284,450) (254,456) 1,325,017 1,302,429
MIT-Level 3 354,395 255,457 45,258 54,592 8,829 102,834 (91,070) (58,488) 317,412 354,395
MIT-Level 4 421,137 372,426 24,234 56,884 4,424 (4,782) (390,448) (3,391) 59,347 421,137
MIG-Level 2 393,686 414,661 77,506 105,844 (8,205) (51,317) (80,558) (75,502) 382,429 393,686
MIG-Level 3 127,769 237,112 20,579 72,773 8,202 (85,658) (48,540) (96,458) 108,010 127,769
MIG-Level 4 429,508 371,521 4,995 55,455 (9,612) 277,430 (420,054) (274,898) 4,837 429,508
MTR-Level 2 1,726,666 1,846,634 355,684 495,574 (38,296) (275,914) (401,428) (339,628) 1,642,626 1,726,666
MTR-Level 3 756,604 594,218 91,823 161,446 (22,980) 192,742 (402,313) (191,802) 423,134 756,604
MTR-Level 4 329,757 236,241 76,222 101,630 (16,128) 98,829 (212,541) (106,943) 177,310 329,757
MGO-Level 2 201,423 266,312 31,135 37,872 1,108 (36,593) (61,066) (66,168) 172,600 201,423
MGO-Level 3 59,105 23,947 6,878 8,003 2,216 38,511 (46,352) (11,356) 21,847 59,105
MGO-Level 4 16,384 11,887 268 1,697 (419) 2,987 (13,766) (187) 2,467 16,384
MFB-Level 2 173,242 233,667 28,890 48,654 (9,159) (44,956) (35,781) (64,123) 157,192 173,242
MFB-Level 3 130,119 105,470 16,967 35,978 (7,548) 253 (60,722) (11,582) 78,816 130,119
MFB-Level 4 111,663 105,162 19,759 22,608 3,221 31,354 (43,959) (47,461) 90,684 111,663
MWG-Level 2 158,464 198,385 23,878 37,659 (7,073) (48,956) (46,307) (28,624) 128,962 158,464
MWG-Level 3 101,949 69,250 13,728 19,214 1,694 39,628 (49,910) (26,143) 67,461 101,949
MWG-Level 4 160,179 150,969 1,660 17,899 (4,646) (5,085) (157,193) (3,604) -- 160,179
CAS-Level 2 829,460 803,255 155,497 211,791 (16,888) (84,802) (133,124) (100,784) 834,945 829,460
CAS-Level 3 365,537 221,334 70,611 65,235 (3,819) 115,550 (69,365) (36,582) 362,964 365,537
CAS-Level 4 160,474 142,742 24,304 25,687 (5,237) (3,598) (36,452) (4,357) 143,089 160,474
GSS-Level 2 746,715 852,889 158,219 213,604 (26,368) (124,108) (151,868) (195,670) 726,698 746,715
GSS-Level 3 338,634 331,847 37,182 41,254 (6,591) 49,822 (59,682) (84,289) 309,543 338,634
GSS-Level 4 519,083 494,094 77,682 90,628 (47,652) (52,849) (54,961) (12,790) 494,152 519,083
HYS-Level 2 206,627 221,068 36,334 45,703 12,587 (17,299) (42,308) (42,845) 213,240 206,627
HYS-Level 3 80,917 88,591 11,281 11,340 45,065 9,476 (38,229) (28,490) 99,034 80,917
HYS-Level 4 145,707 116,083 36,474 36,681 (9,026) (1,383) (12,774) (5,674) 160,381 145,707
MMS-Level 2 634,761 729,713 132,695 166,725 (21,847) (19,742) (215,017) (241,935) 530,592 634,761
MMS-Level 3 417,392 430,480 31,937 57,253 (25,114) 22,760 (158,772) (93,101) 265,443 417,392
MMS-Level 4 404,055 425,496 25,520 35,195 16,480 67,598 (149,649) (124,234) 296,406 404,055
</TABLE>
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account D
and the Board of Directors of Sun Life Assurance Company of Canada (U.S.):
We have audited the accompanying statement of condition of Sun Life of Canada
(U.S.) Variable Account D (the "Variable Account") as of December 31, 1995, the
related statement of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation with the custodian of securities held for the Variable Account as
of December 31, 1995. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Variable Account as of December 31,
1995, the results of its operations and the changes in its net assets for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 2, 1996
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $ 2,846,067 $ 2,471,152
Preferred stock 1,149 0
Mortgage loans 1,066,911 1,120,981
Investments in subsidiaries 138,282 134,807
Real estate 95,574 89,487
Other invested assets 38,387 26,036
Policy loans 38,355 36,584
Cash (20,280) (11,459)
Investment income due and accrued 62,719 56,096
Funds withheld on reinsurance assumed 741,091 566,693
Due from separate accounts 148,675 132,496
Other assets 26,349 27,683
-------------- --------------
General account assets 5,183,279 4,650,556
-------------- --------------
Unitized separate account assets 5,275,808 4,061,821
Non-unitized separate account assets 2,040,596 1,425,445
-------------- --------------
$ 12,499,683 $ 10,137,822
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves $ 1,937,302 $ 1,765,326
Annuity and other deposits 2,290,656 2,277,104
Policy benefits in process of payment 5,884 5,796
Accrued expenses and taxes 44,114 12,386
Other liabilities 36,080 50,087
Due to parent and affiliates--net 9,498 41,881
Interest maintenance reserve 25,218 18,140
Asset valuation reserve 42,099 28,409
-------------- --------------
General account liabilities 4,390,851 4,199,129
-------------- --------------
Unitized separate account liabilities 5,275,784 4,057,759
Non-unitized separate account liabilities 2,040,596 1,425,445
-------------- --------------
11,707,231 9,682,333
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital Stock--Par value $1,000:
Authorized 10,000 shares,
issued and outstanding 5,900 shares 5,900 5,900
Surplus 786,552 449,589
-------------- --------------
Total capital stock and surplus 792,452 455,489
-------------- --------------
$ 12,499,683 $ 10,137,822
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
INCOME
Premiums and annuity considerations $ 274,244 $ 313,025 $ 469,157
Annuity and other deposit funds 722,327 699,189 1,205,680
Transfers from separate
accounts--net 21,455 102,213 350
Net investment income 366,598 337,747 253,496
Amortization of interest maintenance
reserve 899 3,316 2,703
Realized losses on investments (1,434) (6,166) (12,403)
Expense allowance on reinsurance
ceded 0 0 8,475
Mortality and expense risk charges 60,954 52,338 42,981
Other income--net 16,666 33,377 46,102
---------- ---------- ----------
1,461,709 1,535,039 2,016,541
BENEFITS AND EXPENSES
Increase (decrease) in liability for
annuity and other deposit funds 13,552 (69,542) 894,128
Increase in policy reserves 171,976 219,334 589,559
Death, surrender benefits, and
annuity payments 189,744 166,889 128,902
Annuity and other deposit fund
withdrawals 531,928 540,352 146,260
Transfers to non-unitized separate
