<PAGE>
REGISTRATION NO. 33-41858
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 6
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2461439
(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, ASSISTANT VICE PRESIDENT 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)
--------------
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
Post Effective Amendment No. 6 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
- -------------------------------------- --------------------------------------
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 Factors Cover Pages (Summary); Expense Summary
and Ratio of Earnings to Fixed
Charges
4. Use of Proceeds A Word About the Company, the Fixed
Account,the Variable Account and the
Series Fund
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 Company,
Registered the Fixed Account, the Variable
Account and the Series Fund; Purchase
Payments and Contract Values During
Accumulation Period; Cash Withdrawals,
Withdrawal Charges and Market Value
Adjustment; Other Contractual
Provisions
10. Interests of Named Experts and Not Applicable
Counsel
11. Information with Respect to A Word About the Company, the Fixed
Registrant Account, the Variable Account and the
Series Fund; 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
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1997.
<PAGE>
PROSPECTUS
MAY 1, 1997
MFS REGATTA
--------------------------------------------------
The master group deferred annuity contracts (the "Contracts") and related
certificates offered by this Prospectus are designed for use in connection with
retirement and deferred compensation plans, some of which may qualify as
retirement programs under Sections 401, 403, or 408 of the Internal Revenue
Code. The Contracts are issued by Sun Life Assurance Company of Canada (U.S.)
(the "Company"), a wholly-owned subsidiary of Sun Life Assurance Company of
Canada, having its Principal Executive Offices at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181, telephone (617) 237-6030. 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.
Each Participant under a Contract will receive a Certificate evidencing such
Participant's coverage under the Contract. Only one Purchase Payment will be
accepted by the Company for each Certificate. A Purchase Payment must be at
least $5,000 and the prior approval of the Company is required before it will
accept a Purchase Payment in excess of $1,000,000.
The Participant may elect to have values under the Certificate accumulate on
a fixed basis in the Fixed Account, which pays interest at the applicable
Guaranteed Interest Rate(s) for the duration of the particular Guarantee
Period(s) selected by the Participant, or on a variable basis in Sun Life of
Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of
the Company, or divided between the Fixed Account and the Variable Account. The
assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account
uses its assets to purchase, at their net asset value, shares of a specific
series of MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund
registered under the Investment Company Act of 1940, and advised by
Massachusetts Financial Services Company, a subsidiary of the Company. Seven
series are available for investment under the Contracts: (1) Money Market
Series; (2) High Yield Series; (3) Capital Appreciation Series; (4) Government
Securities Series; (5) World Governments Series; (6) Total Return Series; and
(7) Managed Sectors Series. The Series Fund pays its investment adviser certain
fees charged against the assets of each Series. The value of the variable
portion, if any, of a Participant's Account and the amount of variable annuity
payments will vary to reflect the investment performance of the series of the
Series Fund selected by the Participant and the deduction of the contract
charges described under "How the Contract Charges Are Assessed" on page 22. For
more information about the Series Fund, see "The Series Fund" on page 14 and the
accompanying Series Fund prospectus.
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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 PROSPECTUS OF
MFS/SUN LIFE SERIES TRUST. YOU SHOULD RETAIN THIS PROSPECTUS FOR FUTURE
REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ANNUITY SERVICE CENTER, P.O. BOX
1024, BOSTON, MASSACHUSETTS 02103.
<PAGE>
If the Participant elects to have values accumulated on a fixed basis, the
Purchase Payment is allocated to one or more Guarantee Periods available in
connection with the Fixed Account with durations of from one to ten years, as
selected by the Participant. The Fixed Account is the general account of the
Company (See "The Fixed Account" on page 12). 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 and guarantees these amounts at various
interest rates (the "Guaranteed Interest Rates") for the duration of the
Guarantee Period elected by the Participant, subject to the imposition of any
applicable withdrawal charge, Market Value Adjustment, or account administration
fee. The Company may not change a Guaranteed Interest Rate for the duration of
the Guarantee Period; however, Guaranteed Interest Rates applicable to
subsequent Guarantee Periods cannot be predicted and will be determined at the
sole discretion of the Company (subject to the minimum guarantee of four percent
(4%)). 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 the Purchase Payment made
for a Certificate. However, if any part of a Participant's Account is withdrawn,
a withdrawal charge (contingent deferred sales charge) may be assessed by the
Company. This charge is intended to reimburse the Company for expenses relating
to the distribution of the Contracts and Certificates. During the first seven
Account Years up to ten percent (10%) of the Net Purchase Payment may be
withdrawn in each Account Year on a non-cumulative basis without the imposition
of the withdrawal charge by the Company. Amounts withdrawn in excess of such
amount (adjusted by an applicable Market Value Adjustment with respect to the
Fixed Account) will be subject to a withdrawal charge ranging from 6% to 0%. The
withdrawal charge is not imposed after the end of the seventh Account Year (See
"Withdrawal Charges" on page 19). In addition, for the first seven Account Years
the Company deducts a distribution expense charge at the end of each Valuation
Period equal to an annual rate of 0.15% of the daily net assets of the Variable
Account (the staff of the Securities and Exchange Commission deems this charge a
deferred sales charge). There is no deduction for the distribution expense
charge after the seventh Account Anniversary. In no event will the distribution
expense charges and the withdrawal charges assessed against a Participant's
Account exceed 9% of the Purchase Payment (See "Charges Against the Variable
Account for Mortality and Expense Risks and Distribution Expense Charges" on
page 23).
In addition, any cash withdrawal of amounts allocated to the Fixed Account,
other than a withdrawal effective within 30 days of the Expiration Date of the
applicable Guarantee Period, will be subject to a Market Value Adjustment. The
Market Value Adjustment will reflect the relationship between the Current Rate
(which is the Guaranteed Interest Rate currently declared by the Company for
Guarantee Periods equal to the balance of the Guarantee Period applicable to the
amount being withdrawn) and the Guaranteed Interest Rate applicable to the
amount being withdrawn. If the applicable Guaranteed Interest Rate is more than
.50% higher than the Current Rate, the application of the Market Value
Adjustment will result in a higher payment upon withdrawal. Otherwise, the
application of the Market Value Adjustment will result in a lower payment upon
withdrawal (See "Market Value Adjustment" on page 21).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Certificates used with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 20).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status"). For a discussion of cash withdrawals,
withdrawal charges and the Market Value Adjustment see "Cash Withdrawals,
Withdrawal Charges and Market Value Adjustment" on page 18.
On each Account Anniversary and on surrender of a Certificate for full value
the Company will deduct an annual account administration fee ("Account Fee") of
$30 from the Participant's Account. After the Annuity Commencement Date the
Account Fee will be deducted pro rata from each variable annuity payment made
during the year. This charge is to reimburse the Company for administrative
expenses related to the issuance and maintenance of the Contracts and
Certificates (See "Account Fee" on page 22).
2
<PAGE>
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Account for mortality and expense risks assumed by the Company
(See "Charges Against the Variable Account for Mortality and Expense Risks and
Distribution Expense Charges" on page 23).