account 331,403 455,688 28,070
---------- ---------- ----------
1,238,603 1,312,721 1,786,919
Operating expenses 37,492 32,231 24,170
Commissions 108,672 150,011 204,016
Dividends 25,722 22,928 8,074
Taxes, licenses and fees 4,774 4,649 4,180
---------- ---------- ----------
1,415,263 1,522,540 2,027,359
---------- ---------- ----------
Net income (loss) from operations
before surplus note interest and
equity in income of subsidiaries 46,446 12,499 (10,818)
Surplus note interest (31,813) (31,150) (26,075)
---------- ---------- ----------
Net income (loss) from operations
before equity in income of
subsidiaries and federal income tax 14,633 (18,651) (36,893)
Equity in income of subsidiaries 59,875 62,629 62,640
Federal income tax expense (38,593) (42,521) (22,491)
---------- ---------- ----------
NET INCOME $ 35,915 $ 1,457 $ 3,256
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
CAPITAL STOCK $ 5,900 $ 5,900 $ 5,900
PAID-IN SURPLUS 199,355 199,355 199,355
SURPLUS NOTES
Balance, beginning of year 335,000 335,000 265,000
Issued during year 315,000 0 70,000
---------- ---------- ----------
Balance, end of year 650,000 335,000 335,000
---------- ---------- ----------
UNASSIGNED SURPLUS
Balance, beginning of year (84,766) (57,067) (57,485)
Net income 35,915 1,457 3,256
Writedown of goodwill 0 (18,397) 0
Change in non-admitted assets (2,270) (1,485) (191)
Unrealized gains (losses) on real estate 2,009 (671) (4,440)
Change in and transfers of separate account
surplus (1) (227) 117
Change in asset valuation reserve (13,690) (8,376) 1,676
---------- ---------- ----------
Balance, end of year (62,803) (84,766) (57,067)
---------- ---------- ----------
TOTAL SURPLUS 786,552 449,589 477,288
---------- ---------- ----------
TOTAL CAPITAL STOCK AND SURPLUS $ 792,452 $ 455,489 $ 483,188
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(IN 000'S)
Cash flows from operating activities:
Net income (loss) from operations
before surplus note interest and
equity in income of subsidiaries $ 46,446 $ 12,499 $ (10,818)
Adjustments to reconcile net income
(loss) from operations to net cash
provided by (used in) operating
activities:
Increase (decrease) in liability for
annuity and other deposit funds 13,552 (69,542) 894,128
Increase in policy reserves 171,976 219,334 589,559
Increase in investment income due and
accrued (6,623) (2,736) (21,746)
Net accrual and amortization of
discount and premium on investments 3,127 7,272 5,911
Realized losses on investments 1,434 6,166 12,403
Change in non-admitted assets (2,270) (1,485) (191)
Change in funds withheld on
reinsurance (174,398) (199,826) (1,087,862)
Other (11,160) (71,746) 24,953
----------- ----------- -----------
Net cash provided by (used in) operating
activities 42,084 (100,064) 406,337
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale and maturity of
investments 1,705,685 1,596,851 1,173,345
Purchase of investments (1,820,843) (1,491,159) (1,618,587)
Net change in short-term investments (254,897) (20,543) (38,782)
Investment in subsidiaries (6,000) (4,894) (15,250)
Dividends from subsidiaries 37,927 37,444 42,520
----------- ----------- -----------
Net cash provided by (used in) investing
activities (338,128) 117,699 (456,754)
----------- ----------- -----------
Cash flows from financing activities:
Issue of surplus notes 315,000 0 70,000
Payment of interest on surplus notes (31,813) (31,150) (26,075)
Repayment of seed capital 4,036 0 0
----------- ----------- -----------
Net cash provided by (used in) financing
activities 287,223 (31,150) 43,925
----------- ----------- -----------
Decrease in cash during the year (8,821) (13,515) (6,492)
Cash balance, beginning of year (11,459) 2,056 8,548
----------- ----------- -----------
Cash balance, end of year $ (20,280) $ (11,459) $ 2,056
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL--
Sun Life Assurance Company of Canada (U.S.) (the Company) is incorporated as a
life insurance company and is currently engaged in the sale of individual fixed
and variable annuities, group fixed and variable annuities and group pension
contracts. The Company also underwrites a block of individual life insurance
business through a reinsurance contract with its parent. Sun Life Assurance
Company of Canada (the parent company) is a mutual life insurance company. The
Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Statutory accounting
practices are considered to be generally accepted accounting principles for
mutual insurance companies and subsidiaries of mutuals. Prescribed accounting
practices include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and general
administrative rules. Permitted accounting practices encompass all accounting
practices not so prescribed. The permitted accounting practices adopted by the
Company are not material to the financial statements. Preparation of the
financial statements requires management to make certain estimates and
assumptions.
Assets in the balance sheets are stated at values prescribed or permitted to be
reported by state regulatory authorities. Bonds are carried at cost adjusted for
amortization of premium or accrual of discount. Investments in subsidiaries are
carried on the equity basis. Mortgage loans acquired at a premium or discount
are carried at amortized values and other mortgage loans at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost or
appraised value, adjusted for accumulated depreciation, less encumbrances.
Depreciation of buildings and improvements is calculated using the straight line
method over the estimated useful life of the property. For life and annuity
contracts, premiums are recognized as revenues over the premium paying period,
whereas commissions and other costs applicable to the acquisition of new
business are charged to operations as incurred. Furniture and equipment
acquisitions are capitalized but treated as nonadmitted assets. Furniture and
equipment depreciation is calculated on a straight line basis over the useful
life of the assets.
MANAGEMENT AND SERVICE CONTRACTS--
The Company has an agreement with its parent company which provides that the
parent company will furnish, as requested, personnel as well as certain services
and facilities on a cost reimbursement basis. Expenses under this agreement
amounted to approximately $20,293,000 in 1995, $18,452,000 in 1994, and
$13,883,000 in 1993.
REINSURANCE--
The Company has agreements with the parent company which provide that the parent
company will reinsure the mortality risks of the individual life insurance
contracts sold by the Company. Under these agreements basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively. Reinsurance transactions under these agreements
had the effect of decreasing income from operations by approximately $2,184,000,
$2,138,000, and $1,046,000, for the years ended December 31, 1995, 1994 and
1993, respectively.
Effective January 1, 1991, the Company entered into an agreement with the parent
company under which 100% of certain fixed annuity contracts issued by the
Company were reinsured. Effective December 31, 1993 this agreement was
terminated. This agreement had the effect of decreasing income from operations
by approximately $9,930,000 in 1993.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Effective January 1, 1991, the Company entered into an agreement with the parent
company under which certain individual life insurance contracts issued by the
parent company were reinsured by the Company on a 90% coinsurance basis. Also,
effective January 1, 1991, the Company entered into an agreement with the parent
company which provides that the parent company will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. These agreements had
the effect of increasing income from operations by approximately $11,821,000 in
1995, and decreasing income by approximately $29,188,000, and $43,591,000 for
the years ended December 31, 1994 and 1993, respectively.
The life reinsurance assumed agreement requires the reinsurer to withhold funds
in amounts equal to the reserves assumed.
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1995, 1994 and 1993 before the effect of
reinsurance transactions with the parent company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 890,560 $ 962,320 $ 762,553
Net investment income and realized gains (losses) 306,893 304,155 293,557
------------ ------------ ------------
Subtotal 1,197,453 1,266,475 1,056,110
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 1,030,342 1,092,192 926,827
Other expenses 130,302 130,457 85,575
------------ ------------ ------------
Subtotal 1,160,644 1,222,649 1,012,402
------------ ------------ ------------
Income from operations $ 36,809 $ 43,826 $ 43,708
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $1,599,000 in 1995, increasing
income from operations by $1,854,000 in 1994 and decreasing income from
operations by $390,000 in 1993.
SEPARATE ACCOUNTS--
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market values.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Deposits to all separate accounts are reported as increases in separate account
liabilities and are not reported as revenues. Mortality and expense risk charges
and surrender fees incurred by the separate accounts are included in income of
the Company.
The Company has established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Any difference between the assets and liabilities of the separate accounts is
treated as payable to or receivable from the general account of the Company.
Amounts payable to the general account of the Company were $148,675,000 in 1995
and $132,496,000 in 1994.
OTHER--
Income on investments is recognized on the accrual method.
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
Net income reported in the Company's statutory Annual Statement differs from net
income reported in these financial statements. Dividends from subsidiaries are
included in income and undistributed income (losses) of subsidiaries are
included as gains (losses) in unassigned surplus in the statutory Annual
Statement. Both the dividends and the undistributed income (losses) are included
in net income in these financial statements.
Investments in non-insurance subsidiaries are carried at their stockholders'
equity value, determined in accordance with generally accepted accounting
principles. Investments in insurance subsidiaries are carried at their statutory
surplus values.
Certain reclassifications have been made in the 1993 and 1994 financial
statements to conform to the classifications used in 1995.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Massachusetts Financial
Services Company (MFS), Sun Life Insurance and Annuity Company of New York (Sun
Life (N.Y.)), Sun Investment Services Company (Sunesco), Sun Benefit Services
Company, Inc. (Sunbesco), Massachusetts Casualty Insurance Company (MCIC), New
London Trust, F.S.B. (NLT), Sun Capital Advisers, Inc. (Sun Capital), and Sun
Life Finance Corporation (Sunfinco).
Effective January 1, 1994, NLT acquired all of the outstanding shares of
Danielson Federal Savings and Loan Association of Danielson, Connecticut. These
two banks have been merged into a newly formed federally chartered savings bank
now called New London Trust, F.S.B.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds and certain mutual funds and separate accounts
established by the Company, and the MFS Asset Management Group provides
investment advice to substantial private clients.
Clarendon Insurance Agency, Inc., a wholly-owned subsidiary of MFS, serves as
the distributor of certain variable contracts issued by the Company and Sun Life
(N.Y.). 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
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
New York. Sunesco is a registered investment adviser and broker-dealer. MCIC is
a life insurance company which issues only individual disability income
policies. Sun Capital, a registered investment adviser, Sunfinco, and Sunbesco
are currently inactive.
In 1994, the Company reduced its carrying value of MCIC by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus.
During 1995, 1994 and 1993, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
MCIC $6,000,000 $6,000,000 $6,000,000
Sun Capital 0 0 250,000
New London Trust 0 0 9,000,000
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1995, 1994 and 1993 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 12,174 $ 13,485 $ 14,891
Other assets, net of liabilities 126,108 121,321 112,332
--------- --------- ---------
Total net assets $ 138,282 $ 134,806 $ 127,223
--------- --------- ---------
--------- --------- ---------
Total income $ 570,794 $ 495,097 $ 424,324
Operating expenses (504,070) (425,891) (355,679)
Income tax expense (31,193) (29,374) (24,507)
--------- --------- ---------
Net income $ 35,531 $ 39,832 $ 44,138
--------- --------- ---------
--------- --------- ---------
</TABLE>
3. STOCK, SURPLUS NOTES, CONTRIBUTIONS AND NOTE RECEIVABLE:
The Company has issued surplus notes to its parent of $335,000,000 during the
years 1982 through 1993 at interest rates between 7.25% and 10%. The Company
subsequently repaid all principal and interest associated with these surplus
notes on January 16, 1996. On December 19, 1995 the Company issued surplus notes
totalling $315,000,000 to an affiliate, Sun Canada Financial Co., at interest
rates between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the
year 2007, and $157,500,000 will mature in the year 2015. Interest on these
notes is payable semi-annually. Principal and interest on surplus notes are
payable only to the extent that the Company meets specified requirements as
regards free surplus exclusive of the principal amount and accrued interest, if
any, on these notes; and, in the case of principal repayments, with the consent
of the Delaware Insurance Commissioner. Interest payments require the consent of
the Delaware Insurance Commissioner after December 31, 1993. Payment of
principal and interest on the notes issued in 1995 also requires the consent of
the Canadian Office of the Superintendent of Financial Institutions. The Company
expensed $31,813,000, $31,150,000 and $26,075,000 in respect of interest on
surplus notes for the years 1995, 1994 and 1993, respectively. On December 19,
1995, the parent borrowed $120,000,000 at 5.6 % through a short term note from
the Company maturing on January 16, 1996. The note, which is classified under
short-term bonds at December 31, 1995, was repaid in full by the parent at
maturity.