Under certain circumstances the Company may substitute shares of another
registered open-end investment company or unit investment trust both for Series
Fund shares already purchased by the Variable Account and as the security to be
purchased in the future. Also, upon notice to the Owner, Participant or the
Payee during the annuity period, the Company may modify the contract 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-Accounts; or (iv) provides additional Variable Account and/or fixed
accumulation options (See "Substituted Securities" and "Change in Operation of
Variable Account" on page 29 and "Modification" on page 30).
In addition, the Contracts provide that the Company may change the
withdrawal charges, Account Fee, mortality and expense risk charges,
distribution expense charges, the tables used in determining the amount of the
first monthly variable annuity payment and fixed annuity payments 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 30).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit" on page 21).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, frequency of payments and the
Annuity Option (See "Annuity Provisions" on page 24).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes" on page 23).
Subject to certain conditions, and during the Accumulation Period, the
Participant may, without charge, transfer amounts among the Sub-Accounts or
Guarantee Periods available under the Contract. Transfers from or within the
Fixed Account will be subject to the Market Value Adjustment unless the transfer
is effective within 30 days of the Expiration Date of the amount transferred
(See "Transfer Privilege" on page 18).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other 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 27).
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. The Owner or
Participant 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 Series 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
Series Fund Shares" on page 28).
3
<PAGE>
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 29. Such reports, other than prospectuses, will not include the Company's
financial statements.
If a Participant is not satisfied with the Certificate it may be returned to
the Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Participant. When the Company receives the returned Certificate
it will be cancelled and the Participant's Account Value at the end of the
Valuation Period during which the Certificate was received by the Company will
be refunded. However, if applicable state law so requires, the full amount of
any Purchase Payment received by the Company will be refunded, the "free look"
period may be greater than ten days and alternative methods of returning the
Certificate may be acceptable.
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 Commission
(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 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, 1996
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, Assistant Vice President, Sun
Life Assurance Company of Canada (U.S.), 50 Milk Street, Boston, Massachusetts
02109, telephone (617) 348-9600.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Definitions 7
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Expense Summary 9
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Condensed Financial Information--Accumulation Unit Values 10
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Performance Data 11
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This Prospectus is a Catalog of Facts 11
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Uses of the Contract 11
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A Word About the Company, the Fixed Account, the Variable Account and the
Series Fund 12
The Company 12
The Fixed Account 12
The Variable Account 13
The Series Fund 14
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Purchase Payments and Contract Values During Accumulation Period 16
Purchase Payments 16
Participant's Account 16
Variable Accumulation Value 16
Fixed Accumulation Value 17
Guarantee Periods 17
Guaranteed Interest Rates 18
Transfer Privilege 18
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Cash Withdrawals, Withdrawal Charges and Market Value Adjustment 18
Cash Withdrawals 18
Withdrawal Charges 19
Section 403(b) Annuities 20
Market Value Adjustment 21
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Death Benefit 21
Death Benefit Provided by the Contract 21
Election and Effective Date of Election 21
Payment of Death Benefit 22
Amount of Death Benefit 22
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How the Contract Charges Are Assessed 22
Account Fee 22
Premium Taxes 23
Charges Against the Variable Account for Mortality and Expense Risks
and Distribution Expense Charges 23
Withdrawal Charges 24
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Annuity Provisions 24
Annuity Commencement Date 24
Election--Change of Annuity Option 24
Annuity Options 25
Determination of Annuity Payments 26
Fixed Annuity Payments 26
Variable Annuity Payments 26
Variable Annuity Unit Value 26
Exchange of Variable Annuity Units 27
Annuity Payment Rates 27
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</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Other Contractual Provisions 27
Payment Limits 27
Designation and Change of Beneficiary 27
Exercise of Contract Rights 27
Change of Ownership 28
Death of Participant 28
Voting of Series Fund Shares 28
Periodic Reports 29
Substituted Securities 29
Change in Operation of Variable Account 29
Splitting Units 30
Modification 30
Discontinuance of New Participants 30
Custodian 30
Right to Return 30
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Federal Tax Status 31
Introduction 31
Tax Treatment of the Company and the Variable Account 31
Taxation of Annuities in General 31
Qualified Retirement Plans 33
Pension and Profit-Sharing Plans 33
Tax-Sheltered Annuities 34
Individual Retirement Accounts 34
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Administration of the Contracts 34
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Distribution of the Contracts 34
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Additional Information About the Company 35
Selected Financial Data 35
Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Liquidity 38
Reinsurance 38
Reserves 38
Investments 39
Competition 39
Employees 39
Properties 39
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The Company's Directors and Executive Officers 39
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State Regulation 42
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Legal Proceedings 43
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Legal Matters 43
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Accountants 43
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Registration Statements 43
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Financial Statements 43
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Appendix A--Variable Accumulation Unit Value, Variable Annuity Unit Value
and Variable Annuity Payment Calculations 81
Appendix B--State Premium Taxes 81
Appendix C--Withdrawals, Withdrawal Charges and the Market Value
Adjustment 82
Appendix D--Calculation of Performance Data; Advertising and Sales
Literature 84
</TABLE>
6
<PAGE>
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 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 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 PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
*ANNUlTANT: The person or persons named in the Application and on whose
life the first annuity payment is to be made. The Participant may not designate
a "Co-Annuitant" unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the Contract which are based
on the death of the "Annuitant" will be based on the date of death of the last
survivor of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
survivor of the persons so named. Collectively, these persons are referred to in
this Contract as "Annuitants." The Participant is not permitted to name a
"Co-Annuitant" under a Qualified Contract.
*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 amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under this Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Certificate and, for Non-Qualified Contracts, who is
the "designated beneficiary" for purposes of Section 72(s) of the Internal
Revenue Code in the event of the Participant's death.
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.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for this Contract.
DATE OF COVERAGE: The date on which a 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 AMOUNT: Any portion of a Participant's Account Value allocated to
a particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited. This period may be one to ten years, as elected by the Participant.
- ------------------------
*As specified in the Application, unless changed.
7
<PAGE>
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
ISSUE DATE: The date on which the Contract becomes effective.
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. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in the Contract and in whose name or names the Contract is issued. 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 assets of a retirement plan, but the
term "Owner", as used herein, shall refer to the organization entering into the
Contract.
PARTICIPANT: The person named in the Certificate who is entitled to
exercise all rights and privileges of ownership under the Certificate, except as
reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
the Net Purchase Payment is credited.
PARTICIPANT'S ACCOUNT VALUE: The Variable Accumulation Value, if any, plus
the Fixed Accumulation Value, if any, of a Participant's Account for any
Valuation Period.
PAYEE: A recipient of payments under the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
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,
or 408 of the Internal Revenue Code of 1986, as amended.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
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 ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
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 Application, unless changed.
8
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Example is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as
of the Series Fund. 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 Series Fund's prospectus. In addition to the
expenses listed below, premium taxes may be applicable.