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
4. BONDS:
The amortized cost and estimated market value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and
government agencies and authorities $ 467,597 $ 22,783 $ 443 $ 489,937
States, provinces and political
subdivisions 2,252 81 0 2,333
Foreign governments 38,303 4,551 6 42,848
Public utilities 513,704 45,466 203 558,967
Transportation 215,786 22,794 2,221 236,359
Finance 225,074 13,846 84 238,836
All other corporate bonds 1,045,745 67,371 7,415 1,105,701
---------- ---------- ---------- ----------
Total long-term bonds 2,508,461 176,892 10,372 2,674,981
Short-term bonds:
U.S. Treasury Bills, bankers
acceptances and commercial paper 337,606 0 0 337,606
---------- ---------- ---------- ----------
$2,846,067 $176,892 $10,372 $3,012,587
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and
government agencies and authorities $ 444,100 $ 5,017 $11,010 $ 438,107
States, provinces and political
subdivisions 252 0 17 235
Foreign governments 20,965 147 187 20,925
Public utilities 458,839 11,414 11,619 458,633
Transportation 215,478 5,099 9,444 211,133
Finance 193,355 3,734 4,010 193,080
All other corporate bonds 1,055,455 15,785 31,171 1,040,069
---------- --------- ---------- ----------
Total long-term bonds 2,388,444 41,196 67,458 2,362,182
Short-term bonds:
U.S. Treasury Bills, bankers
acceptances and commercial paper 82,708 0 0 82,708
---------- --------- ---------- ----------
$2,471,152 $41,196 $67,458 $2,444,890
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
4. BONDS (CONTINUED):
The amortized cost and estimated market value of bonds at December 31, 1995 and
1994 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 or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
(IN 000'S)
Maturities are:
Due in one year or less $ 678,775 $ 681,119
Due after one year through five
years 844,446 866,230
Due after five years through ten
years 256,552 269,549
Due after ten years 884,187 1,000,908
---------- ----------
2,663,960 2,817,806
Mortgage-backed securities 182,107 194,781
---------- ----------
$2,846,067 $3,012,587
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
(IN 000'S)
Maturities are:
Due in one year or less $ 209,875 $ 209,527
Due after one year through five
years 953,222 930,578
Due after five years through ten
years 319,858 311,360
Due after ten years 877,062 885,462
---------- ----------
2,360,017 2,336,927
Mortgage-backed securities 111,135 107,963
---------- ----------
$2,471,152 $2,444,890
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales of investments in debt securities during 1995, 1994, and
1993 were $1,510,553,000, $1,390,974,000, and $911,644,000, gross gains were
$24,757,000, $15,025,000, and $43,674,000 and gross losses were $5,742,000,
$30,041,000 and $687,000, respectively.
Long-term bonds at December 31, 1995 and 1994 included $20,000,000 of bonds
issued to the Company by a subsidiary company, MFS, during 1987. These bonds
will mature in 2000.
Bonds included above with an amortized cost of approximately $2,059,000 and
$1,561,000 at December 31, 1995 and 1994, respectively, were on deposit with
governmental authorities as required by law.
At year end 1995, the Company had outstanding mortgage-backed securities (MBS)
forward commitments amounting to a par value of $137,675,000 to be funded
through the sale of certain short-term securities shown above.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
5. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $250,729,000 at December 31, 1995.
6. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
provisions have been made. In those cases where, in management's judgement, the
mortgage loans' values are impaired, appropriate losses are recorded.
The following table shows the geographic distribution of the mortgage portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- -----------
(IN 000'S)
<S> <C> <C>
California $ 153,811 $ 131,953
Massachusetts 83,999 101,932
Pennsylvania 141,468 136,778
Ohio 83,915 79,478
Washington 91,900 90,422
Michigan 69,125 75,592
New York 81,480 93,178
All other 361,213 411,648
---------- -----------
$1,066,911 $1,120,981
---------- -----------
---------- -----------
</TABLE>
The Company has restructured mortgage loans totalling $49,846,000, against which
there are provisions of $8,799,000 at December 31, 1995.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $13,100,000 at
December 31, 1995.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
7. INVESTMENTS--GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses) (pre-tax):
Bonds $(2,300) $ 0 $ 0
Mortgage loans 418 (5,689) (9,975)
Stocks 0 0 445
Real estate 391 (334) (2,873)
Other assets 57 (143) 0
------- ------- --------
$(1,434) $(6,166) $(12,403)
------- ------- --------
------- ------- --------
Changes in unrealized gains (losses):
Bonds $ 0 $ 0 $ 84
Mortgage loans (1,574) 0 0
Real estate 3,583 (671) (4,113)
Stocks 0 0 (411)
------- ------- --------
$ 2,009 $ (671) $ (4,440)
------- ------- --------
------- ------- --------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rate risk are charged or credited to an interest
maintenance reserve and amortized into income over the remaining contractual
life of the security sold. The realized capital gains and losses credited or
charged to the interest maintenance reserve were a credit of $12,714,000 in
1995, a charge of $14,070,000 in 1994 and a credit of $40,993,000 in 1993. All
gains and losses are net of applicable taxes.
8. INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $205,445 $200,339 $204,405
Interest income from mortgage loans 99,753 106,347 99,790
Interest income from policy loans 2,777 2,670 2,503
Real estate investment income 10,693 8,649 8,593
Interest income on funds withheld 57,373 30,741 19,420
Other 2,627 1,418 645
-------- -------- --------
Gross investment income 378,668 350,164 335,356
Investment expenses 12,070 12,417 12,679
Interest expense on funds withheld 0 0 69,181
-------- -------- --------
$366,598 $337,747 $253,496
-------- -------- --------
-------- -------- --------
</TABLE>
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
9. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, gains or losses are deferred in IMR and amortized over the remaining life
of the hedged assets. At December 31, 1995, there were no futures contracts
outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1995
--------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
----------------- ------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $367,000 $3,275
Foreign currency swap 2,745 290
Forward spread lock swaps $ 50,000 $ 112
</TABLE>
The market values of interest rate swaps and forward spread lock agreements are
primarily obtained from dealer quotes. The market value is the estimated amount
that the Company would receive or pay on termination or sale, taking into
account current interest rates and the current creditworthiness of the counter
parties. The Company is exposed to potential credit loss in the event of
non-performance by counterparties. The counterparties are major financial
institutions and management believes that the risk of incurring losses related
to credit risk is remote.
10. 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, secured 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.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
10. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 111,611 $ 121,716
Less non-recourse debt (111,594) (121,699)
--------- ---------
17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (13,132) (15,292)
--------- ---------
Investment in leveraged leases 28,035 25,875
Less fees (213) (237)
--------- ---------
Net investment in leveraged leases $ 27,822 $ 25,638
--------- ---------
--------- ---------
</TABLE>
The net investment is classified as other invested assets in the accompanying
balance sheets.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
Withdrawal characteristics of general account and separate account annuity
reserves and deposits:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
AMOUNT % OF TOTAL
---------- ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal--with adjustment
--with market value adjustment $3,796,596 36.36%
--at book value less surrender charges (surrender
charge >5%) 4,066,126 38.94
--at book value (minimal or no charge or adjustment) 1,278,215 12.24
Not subject to discretionary withdrawal provision 1,301,259 12.46
---------- ----------
Total annuity actuarial reserves and deposit liabilities $10,442,196 100.00%
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
AMOUNT % OF TOTAL
---------- ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal--with adjustment
-- with market value adjustment $3,083,623 35.98%
-- at book value less surrender charges (surrender
charge > 5%) 2,915,460 34.02
-- at book value (minimal or no charge or
adjustment) 1,252,843 14.62
Not subject to discretionary withdrawal provision 1,318,092 15.38
---------- ----------
Total annuity actuarial reserves and deposit liabilities $8,570,018 100.00%
---------- ----------
---------- ----------
</TABLE>
12. RETIREMENT PLANS:
The Company participates with its parent company in a non-contributory defined
benefit pension plan covering essentially all employees. The benefits are based
on years of service and compensation.
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
12. RETIREMENT PLANS (CONTINUED):
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA. The Company is charged for
its share of the pension cost based upon its covered participants. Pension plan
assets consist principally of a variable accumulation fund contract held in a
separate account of the parent company.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 87, which is in accordance with generally accepted accounting
principles.
The following table sets forth the funded status for the pension plan (for the
parent, Sun Life (U.S.), Sun Life (N.Y.) and Sunesco) at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
TOTAL PENSION PLAN
------------------
1995 1994
-------- --------
(IN 000'S)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(40,949) $(38,157)
Accumulated benefit obligation (42,452) (39,686)
-------- --------
-------- --------
Projected benefit obligation for service rendered to
date $(60,885) $(53,494)
Plan assets at fair value 117,178 101,833
-------- --------
Difference between plan assets and projected benefit
obligation 56,293 48,339
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (9,016) (1,238)
Unrecognized net asset at January 1, 1994, being
recognized over 17 years (30,842) (32,898)
-------- --------
Prepaid pension cost included in other assets $ 16,435 $ 14,203
-------- --------
-------- --------
</TABLE>
The components of the 1995 and 1994 pension cost for the pension plan were:
<TABLE>
<CAPTION>
TOTAL PENSION
PLAN
-----------------
1995 1994
-------- -------
(IN 000'S)
<S> <C> <C>
Service cost $ 3,389 $ 2,847
Interest cost 4,050 3,770
Actual return on plan assets (16,388) (8,294)
Net amortization and deferral 6,715 (818)
-------- -------
Net pension income $ (2,234) $(2,495)
-------- -------
-------- -------
</TABLE>
The Company's share of the group's accrued pension cost at December 31, 1995 and
1994 was $420,000 and $417,000, respectively. The Company's share of net
periodic pension cost was $3,000 and $417,000, respectively.
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.5% and 4.5%, respectively. The expected long-term rate of return on assets was
7.5%.
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
12. RETIREMENT PLANS (CONTINUED):
The Company also participates with its parent and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Employer
contributions were $185,000, $152,000 and $124,000 for the years ended December
31, 1995, 1994, and 1993, respectively.
13. OTHER POST-RETIREMENT BENEFIT PLANS:
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers Accounting for Post-retirement Benefits
other than Pensions". SFAS No. 106 requires the Company to accrue the estimated
cost of retiree benefit payments during the years the employee provides
services. SFAS No. 106 allows recognition of the cumulative effect of the
liability in the year of adoption or the amortization of the obligation over a
period of up to 20 years. The Company has elected to recognize this obligation
of approximately $400,000 over a period of ten years. The Company's cash flows
are not affected by implementation of this standard, but implementation
decreased net income by $142,000, $114,000, and $120,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The Company's post-retirement
health care plans currently are not funded.
The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(IN 000'S)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
--Retirees $ 0 $ 0
--Fully eligible active plan participants (601) (444)
--Other active plan participants 0 0
------- -------
--Accumulated post-retirement benefit obligation in excess
of plan assets (601) (444)
--Unrecognized gains from past experience (55) (110)
--Unrecognized transition obligation 280 320
------- -------
--Accrued post-retirement benefit cost $(376) $(234)
------- -------
------- -------
Net periodic post-retirement benefit cost components:
--Service cost--benefits earned $ 65 $ 49
--Interest cost on accumulated post-retirement benefit
obligation 42 33
--Amortization of transition obligation 40 40
--Net amortization and deferral (5) (8)
------- -------
--Net periodic post-retirement benefit cost $ 142 $ 114
------- -------
------- -------
</TABLE>
The discount rate used in determining the accumulated post-retirement benefit
obligation was 7.5% in 1995 and 8% in 1994, and the assumed health care cost
trend rate was 12.0% graded to 6% over 10 years after which it remains constant.
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
13. OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED):
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the post-retirement
benefit obligation as of December 31, 1995 by $149,000 and the estimated service
and interest cost components of the net periodic post-retirement benefit cost
for 1995 by $29,000.