<TABLE>
<CAPTION>
CAPITAL
MONEY APPRE- GOVERNMENT WORLD TOTAL MANAGED
PARTICIPANT MARKET HIGH YIELD CIATION SECURITIES GOVERNMENTS RETURN SECTORS
TRANSACTION EXPENSES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
- ----------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases.... 0 0 0 0 0 0 0
Deferred Sales Load (as a
percentage of Participant's
Account Value withdrawn) (1)
Account Year
1.............................. 6% 6% 6% 6% 6% 6% 6%
2.............................. 6% 6% 6% 6% 6% 6% 6%
3.............................. 5% 5% 5% 5% 5% 5% 5%
4.............................. 5% 5% 5% 5% 5% 5% 5%
5.............................. 4% 4% 4% 4% 4% 4% 4%
6.............................. 4% 4% 4% 4% 4% 4% 4%
7.............................. 3% 3% 3% 3% 3% 3% 3%
thereafter..................... 0% 0% 0% 0% 0% 0% 0%
Exchange fee (2)................... 0 0 0 0 0 0 0
<CAPTION>
ANNUAL ACCOUNT FEE $30 Per Participant's Account
- -----------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of average
separate account assets)
Mortality and Expense Risk Fees.... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Distribution Expense Charge (3).... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Other Fees and Expenses of the
Separate Account................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual
Expenses......................... 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
<CAPTION>
SERIES FUND ANNUAL EXPENSES
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of Series Fund
average net assets)
Management Fees.................... 0.50% 0.75% 0.75% 0.55% 0.75% 0.68% 0.75%
Other Expenses..................... 0.06% 0.09% 0.05% 0.08% 0.15% 0.04% 0.07%
Total Series Fund Annual
Expenses......................... 0.56% 0.84% 0.80% 0.63% 0.90% 0.72% 0.82%
</TABLE>
- ------------------------
(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 the entire Participant's Account Value
may be withdrawn free of the withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Distribution Expense Charge is imposed only during the first seven
Account Years. This charge may be deemed a deferred sales charge.
9
<PAGE>
EXAMPLE
If you surrender your Certificate 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 $ 74 $ 107 $ 142 $ 229
High Yield Series 77 115 156 257
Capital Appreciation Series 76 114 154 253
Government Securities Series 75 109 145 236
World Governments Series 77 117 159 264
Total Return Series 76 111 150 245
Managed Sectors Series 77 114 155 255
</TABLE>
If you do not surrender your Certificate, 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 $ 20 $ 62 $ 106 $ 229
High Yield Series 23 70 120 257
Capital Appreciation Series 22 69 118 253
Government Securities Series 21 64 109 236
World Governments Series 23 72 123 264
Total Return Series 22 66 114 245
Managed Sectors Series 23 69 119 255
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements included elsewehere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------------------------
1989* 1990 1991 1992 1993 1994 1995
------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.1193 $ 9.0168 $ 12.5296 $ 14.0559 $ 16.3574 $ 15.5512
End of period $ 10.1193 $ 9.0168 $ 12.5296 $ 14.0559 $ 16.3574 $ 15.5512 $ 20.6225
Units outstanding end of period 264,632 3,677,247 7,517,358 8,168,037 7,272,302 6,184,731 6,615,207
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.0333 $ 10.7567 $ 12.2849 $ 12.9408 $ 13.8738 $ 13.3872
End of period $ 10.0333 $ 10.7567 $ 12.2849 $ 12.9408 $ 13.8738 $ 13.3872 $ 15.5323
Units outstanding end of period 179,505 2,723,676 5,194,019 4,761,049 4,708,841 4,235,203 3,535,152
HIGH YIELD SERIES
Unit Value:
Beginning of period $ 10.0000 $ 9.8487 $ 8.3800 $ 12.1924 $ 13.8294 $ 16.0549 $ 15.4801
End of period $ 9.8487 $ 8.3800 $ 12.1924 $ 13.8294 $ 16.0549 $ 15.4801 $ 17.8678
Units outstanding end of period 24,369 247,285 795,298 1,031,001 1,087,265 839,825 1,068,412
MANAGED SECTORS SERIES
Unit Value:
Beginning of period $ 10.0000 $ 9.8911 $ 8.7393 $ 13.9725 $ 14.6738 $ 15.0587 $ 14.5653
End of period $ 9.8911 $ 8.7393 $ 13.9725 $ 14.6738 $ 15.0587 $ 14.5653 $ 18.9987
Units outstanding end of period 126,499 1,410,497 2,409,951 2,768,568 2,431,072 2,066,642 2,150,361
MONEY MARKET SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.0971 $ 10.7366 $ 11.2031 $ 11.4176 $ 11.5560 $ 11.8185
End of period $ 10.0971 $ 10.7366 $ 11.2031 $ 11.4176 $ 11.5560 $ 11.8185 $ 12.2910
Units outstanding end of period 221,039 5,562,419 6,380,774 4,115,845 3,081,737 3,873,044 3,453,907
TOTAL RETURN SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.1677 $ 10.2969 $ 12.3469 $ 13.2211 $ 14.7834 $ 14.2495
End of period $ 10.1677 $ 10.2969 $ 12.3469 $ 13.2211 $ 14.7834 $ 14.2495 $ 17.8165
Units outstanding end of period 391,244 8,211,655 15,599,909 16,375,301 15,806,723 14,225,539 13,106,997
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period $ 10.0000 $ 10.2725 $ 11.4930 $ 13.0187 $ 12.8985 $ 15.1215 $ 14.2437
End of period $ 10.2725 $ 11.4930 $ 13.0187 $ 12.8985 $ 15.1215 $ 14.2437 $ 16.2514
Units outstanding end of period 20,710 748,280 2,220,300 2,205,650 2,300,611 1,967,375 1,730,002
<CAPTION>
1996
----------
<S> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period $ 20.6225
End of period $ 24.7064
Units outstanding end of period 6,316,305
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period $ 15.5323
End of period $ 15.5644
Units outstanding end of period 3,362,650
HIGH YIELD SERIES
Unit Value:
Beginning of period $ 17.8678
End of period $ 19.7545
Units outstanding end of period 1,204,380
MANAGED SECTORS SERIES
Unit Value:
Beginning of period $ 18.9987
End of period $ 22.0312
Units outstanding end of period 2,202,213
MONEY MARKET SERIES
Unit Value:
Beginning of period $ 12.2910
End of period $ 12.7175
Units outstanding end of period 3,859,738
TOTAL RETURN SERIES
Unit Value:
Beginning of period $ 17.8165
End of period $ 20.0405
Units outstanding end of period 12,461,003
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period $ 16.2514
End of period $ 16.7734
Units outstanding end of period 1,460,289
</TABLE>
- ------------------------
* From July 13, 1989 (date of commencement of operations) to December 31, 1989.
10
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal and contract charges. Results calculated without withdrawal
and/or contract charges will be higher. Performance figures used by the Variable
Account are based on the actual historical performance of the Series Fund for
specified periods, and the figures are not intended to indicate future
performance. The Variable Account may also from time to time compare its
investment performance to various unmanaged indices or other variable annuities
and may refer to certain rating and other organizations in its marketing
materials. More detailed information on the computations is set forth in
Appendix D.
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. It describes its uses and objectives, its benefits and
costs, and the rights and privileges of the Owner and the Participant, as
applicable. It also contains information about the Company, the Variable
Account, the Fixed Account and the Series Fund. 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 the Purchase Payment, 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
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 Participant bears the
risk that the Guaranteed Interest Rate to be credited on amounts allocated to
the Fixed Account may not exceed the minimum guaranteed rate of 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(b), Section 408(c) or Section 408(k) of the Internal Revenue Code,
however, the Company may discontinue offering new Contracts in connection with
certain types of qualified plans. 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); or (4)
individual retirement accounts, including 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
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law.