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, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
--------------- ------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds 2,846,067 3,012,586
Mortgages 1,066,911 1,111,895
Real estate 95,575 98,437
LIABILITIES
Insurance reserves 124,066 124,066
Individual annuities 434,261 431,263
Pension products 2,227,882 2,265,386
Derivatives -- 3,387
<CAPTION>
DECEMBER 31, 1994
------------------------------
ESTIMATED
CARRYING AMOUNT FAIR VALUE
--------------- ------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $2,471,152 $2,444,890
Mortgages 1,120,981 1,107,012
Real estate 89,487 91,072
LIABILITIES
Insurance reserves 129,302 129,302
Individual annuities 475,557 476,570
Pension products 2,772,618 2,668,382
Derivatives -- 1
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
using prices for publicly traded bonds of similar credit risk and maturity and
repayment characteristics.
The fair values of the Company's general account reserves and liabilities under
investment-type contracts (insurance, annuity and pension contracts that do not
involve mortality or morbidity risks) are estimated using discounted cash flow
analyses or surrender values. Those contracts that are deemed to have short term
guarantees have a carrying amount equal to the estimated market value.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
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.
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 rate risk are charged or credited to an interest
maintenance reserve (IMR) and amortized into income over the remaining
contractual life of the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1995 1994
---------------- ---------------
AVR IMR AVR IMR
------- ------- ------- ------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $28,409 $18,140 $20,033 $31,414
Realized capital gains (losses), net of
tax (1,524) 7,977 (1,320) (9,958)
Amortization of investment gains 0 (897) 0 (3,316)
Unrealized investment gains (losses) 3,650 0 (3,537) 0
Required by formula 11,564 0 13,233 0
------- ------- ------- ------
Balance, end of year $42,099 $25,218 $28,409 $18,140
------- ------- ------- ------
------- ------- ------- ------
</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 $12,429,000, $43,200,000 and
$25,000,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
17. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements for 1995 and 1994.
18. NEW ACCOUNTING PRONOUNCEMENT:
In April, 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises." Under this
interpretation, annual financial statements of mutual life insurance enterprises
for fiscal years beginning after December 15, 1992, shall provide a brief
description that financial statements prepared on the basis of statutory
accounting practices will no longer be described as prepared in conformity with
generally accepted accounting principles. In January 1995, Statement of
Financial Accounting Standards
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
18. NEW ACCOUNTING PRONOUNCEMENT (CONTINUED):
No. 120 (SFAS No. 120) "Accounting and Reporting by Mutual Life Insurance
Enterprises for Certain Long Duration Participating Contracts" was issued. SFAS
No. 120 delays the effective date of interpretation No. 40 until fiscal years
beginning after December 15, 1995.
Beginning in 1996, the Company will file financial statements prepared in
accordance with all applicable pronouncements that define generally accepted
accounting principles for all enterprises.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
WELLESLEY HILLS, MASSACHUSETTS
We have audited the accompanying balance sheets of Sun Life Assurance Company of
Canada (U.S.) (a wholly-owned subsidiary of Sun Life Assurance Company of
Canada) as of December 31, 1995 and 1994, and the related statements of
operations, capital stock and surplus, and cash flows for each of the three
years in the period ended December 31, 1995. 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.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1996
74
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the valuation period is one day; no dividends or
distributions caused Fund shares to go "ex-dividend" during the current
valuation period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks of .00003539 (the daily
equivalent of the current maximum charge of 1.3% on an annual basis) gives a net
investment factor of 1.00323972. If the value of the variable accumulation unit
for the immediately preceding valuation period had been 14.5645672, the value
for the current valuation period would be 14.6117523 (14.5645672 x 1.00323972).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843446 (12.3456789 x 1.00323972
(the Net Investment Factor) x 0.99989255). 0.99989255 is the factor, for a one
day valuation period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in the Contract.
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 variable
accumulation units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the variable accumulation unit value and the
annuity unit value for the particular Sub-Account for the valuation period which
ends immediately preceding the annuity commencement date are 14.5645672 and
12.3456789, respectively; that the annuity payment rate for the age and option
elected is $6.78 per $1,000; and that the annuity unit value on the day prior to
the second variable annuity payment date is 12.3843446. The first variable
annuity payment would be $865.57 (8,765.4321 x 14.5645672 x 6.78 divided by
1,000). The number of annuity units credited would be 70.1112 ($865.57 divided
by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112
x 12.3843446).
75
<PAGE>
APPENDIX B
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of April 30, 1996 premium
taxes will be imposed on Contracts offered by this Prospectus only by the
jurisdictions listed below at the rates indicated. For information subsequent to
April 30, 1996 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
-----------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- -------------------------------------------------- ---------- --------------
<S> <C> <C>
California % .50 2.35%
District of Columbia 2.25% 2.25%
Kansas -- 2.00%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Mississippi -- 1.00%*
Nevada -- 3.50%
Pennsylvania -- 2.00%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
<FN>
* No tax on purchase payments received on or after July 1, 1995.
</TABLE>
76
<PAGE>
APPENDIX C
WITHDRAWALS, SURRENDERS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
A. FIXED ACCOUNT--3, 5 AND 7 YEAR GUARANTEE PERIODS:
For the purposes of this illustration, the following assumptions have been made:
1. 100% of Purchase Payments have been allocated to the Fixed Account and
the Owner has elected Initial Guarantee Periods of five (5) years.
2. The date of full surrender or partial withdrawal is the last day of the
12th month following the Date of Coverage.
3. The Guarantee Rate being credited on Payments allocated to the five (5)
year Guarantee Period on the date of full surrender or partial withdrawal
is 4.40%.
4. The Account Fee is $25.
PLEASE REFER TO THE TABLE BELOW.
TABLE 1*
<TABLE>
<CAPTION>
1 2 3 4 5 6 7 8 9 10
- --- ------ ----- --------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 100 4.25% $ 104.25 -- $ 0.00 $ 104.25($79.25) -0.45% -($ 0.47)(-$0.36) $ 103.78($78.89)
2 100 4.25 103.90 6.00% 4.80 99.10 -0.46 -(0.46) 98.64
3 100 4.50 103.75 6.00 6.00 97.75 0.31 0.31 98.06
4 100 4.50 103.38 6.00 6.00 97.38 0.32 0.31 97.69
5 100 4.70 103.13 6.00 6.00 97.13 0.98 0.95 98.08
6 100 4.70 102.74 6.00 6.00 96.74 0.99 0.96 97.70
7 100 4.70 102.35 6.00 6.00 96.35 1.01 0.98 97.33
8 100 4.50 101.88 6.00 6.00 95.88 0.34 0.33 96.20
9 100 4.50 101.50 6.00 6.00 95.50 0.35 0.33 95.83
10 100 4.50 101.13 6.00 6.00 95.13 0.36 0.34 95.46
11 100 4.50 100.75 6.00 6.00 94.75 0.36 0.34 95.09
12 100 4.40 100.37 6.00 6.00 94.37 0.00 0.00 94.37
------ --------- ------ ---------- -------------- -------------
$1,200 $ 1,229.11 $ 64.80 $ 1,164.31 $ 3.92 $1,168.23
------ --------- ------ ---------- -------------- -------------
------ --------- ------ ---------- -------------- -------------
($1,139.31) ($4.03) ($1,143.34)
<FN>
*See next page for Explanation of Columns
</TABLE>
77
<PAGE>
EXPLANATION OF COLUMNS IN TABLE 1.