A Contract is issued to the Owner covering all Participants. Each
Participant receives a Certificate which evidences his or her participation
under the Contract. For the purposes of determining benefits under the Contract,
a Participant's Account is established for each Participant.
11
<PAGE>
A WORD ABOUT THE COMPANY,
THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE SERIES FUND
THE COMPANY
The Company is a stock life insurance company 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 and
offers in New York contracts similar to the Contract offered by this Prospectus.
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, 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 ("Sun Life (Canada)"), 150 King Street West, Toronto, Ontario, Canada.
Sun Life (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. It is expected that as of May 1, 1997, all of the
outstanding common stock of the Company will be held by a wholly-owned
subsidiary of Sun Life (Canada), Sun Life of Canada (U.S.) Holdings, Inc., which
has been formed to serve as the holding company for the U.S. subsidiaries of Sun
Life (Canada) and for general corporate financing purposes.
THE 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. A Purchase Payment will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected by the Participant at the time of the establishment of a
Participant's Account. In addition, all or part of the Participant's Account
Value may be transferred to Guarantee Periods available under the Contract as
described under "Transfer Privilege". Assets supporting amounts allocated to
Guarantee Periods become part of the Company's general account assets and are
available to fund the claims of all classes of customers of the Company,
including claims for benefits under Certificates.
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 the assets of 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
12
<PAGE>
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 contract.
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 Participant's 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 Participant's 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 and distribution 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 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 4%
per year, compounded annually, to amounts allocated to the Fixed Account under
the Contract. The Company may credit interest at a rate in excess of 4% per
year; however, the Company is not obligated to credit any interest in excess of
4% per year. There is no specific formula for the determination of excess
interest credits. Such credits, if any, will be determined by the Company based
on information as to expected investment yields. Some of the factors that the
Company may consider in determining whether to credit interest to amounts
allocated to the Fixed Account and the amount thereof, are: general economic
trends; rates of return currently available and anticipated on the Company's
investments; regulatory and tax requirements; and competitive factors. 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 Guarantee
Periods in volatile interest rate environments. ANY INTEREST CREDITED TO AMOUNTS
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF 4% PER YEAR WILL BE DETERMINED IN
THE SOLE DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE RISK THAT
INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT EXCEED THE
MINIMUM GUARANTEE OF 4% FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus among its various
policyholders and contract owners and to its sole stockholder.
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 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 Series
Fund shares, its investment performance reflects the investment performance of
the Series Fund. Values of Series Fund shares held by the Variable
13
<PAGE>
Account fluctuate and are subject to the risks of changing economic conditions
as well as the risk inherent in the ability of the Series Fund's management to
make necessary changes in its portfolios to anticipate changes in economic
conditions. Therefore, the Participant 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 Purchase
Payment 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 F (the "Variable Account") was
established by the Company as a separate account on July 13,1989 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 shares of a specific series of the Series
Fund. All amounts allocated to the Variable Account will be used to purchase
Series Fund shares as designated by the Participant at their net asset value.
Any and all distributions made by the Series Fund 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
withdrawals, annuity payments, death benefits, Account Fees, contract charges
against the assets of the Variable Account for the assumption of mortality and
expense risks, distribution expense risks, and any applicable taxes will, in
effect, be made by redeeming the number of Series Fund shares at their net asset
value equal in total value to the amount to be deducted. The Variable Account
will be fully invested in Series Fund shares at all times.
THE SERIES FUND
MFS/Sun Life Series Trust (the "Series Fund") is an open-end investment
management company registered under the Investment Company Act of 1940.
Currently shares of the Series Fund are also sold to other separate accounts
established by the Company and Sun Life Insurance and Annuity Company of New
York in connection with individual and group variable annuity contracts and
variable life insurance contracts. In the future, shares of the Series Fund may
be sold to other separate accounts established by the Company or its affiliates
to fund other variable annuity or variable life insurance contracts. The Company
and its affiliates will be responsible for reporting to the Series Fund's Board
of Trustees any potential or existing conflicts between the interests of
variable annuity contract owners/participants and the interests of owners of
variable life insurance contracts that provide for investment in shares of the
Series Fund. The Board of Trustees, a majority of whom are not "interested
persons" of the Series Fund, as that term is defined in the Investment Company
Act of 1940, also intends to monitor the Series Fund to identify the existence
of any such irreconcilable material conflicts and to determine what action, if
any, should be taken by the Series Fund and/or the Company and its affiliates
(see "Management of the Series Fund" in the Series Fund prospectus).
14
<PAGE>
The Series Fund is composed of twenty independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in twenty series, each corresponding to one of the
portfolios; however, the Contracts provide for investment only in shares of the
seven series of the Series Fund described below. Additional portfolios may be
added to the Series Fund which may or may not be available for investment by the
Variable Account.
(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 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
Fund 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.
(5) WORLD GOVERNMENTS SERIES ("WGS") will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
(6) TOTAL RETURN SERIES ("TRS") will seek primarily to obtain above-average
income (compared to a portfolio entirely invested in equity securities)
consistent with prudent employment of capital; its secondary objective is to
take advantage of opportunities for growth of capital and income. Assets will be
allocated and reallocated from time to time between money market, fixed income
and equity securities. Under normal market conditions, at least 25% of the Total
Return Series' assets will be invested in fixed income securities and at least
40% and no more than 75% of its assets will be invested in equity securities.
(7) MANAGED SECTORS SERIES ("MSS") will seek capital appreciation by varying
the weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
The investment adviser of the Series Fund, Massachusetts Financial Services
Company ("MFS"), is paid fees by the Series Fund for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is a subsidiary of
the Company. MFS also serves as investment adviser to each of the funds in the
MFS Family of Funds, and to certain other investment companies established or
distributed by MFS and/ or the Company. MFS Institutional Advisors, Inc., a
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. 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 more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund and in the Series
Fund's Statement of Additional Information.
15
<PAGE>
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. The Company will not accept a Purchase Payment to be allocated
to a Participant's Account which is less than $5,000. In addition, the prior
approval of the Company is required before it will accept a Purchase Payment in
excess of $1,000,000. Only one Purchase Payment may be made per Certificate.
A completed Application and the Purchase Payment are forwarded to the
Company for acceptance. Upon acceptance, the Contract and Certificate(s), as
applicable, are issued to the Owner and/or Participant(s), respectively, and the
Purchase Payment is then credited to the Participant's Account. A Purchase
Payment must be applied within two business days of receipt by the Company of a
completed Application. The Company may retain the Purchase Payment for up to
five business days while attempting to complete an incomplete Application. If
the Application cannot be made complete within five business days, the
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 business days.
(2) ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered.
(3) ALLOCATION OF NET PURCHASE PAYMENT
The Net Purchase Payment is that portion of the Purchase Payment which
remains after deduction of any applicable premium or similar tax. The Net
Purchase Payment will be allocated either to Guarantee Periods available in
connection with 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 particular Participant's Application.
PARTICIPANT'S ACCOUNT
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
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.
(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 applied by the Company to the Participant's Account.
(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
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<PAGE>
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) 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 Series 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 Series Fund on 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 Series Fund share held in the
Sub-Account determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and distribution expense risk.
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 Guarantee Amounts
credited to the Participant's Account for such Valuation Period.
GUARANTEE PERIODS
The Participant may elect one or more Guarantee Period(s) with durations of
from one to ten years. The period(s) elected will determine the Guaranteed
Interest Rate(s). The Purchase Payment, or the portion thereof (or the amount
transferred in accordance with the Transfer Privilege) allocated to a particular
Guarantee Period, less any applicable premium or similar taxes and any amounts
subsequently withdrawn, will earn interest at the Guaranteed Interest Rate
during the Guarantee Period. Initial Guarantee Periods begin on the Date of
Coverage or, in the case of a transfer, on the effective date of the transfer,
and end the number of calendar years in the Guarantee Period elected from the
end of the calendar month in which the amount was allocated to the Guarantee
Period (the "Expiration Date"). Subsequent Guarantee Periods begin on the first
day following the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) will be referred to herein as a "Guarantee Amount". Interest will be
credited daily at a rate equivalent to the compound annual rate. As a result of
renewals and transfers of portions of the Participant's Account Value described
under "Transfer Privilege" below, which will begin new Guarantee Periods,
Guarantee Amounts allocated to Guarantee Periods of the same duration may have
different Expiration Dates. Thus each Guarantee Amount will be treated
separately for purposes of determining any Market Value Adjustment (see "Market
Value Adjustment").
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous
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Guarantee Period will commence automatically at the end of the previous
Guarantee Period unless the Company receives, prior to the end of such Guarantee
Period, a written election by the Participant of a different Guarantee Period
from among those being offered by the Company at such time, or instructions to
transfer all or a portion of the Guarantee Amount to one or more Sub-Accounts in
accordance with the Transfer Privilege Provision.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each of the ten Guarantee Periods. Current Guaranteed Interest 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 duration of the respective
Guarantee Periods. However, Participant's Account Value withdrawn from the Fixed
Account will be subject to any applicable withdrawal charge and Account Fee and
may be subject to a Market Value Adjustment on withdrawal or surrender (See
"Market Value Adjustment").
The Guaranteed Interest Rate will not be less than 4% per year compounded
annually. The Company has no specific formula for determining the rate of
interest that it will declare as a Guaranteed Interest Rate, as these rates will
be reflective of interest rates available on the types of debt instruments in
which the Company intends to invest amounts allocated to the Fixed Account (See
"The Fixed Account"). In addition, the Company's management may consider other
factors in determining Guaranteed Interest Rates for a particular duration
including: regulatory and tax requirements; sales commissions and administrative
and distribution expenses borne by the Company; general economic trends; and
competitive factors. The Participant bears the risk that the Guaranteed Interest
Rate to be credited on amounts allocated to the Fixed Account may not exceed the
minimum guaranteed rate of 4% for any Guarantee Period.
TRANSFER PRIVILEGE
During the Accumulation Period the Participant may, upon written request
received by the Company, transfer all or part of the Participant's Account Value
to one or more Sub-Accounts or Guarantee Periods available under the Contract,
subject to the following conditions: (1) not more than 12 transfers may be made
in any Account Year; (2) the amount being transferred may not be less than
$1,000, unless the total Participant's Account Value attributable to a
Sub-Account or Guarantee Amount is being transferred; and (3) any Participant's
Account Value remaining in a Sub-Account or Guarantee Amount may not be less
than $100. In addition, transfers of all or a portion of a Guarantee Amount will
be subject to the Market Value Adjustment described below unless the transfer is
effective within 30 days prior to the Expiration Date applicable to the
Guarantee Amount; and transfers involving Variable Accumulation Units shall be
subject to such terms and conditions as may be imposed by the Series Fund. A
transfer generally will be effective on the date the request for transfer is
received by the Company. Under current law, there will not be any tax liability
to the Participant if a Participant makes a transfer.
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant 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. Amounts
withdrawn may not be redeposited.
The Participant may request a full surrender or 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, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the
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<PAGE>
Account Fee, then such partial withdrawal will be treated as a full surrender.
The Account Fee and any applicable Market Value Adjustment will be deducted from
the Participant's Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro-rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT,
WILL BE SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account at the end
of the Valuation Period during which the cash withdrawal is effective.
The Company, upon request, will advise the 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 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 Series Fund is not reasonably practicable or (b) it is not reasonably
practicable to determine the value of the net assets of the Series Fund or (3)
for such other periods as the Securities and 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 months from the date written request for such withdrawal is
received by the Company. The Company is not required to pay interest on amounts
so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, and 408 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 is made, a withdrawal charge (contingent deferred sales
charge) may be assessed by the Company. During the first seven Account Years, up
to 10% of the Net Purchase Payment may be withdrawn in each Account Year on a
non-cumulative basis without the imposition of the withdrawal charge. Amounts
withdrawn from a Participant's Account in excess of such amount (adjusted by any
applicable Market Value Adjustment) will be subject to the withdrawal charge
assessed against such excess amount as follows:
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<TABLE>
<CAPTION>
ACCOUNT YEAR WITHDRAWAL CHARGE
- ------------- -------------------------
<S> <C>
1 6%
2 6%
3 5%
4 5%
5 4%
6 4%
7 3%
thereafter 0%
</TABLE>
The withdrawal charge is not imposed after the end of the seventh Account
Year, nor is the withdrawal charge imposed upon payment of the death benefit or
upon amounts applied to purchase an annuity.
The withdrawal charge is not assessed with respect to a Participant's
Account established for the personal account of an employee of the Company or of
any of its affiliates, or of a licensed insurance agent engaged in distributing
the Contracts.
In no event shall the aggregate withdrawal charges (together with the
distribution expense charge described under "How the Contract Charges Are
Assessed") assessed against a Participant's Account exceed 9% of the Purchase
Payment. The Company may, upon notice to the Owner, modify the withdrawal
charges provided that such modification shall apply only to Participant's
Accounts established after the effective date of such modification (See
"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 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 Participant 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 Participant must have
an immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contract (See "Federal
Tax Status").
Under the terms of a particular Section 403(b) plan, the Participant may be
entitled to transfer all or a portion of the Participant's Account Value to one
or more alternative funding options. Participants should consult the documents
governing their plan and the person who administers the plan for information as
to such investment alternatives.
With respect to these restrictions on withdrawals from the Variable Account,
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".
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MARKET VALUE ADJUSTMENT
Any cash withdrawal of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount, will be
subject to a Market Value Adjustment ("MVA") (for this purpose, transfers,
distributions on the death of a Participant and amounts applied to purchase an
annuity are treated as cash withdrawals). The MVA will be applied to the amount
being withdrawn after deduction of any applicable Account Fee and before
deduction of any applicable withdrawal charge.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Guarantee Amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. If the applicable Guaranteed Interest Rate is
more than .50% higher than the Current Rate, the application of the MVA will
result in a higher payment upon withdrawal. Otherwise, the application of the
MVA will result in a lower payment upon withdrawal.