COLUMNS 1 AND 2:
Represent Payments and Payment amounts, respectively. Each Payment of $100 was
made on the first (1st) day of each month for one year (12 payments).
COLUMN 3:
Represents the Initial Guarantee Rate being credited to each Payment.
COLUMN 4:
Represents the value of each Payment on the date of full surrender or partial
withdrawal before the imposition of any Withdrawal Charge and Market Value
Adjustment.
COLUMN 5:
Represents the Withdrawal Charge percentage that is applied to each Payment on
the date of full surrender or partial withdrawal.
The percentage is 6% for Payments 2-12 because these Payments have been in the
Account for less than one year. No Withdrawal Charge is imposed on Payment 1
because up to ten percent (10%) of Payments credited to a Participant's Account
may be withdrawn each Account Year without imposition of this charge. In this
example, 10% represents (10% x $1,200) = $120. The 10% amount is applied to the
oldest previously unliquidated Payment, then the next oldest and so forth. This
results in no Withdrawal Charge being imposed on Payment 1 and a Withdrawal
Charge imposed on $80 of Payment 2.
COLUMN 6:
Represents the amount of Withdrawal Charge imposed on each Payment. It is
calculated by multiplying the Payment in Column 2 by the Withdrawal Charge
percentage in Column 5.
For example, the Withdrawal Charge imposed on Payment 8 = $100 X 6% = $6.00.
The Withdrawal Charge imposed on Payment 2 = ($100 - $20) X 6% = $4.80. The $20
represents the portion of the Payment on which no Withdrawal Charge is imposed
as described under the explanation of Column 5 above.
COLUMN 7:
Represents the value of each Payment in Column 4 on the date of full surrender
or partial withdrawal after the imposition of the Withdrawal Charge in Column 6.
In the case of a full surrender, the Account Fee is deducted from the oldest
unliquidated payment. This deduction is reflected in the Table by the amount in
parentheses beside Column 7, $79.25.
COLUMN 8:
Represents the Market Value Adjustment (MVA) percentage applied to the value of
each Payment on the date of full surrender or partial withdrawal after
imposition of the Withdrawal Charge.
FOR EXAMPLE:
The MVA% applied to Payment 3 = .75 (A - B) X C/12
<TABLE>
<S> <C> <C> <C>
Where A = The Guarantee Rate of the Payment being surrendered (Column 3)
= 4.50%,
B = The Guarantee Rate being credited to Payments allocated to the five (5)
year
Guarantee Period on the date of full surrender or partial withdrawal
= 4.40% and
C = The number of months remaining in the Guarantee Period of the Payment
being
surrendered
= 60 (5 years) - 10
= 50
MVA% = .75 (A - B) X C/12
= .75 (4.50 - 4.40) X 50/12
= .75 (.10) X 50/12
= .31%
</TABLE>
78
<PAGE>
COLUMN 9:
Represents the dollar amount of the MVA. For each Payment, it is determined by
multiplying the value in Column 7 by the MVA percentage in Column 8.
For example, the MVA for Payment 3
<TABLE>
<C> <S> <C> <C>
= Column 7 X Column 9
= $97.75 X .31%
= $0.31
</TABLE>
COLUMN 10:
Represents the values of Payments on the date of full surrender or partial
withdrawal after deducting the Withdrawal Charge and either deducting or adding
the MVA. For any Payment, the amount in Column 10 is determined by adding the
amounts in Columns 7 and 9.
In each of Columns 9 and 10, the amounts in parentheses, -$.36 and $78.89,
respectively, reflect the deduction of the Account Fee, in the case of a full
surrender.
FULL SURRENDER:
The total of Column 10, in parentheses ($1,143.34), reflects the amount of a
full surrender after imposition of Withdrawal Charges, Account Fee and Market
Value Adjustments.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 10 for as many payments as are liquidated reflects
the amount of a partial withdrawal.
For example, if $1,000 of Payments were withdrawn, the amount of the withdrawal
would be the sum of the amounts in Column 10 for Payments 1 through 10 which is
$978.77.
B. VARIABLE ACCOUNT AND FIXED ACCOUNT--1 YEAR GUARANTEE PERIOD (NO MARKET VALUE
ADJUSTMENT APPLICABLE):
For the purposes of this illustration, the following assumptions have been made:
1. Purchase Payments have been allocated to either the Variable Account,
the Fixed Account-- one (1) Year Guarantee Period or to a combination of
both.
2. The date of full surrender or partial withdrawal is during the ninth
(9th) Account Year.
PLEASE REFER TO THE TABLE BELOW.
<TABLE>
<CAPTION>
TABLE 2*
1 2 3 4 5 6
--------- --------- --------- --------- ----------- ---------
<S> <C> <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 1 1.20
4 1,600 0 1,600 2 32.00
5 1,800 0 1,800 3 54.00
6 2,000 0 2,000 4 80.00
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 $ 507.20
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* See next page for Explanation of Columns
79
<PAGE>
EXPLANATION OF COLUMNS IN TABLE 2
COLUMNS 1 AND 2:
Represent Payments and amounts of Payments. Each Payment was made at the
beginning of each Account 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
Participant's Account for more than seven (7) years.
b) $1,280 of Payment 3 represents 10% of Payments that have been credited to
the Participant's Account for less than seven (7) 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
<TABLE>
<C> <S>
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 X 6%
= $120
</TABLE>
FULL SURRENDER:
The total of Column 6, $507.20, represents the total amount of withdrawal
charges imposed on Payments in this illustration.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated reflects
the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4 and 5) were withdrawn,
the amount of the withdrawal charges imposed would be the sum of amounts in
Column 6 for Payments 1, 2, 3, 4 and 5 which is $87.20.