The Market Value Adjustment is determined by the application of the
following formula:
1 + I N/12
( -----------)
1 + J + .005 - 1
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the Market Value Adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the Market Value Adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the Market Value Adjustment, rounded to the next
higher number of complete years (the "Current Rate"), and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the Market Value Adjustment.
See Appendix C for examples of the application of the Market Value
Adjustment.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Annuitant. If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a single cash payment;
or (b) to have the death benefit 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
Participant will become effective on the date it is received by the Company. For
the purposes of the Payment of Death Benefit and Amount of Death Benefit
sections below, any election of the method of settlement of the death benefit by
the Participant which is in effect on
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<PAGE>
the date of death of the Annuitant will be deemed effective on the date Due
Proof of Death of the Annuitant 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 the Annuitant is received by the
Company. If an election by the Beneficiary is not received by the Company within
60 days following the date due proof of the death of the Annuitant is received
by the Company, the Beneficiary will be deemed to have elected a cash payment as
of the last day of the 60 day period.
In all cases, no 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 (see "Other Contractual
Provisions -- Death of Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer 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 Participant or, if the Annuitant was the Participant, to the estate of the
deceased Participant/Annuitant, payment will be made within seven days of the
date due proof of the death of the Annuitant, the Participant and/or the
designated Beneficiary, as applicable, is received by the Company. If settlement
under one or more of the Annuity Options is elected the Annuity Commencement
Date will be the first day of the second calendar month following the effective
date or the deemed effective date of the election, and the Participant's Account
will be maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the effective date or deemed effective
date of the death benefit election and is equal to the greatest of (1) the
Participant's Account Value for the Valuation Period during which the death
benefit election is effective or is deemed to become effective; (2) the Purchase
Payment made with respect to the Participant's Account, minus the sum of all
partial withdrawals; (3) the amount that would have been payable in the event of
a full surrender of the Participant's Account on the date the death benefit
election is effective or is deemed to become effective; and (unless prohibited
by applicable state law) (4) the Participant's Account Value on the Seven Year
Anniversary immediately preceding the date the death benefit election is
effective or is deemed to become effective, adjusted for any subsequent partial
withdrawals.
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 distribution expense charges; and (3) as withdrawal charges (contingent
deferred sales charges). In addition, certain deductions are made from the
assets of the Series Fund for investment management fees and expenses. These
fees and expenses are described in the Series Fund's Prospectus and Statement 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") equal
to the lesser of $30 and 2% of the Participant's Account Value to reimburse it
for administrative expenses relating to the issue and maintenance of the
Contract, the Certificate 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 on a pro rata basis from amounts allocated to each
Guarantee Period and each Sub-Account in which the Participant's Account is
invested at the time of such deduction. On the Annuity 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
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<PAGE>
before the Annuity Commencement Date. After the Annuity Commencement, the
Account Fee will be deducted in equal amounts from each variable annuity payment
made during the year. No deduction will be made from fixed annuity payments.
The Contract provides that the Company may modify the Account Fee provided
that such modification shall apply only with respect to Participant's 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 on or
after the date they are incurred.
CHARGES AGAINST THE VARIABLE ACCOUNT FOR MORTALITY AND EXPENSE RISKS AND
DISTRIBUTION EXPENSE CHARGES
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 the 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 Participant's
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 assessed under 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 at an effective annual rate of 1.25%. 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) and the distribution
expense charge described below. However, the withdrawal charges and distribution
expense 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.
The Company assumes the risk that withdrawal charges assessed under the
Contracts may be insufficient to compensate the Company for the costs of
distributing the Contracts. For assuming such risk the Company makes a deduction
from the Variable Account at the end of each Valuation Period for the first
seven Account Years (during both the accumulation period and, if applicable,
after annuity payments begin) at an effective annual rate of 0.15% (the staff of
the Securities and Exchange Commission deems this charge a deferred sales
charge). No deduction is made after the seventh Account Anniversary. If the
distribution expense charge is insufficient to cover the actual risk assumed,
the Company will bear the loss; however, if the charge is more than sufficient,
any excess will be profit to the Company and would be available for any proper
corporate purpose. In no event will the distribution expense charges and the
withdrawal charges assessed against a Participant's Account exceed 9% of the
Purchase Payment.
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The Contract provides that the Company may modify the mortality and expense
risk and distribution expense charges; however, such modification shall apply
only with respect to Participant's Accounts established after the effective date
of such modification (See "Modification"). For the year ended December 31, 1996,
mortality and expense risk and distribution expense charges were the only
expenses of the Variable Account.
WITHDRAWAL CHARGES
No deduction for sales charges is made from a Purchase Payment. However, a
withdrawal charge (contingent deferred sales charge) of up to 6% of certain
amounts withdrawn, when applicable, will be used to cover certain expenses
relating to the sale of the Contract and Certificates thereunder, 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 6.86% of the
Purchase Payment (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 Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 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 Annuitant'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 or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Amount." 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 may be issued in connection
with retirement plans which meet the requirements of Section 401, 403 or 408 of
the Internal Revenue Code, as well as certain non-qualified plans, reference
should be made to the terms of the particular plan for any limitations or
restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 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. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no
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election is in effect on the 30th day prior to the Annuity Commencement Date,
then the portion of the adjusted value of the Participant's Account to be
applied to provide a Fixed Annuity and a Variable Annuity 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 Participant or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of a 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
Participant may surrender a Certificate 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 applicable, will be
applied.
Annuity Options A, B, C and D are available to provide either a Fixed
Annuity or a Variable Annuity. Annuity Option E is 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.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that if there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the amounts due
under this option in one sum. The discounted value for variable annuity payments
will be based on interest compounded annually at the assumed interest rate of
4%. The discounted value for payments being made on a fixed basis will be based
on the interest rate initially used by the Company to determine the amount of
each payment.
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.
* Annuity Option D. Monthly Payments for a Specified Period
Certain: 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,
as described under Annuity Option B above, in certain circumstances the
discounted value of the remaining payments, if any, will be calculated and paid
in one sum.
* 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
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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than 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
Participant's Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date, 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, plus or minus any
applicable Market Value Adjustment and minus any applicable premium or similar
taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on a minimum guaranteed interest rate of 4% per year, or, if more favorable to
the Payee(s), in accordance with the Annuity Payment 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 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 at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date. The number of Annuity Units
of each particular Sub-Account credited 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 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 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 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.
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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 Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other 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 between Sub-Accounts. 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 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 4%; and (b) the monthly fixed annuity payment, when
this payment is based on the minimum guaranteed interest rate of 4% per year.
These rates may be changed by the Company with respect to Participant's 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 1983
Individual Annuitant Mortality Table.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
Only one Purchase Payment may be made per Certificate. The single Purchase
Payment credited to each Participant's Account must be at least $5,000. In
addition, the prior approval of the Company is required before it will accept a
Purchase Payment in excess of $1,000,000.