80
<PAGE>
(This page has been left blank intentionally.)
81
<PAGE>
(This page has been left blank intentionally.)
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ANNUITY SERVICE CENTER
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
500 Boylston Street
Boston, Massachusetts 02116
LEGAL COUNSEL
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
COG-1 5/96
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 14. Other Expenses of Issuance and Distribution
Not applicable.
Item 15. Indemnification of Directors and Officers
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
"Section 8.01 (a). Every person who is or was a director, officer or
employee of this corporation or of any other corporation which he served at the
request of this corporation and in which this corporation owns or owned shares
of capital stock or of which it is or was a creditor 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 director, officer or employee of this corporation or
such other 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 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: (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) hereof.
II-1
<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 by-law whether or not that person continues to be a
director, officer or employee of this corporation or such other 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 by-law with respect to some matters in a claim, action, suit or proceeding,
but not with respect to others, he shall be entitled to indemnification as the
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 by-law shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law. If any clause,
provision or application of this section 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 by-law 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 by-law shall be construed to protect any
director or officer of the corporation against any liability to the corporation
or its security holders to which he would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office."
II-2
<PAGE>
Item 16. Exhibits
Exhibits:
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
1 Underwriting Agreement *
3(a) Certificate of Incorporation *
3(b) By-laws *
4(a) Combination Fixed/Variable Group
Annuity Contract **
4(b) Certificate to be used in connection
with Contract filed as Exhibit 4(a) **
5 Opinion re: Legality ***
23 Consents of Experts and Counsel
(a) Independent Auditors' Consent Filed Herewith
(b) Consent of Counsel Filed Herewith
24 Powers of Attorney ****
* Incorporated by reference from the Registration Statement of the Registrant
on Form S-1, File No. 33-29851.
** Incorporated by reference from Amendment No. 2 to the Registration
Statement of the Registrant on Form S-1, File No. 2-99959.
*** Incorporated by reference from the Registration Statement of the Registrant
on Form S-2, File No. 33-31711.
**** Incorporated by reference from Post-Effective Amendment No. 5 to the
Registration Statement of Registrant on Form S-2, File No. 33-31711.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
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 the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Sun Life Assurance Company of Canada (U.S.), certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-2
and has duly caused this Post-effective Amendment No. 7 to its Registration
Statement on Form S-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Wellesley, Commonwealth of Massachusetts, on the
30th day of April, 1996.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By:* /s/ JOHN D. McNEIL
---------------------------
John D. McNeil
Chairman
Attest: /s/ BONNIE S. ANGUS
--------------------------
Bonnie S. Angus
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-effective Amendment No. 7 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman and
Director
(Principal
* /s/ JOHN D. McNEIL Executive Officer) April 30, 1996
- ------------------------------
John D. McNeil
Vice President and Actuary
(Principal Financial
/s/ ROBERT P. VROLYK Accounting Officer) April 30, 1996
- ------------------------------
Robert P. Vrolyk
* /s/ RICHARD B. BAILEY Director April 30, 1996
- ------------------------------
Richard B. Bailey
- ------------------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-Effective
Amendment No. 5 to the Registration Statement of Registrant on Form S-2,
File No. 33-31711.
II-5
<PAGE>
Signature Title Date
--------- ----- ----
* /s/ A. KEITH BRODKIN Director April 30, 1996
- ------------------------------
A. Keith Brodkin
* /s/ M. COLYER CRUM Director April 30, 1996
- ------------------------------
M. Colyer Crum
* /s/ JOHN R. GARDNER President and April 30, 1996
- ------------------------------
John R. Gardner Director
Senior Vice President
* /s/ DAVID D. HORN and General Manager April 30, 1996
- ------------------------------ and Director
David D. Horn
* /s/ JOHN S. LANE Director April 30, 1996
- ------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director April 30, 1996
- ------------------------------
Angus A. MacNaughton
- ------------------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-Effective
Amendment No. 5 to the Registration Statement of Registrant on Form S-2,
File No. 33-31711.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number ----
- -------
1 Underwriting Agreement. . . . . . . . . . . . . . . . . . *
3(a) Certificate of Incorporation. . . . . . . . . . . . . . . *
3(b) By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . *
4(a) Combination Fixed/Variable Group Annuity
Contract. . . . . . . . . . . . . . . . . . . . . . . **
4(b) Certificate to be issued in connection with
Contract Filed as Exhibit 4(a). . . . . . . . . . . . **
5 Opinion Re: Legality. . . . . . . . . . . . . . . . . . . ***
23(a) Independent Auditors' Consent . . . . . . . . . . . . . .
23(b) Consent of Counsel. . . . . . . . . . . . . . . . . . . .
24 Powers of Attorney. . . . . . . . . . . . . . . . . . . . ****
- ------------------------------
* Filed with the Registration Statement of the Registrant on Form S-1,
File No.33-29851.
** Filed with Amendment No. 2 to the Registration Statement of the
Registrant on Form S-1, File No. 2-99959.
*** Filed with the Registration Statement of the Registrant on Form S-2,
File No. 33-31711.
**** Filed with Post-Effective Amendment No. 5 to the Registration Statement
of Registrant on Form S-2, File No. 33-31711.
II-7
<PAGE>
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-effective Amendment No. 7 to
Registration Statement No. 33-31711 on Form S-2 of Sun Life Assurance Company of
Canada (U.S.) of our report dated February 2, 1996 accompanying the financial
statements of Sun Life of Canada (U.S.) Variable Account D and to the use of our
report dated February 7, 1996 accompanying the financial statements of Sun Life
Assurance Company of Canada (U.S.) appearing in the Prospectus, which is part of
such Registration Statement, and to the incorporation by reference of our
reports dated February 7, 1996 included in the Annual Report on Form 10-K of Sun
Life Assurance Company of Canada (U.S.) for the year ended December 31, 1995.
We also consent to the reference to us under the heading "Accountants" in
such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
<PAGE>
Exhibit 23(b)
CONSENT OF COUNSEL
I hereby consent to the reference to me in Post-effective Amendment No. 7
to the Registration Statement on Form S-2 of Sun Life Assurance Company of
Canada (U.S.) under the caption "Legal Matters" in the Prospectus contained
therein.
DAVID D. HORN, ESQ.
April 30, 1996