DESIGNATION AND CHANGE OF BENEFICIARY
The beneficiary designation contained in the Application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant and, in the case of a Non-
Qualified Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received the change or revocation will be effective as of
the date on which the beneficiary designation or revocation was signed, 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 a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
EXERCISE OF CONTRACT RIGHTS
The Contract shall belong to the Owner. All Contract rights and privileges
may be expressly reserved by the Owner, failing which, each Participant shall be
entitled to exercise such rights and privileges in connection with such
Participant's Certificate. In any case, such rights and privileges can be
exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
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CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Owner; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement or
deferred compensation plans for which a Qualified Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract evidenced by that Participant's Certificate. A
change of ownership will not be binding upon the Company until written
notification is received by the Company. When such notification is so received,
the change will be effective as of the date on which the request for change was
signed by the Owner or Participant, as appropriate, 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.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant
and before the Annuity Commencement Date, the Participant's Account Value, plus
or minus any applicable Market Value Adjustment, must be distributed to the
Beneficiary, if then alive, either (1) within five years after the date of death
of the Participant, or (2) over some period not greater than the life or
expected life of the Beneficiary, with annuity payments beginning within one
year after the date of death of the Participant. The person named as the
Participant's Beneficiary shall be considered the designated beneficiary for the
purposes of Section 72(s) of the Internal Revenue Code and if no person then
living has been so named, then the Annuitant shall automatically be the
designated beneficiary for this purpose.
These mandatory distribution requirements will not apply when the designated
beneficiary is the spouse of the Participant, if the spouse elects to continue
the Certificate in the spouse's own name, as Participant. When the Participant
was also the Annuitant, the surviving spouse (if the designated beneficiary) may
elect to be named as both Participant and Annuitant and continue the
Certificate, but if that election is not made, the Death Benefit provision of
the Contract shall then be controlling. In all other cases where the Participant
and the Annuitant are the same individual, the Death Benefit provision of the
Contract controls.
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed at
least as rapidly as the method of distribution then in effect.
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.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
VOTING OF SERIES FUND SHARES
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. The Owner or
Participant 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 Series 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, Participants and Payees.
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Owners of Qualified Contracts 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 may be entitled to
instruct the Owners as to how to instruct the Company to vote the Series Fund
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 Series 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 Series 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 person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of the Series Fund. The number of Series 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 90 days prior to each such meeting. Prior to the
Annuity Commencement Date, the number of Series 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 Participant's Account by the net asset value of one Series Fund share as of
the same date. On or after the Annuity Commencement Date, the number of Series
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 Sub-Account with respect to
the particular Payee by the net asset value of a Series Fund share as of the
same date. After the Annuity Commencement Date, the number of Series 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
During the Accumulation Period the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such account,
which statement shall be accurate as of a date not more than two 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
Series Fund as may be required by the Investment Company Act of 1940 and the
Securities Act of 1933. The Company will also send such statements reflecting
transactions in the Participant's Account as may be required by applicable laws,
rules and regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all Series of the Series Fund 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 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 or unit investment trust may be
substituted both for Series 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 Series Fund
shares held by the Sub-Accounts, the Variable Account
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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, 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 and Participant(s) (or 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 in
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, distribution expense 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's 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 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's Accounts established prior to the effective date of such
modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under a Contract. Such limitation or discontinuance shall have no
effect on rights or benefits with respect to any Participant's Accounts
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 Series Fund shares at net asset value in connection with
amounts allocated to the Sub-Accounts in accordance with the instructions of the
Participant and redeemed Series 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
If the Participant is not satisfied with the Certificate it may be returned
by mailing it to the Company at the Annuity Service Mailing Address on the cover
of this Prospectus within ten days after it was delivered to the Participant.
When the Company receives the returned Certificate it will be cancelled and the
Participant's Account Value at the end of the Valuation Period during which the
Certificate was received by the Company will be refunded to the Participant.
However, if applicable state law so requires, the full amount of any Purchase
Payment received by the Company will be refunded, the "free look" period may be
greater than ten days and alternative methods of returning the Certificate may
be acceptable.
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With respect to Individual Retirement Accounts, under the Employee
Retirement Income Security Act of 1974 ("ERlSA") a Participant 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 Participant is furnished
with such disclosure statement before the seventh day preceding the date the
Individual Retirement Account is established, the Participant will not have any
right of revocation. If the disclosure statement is furnished after the seventh
day preceding the establishment of the Individual Retirement Account, then the
Participant may give a notice of revocation to the Company at any time within
seven days after the Date of Coverage. Upon such revocation, the Company will
refund the Purchase Payment made by the Participant. The foregoing right of
revocation with respect to an Individual Retirement Account is in addition to
the return privilege set forth in the preceding paragraph. The Company will
allow a participant establishing an Individual Retirement Account a "ten day
free-look," notwithstanding the provisions of ERISA.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts and related Certificates 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(b), 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 may depend upon the type of retirement plan for which
the Contract or Certificate is purchased and a number of different factors. This
discussion is general in nature, is based upon the Company's understanding of
current federal income tax laws, and is not intended as tax advice. Congress has
the power to enact legislation affecting the tax treatment of annuity contracts,
and such legislation could be applied retroactively to Contracts purchased
before the date of enactment. Also, because the Internal Revenue Code, as
amended, is not in force in the Commonwealth of Puerto Rico, some references in
this discussion will not apply to Contracts or Certificates issued in Puerto
Rico. Any person contemplating the purchase of a Contract or Certificate 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
CERTIFICATE OR ANY TRANSACTION INVOLVING THE CONTRACTS OR CERTIFICATES.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The
operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, but the
Variable Account is not taxable as a regulated investment company or otherwise
as an entity separate from the Company. The income of the Variable Account
(consisting primarily of interest, dividends and net capital gains) is not
taxable to the Company to the extent that it is applied to increase reserves
under contracts participating in the Variable Account.
TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from
the Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
or Certificate until a distribution occurs, either as an annuity payment or as a
cash withdrawal or lump-sum payment prior to the Annuity Commencement Date.
However, corporate Owners and Participants and other Owners and Participants
that are not natural persons are subject to current taxation on the annual
increase in the value of a Non-Qualified Contract, unless the non-natural person
holds the Contract as agent for a natural person (such as where a bank or other
entity holds a Contract as trustee under a trust agreement). This current
taxation of annuities held by non-natural persons does not apply to earnings
accumulated under an immediate annuity, which the Code defines as a single
premium contract with an annuity commencement date within one year of the date
of purchase.
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The Code is unclear in its application to a group annuity contract where the
Owner is distinct from the individuals who receive the Contract benefits (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.
A partial cash withdrawal (that is, a withdrawal of less than the entire
Participant's Account Value) from a Certificate issued under a Non-Qualified
Contract (a "Non-Qualified Certificate") before the Annuity Commencement Date is
treated first as a withdrawal from the increase in the Participant's Account
Value, rather than as a return of Purchase Payments. The amount of the
withdrawal allocable to this increase will be includible in the Participant's
income and subject to tax at ordinary income rates. If part or all of a
Participant's Account Value is assigned or pledged as collateral for a loan, the
amount assigned or pledged must be treated as if it were withdrawn from the
Certificate.
In the case of annuity payments under a Non-Qualified Certificate after the
Annuity Commencement Date, a portion of each payment is treated as a nontaxable
return of Purchase Payments. The nontaxable portion is determined by applying to
each annuity payment an "exclusion ratio," which, in general, is the ratio that
the total amount the Participant paid for the Certificate bears to the Payee's
expected return under the Certificate. The remainder of the payment is taxable
at ordinary income rates.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the amount the Participant paid for the
Certificate. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Certificate, any subsequent
annuity payments will be fully taxable as income. Conversely, if the Annuitant
dies before the Payee recovers the entire amount paid, the Payee will be allowed
a deduction for the amount of unrecovered Purchase Payments.
Taxable cash withdrawals and lump-sum payments from Non-Qualified
Certificates may be subject to a penalty tax equal to 10% of the amount treated
as taxable income. This 10% penalty also may apply to certain annuity payments.
This penalty will not apply in certain circumstances (such as where the
distribution is made upon the death of the Participant). The withdrawal penalty
also does not apply to distributions under an immediate annuity (as defined
above).
In the case of a Certificate issued under a Qualified Contract (a "Qualified
Certificate"), distributions generally are taxable and distributions made prior
to age 59 1/2 are subject to a 10% penalty tax, although this penalty 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 10 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 Certificates are purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Certificate generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A purchaser of a Qualified Certificate should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
A transfer of a Non-Qualified Certificate 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 Participant's Account Value minus the total amount paid
for the Certificate.
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 Certificate or
under a Qualified Certificate issued for use with an
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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 he or she
chooses not to have any amounts withheld.
In the case of distributions from a Qualified Certificate (other than
distributions from a Certificate 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 Certificate
is not an eligible rollover distribution, then the Participant or Payee can
choose not to have amounts withheld as described above for Non-Qualified
Certificates and 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.
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 federal income tax purposes, and
therefore the annual increase in the value of such contracts is subject to
current taxation. The Company believes that each series of the Series Fund
complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract, the
Certificate and/or the Variable Account) necessary to comply with the
guidelines.
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. 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. Following
are brief descriptions of various types of qualified retirement plans and the
use of the Qualified Contracts 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.
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<PAGE>
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.
Only one Purchase Payment per Certificate will be accepted (See "Section 403(b)
Annuities").
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. 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."
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
and type, the status of 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, Clarendon
Insurance Agency, Inc. ("Clarendon"), 500 Boylston Street, Boston, Massachusetts
02116, a wholly-owned subsidiary of Massachusetts Financial Services Company,
which in turn is a wholly-owned subsidiary of the Company. Clarendon is
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as broker-dealer and is a member of the National
Association of Securities Dealers, Inc. Clarendon also acts as the general
distributor of certain other 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
6.86% of Purchase Payments. In addition to commissions, the Company may, from
time to time, pay or allow additional promotion incentives, in the form of cash
or other compensation. In some instances, such other incentives may be offered
only to certain broker-dealers that sell or are expected to sell, during
specified time periods, certain minimum amounts of the Contracts or Certificates
or other Contracts offered by the Company. Commissions will not be paid with
respect to Participant's Accounts established for the personal account of
employees of the Company or any of its affiliates, or of persons engaged in the
distribution of the Contracts. During 1994, 1995 and 1996, approximately $424,
$85, and $0, 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 61.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310 $ 1,339,282
Net investment income and
realized gains (losses)....... 312,870 315,966 312,583 311,322 292,746
-------------- -------------- -------------- -------------- --------------
2,444,809 2,199,867 2,310,108 2,754,632 1,632,028
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits 2,149,145 1,995,208 2,102,290 2,515,320 1,426,756
Other expenses 175,342 150,937 186,892 232,365 229,004
-------------- -------------- -------------- -------------- --------------
2,324,487 2,146,145 2,289,182 2,747,685 1,655,760
-------------- -------------- -------------- -------------- --------------
Operating gain (loss) 120,322 53,722 20,926 6,947 (23,732)
Federal income tax expense
(benefit) (2,702) 17,807 19,469 3,691 (15,360)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 123,024 $ 35,915 $ 1,457 $ 3,256 $ (8,372)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets $ 13,759,005 $ 12,359,683 $ 10,117,822 $ 9,179,090 $ 7,474,407
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes $ 315,000 $ 650,000 $ 335,000 $ 335,000 $ 265,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Note 1 to financial statements for the effect of the reinsurance agreements
on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
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, 1996, 5.0% 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 $837,435 at December 31,
1996.
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
35
<PAGE>
adjusted for depreciation (book value) are reported at market value. During
1996, the change in the difference between the market value and book value for
properties reported at market value was $4,624,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$938,932,000 at December 31, 1996, representing 26.9% of cash and invested
assets. At December 31, 1995, mortgage loans represented 26.5% 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, 1996, 0.45% 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 2.51%. The expense in the
year for the provision for losses and for losses on foreclosures was $2,767,000.
During 1996, the Company purchased three limited partnership investments for
an aggregate total of $12,285,000 that were formed to own and operate apartment
complexes which qualify for low income tax credits. The credits are taken
annually over a ten year period, but are fully vested at the end of a fifteen
year compliance period. The Company also committed to an additional limited
partnership interest for $10,180,000 in 1995. These investments are classified
as other invested assets in the balance sheet.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1996 the Company had
outstanding mortgage commitments of $9,800,000 which will be funded during 1997.
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 $567,143,000 at December
31, 1996. 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 Massachusetts Casualty Insurance Company, 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
1996 COMPARED TO 1995
Net income from operations after dividends and before federal income taxes
increased by $61.1 million for the year ending December 31, 1996 as compared to
December 31, 1995. Net income associated with the reinsurance agreements with
the parent increased by $23.9 million in 1996. The net income improvement in the
reinsured business results from improved mortality experience, improved
investment performance and fewer significant death claims in 1996 as compared to
1995. Prior to reinsurance, earnings from the life line of business remained
relatively flat. The remaining $37.2 million increase is attributable to the
Company's retirement products and services line of business, which markets
combination fixed/variable annuities and group pension guaranteed investment
contracts. The decline in interest rates during 1995 resulted in the split of
these combination fixed/variable annuity sales to change from 45% fixed and 55%
variable in 1995 to 25% fixed and 75% variable in 1996. In addition, total gross
sales increased by $235.9 million in 1996 as compared to 1995. The declining
interest rate environment and strong market performance in 1995 resulted in
unrealized gains on assets held in the separate accounts, which generated a
substantial increase in fees calculated as a percentage of the separate account
net assets, which are then transferred to the general account. The declining
interest rates also resulted in increases in reserves due to the increase in the
market value adjustment provision of certain fixed annuities. The resultant
reserve increases were in excess of the unrealized gains causing strain on the
1995 earnings. In 1996, interest rates increased, resulting in a reduction in
the unrealized gains on assets held in the separate accounts and a
36
<PAGE>
corresponding reduction in reserves and a release of some of the reserve strain
incurred in 1995. The earnings on these market value adjusted products fluctuate
as the change in the market value of the assets do not move in tandem with the
change in the market value of the liabilities.
Total income increased by $239.4 million for the year ended December 31,
1996 as compared to December 31, 1995. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $282.7 million primarily due to
an increase in variable sales held in the separate accounts. This increase in
variable sales was driven by strong performance in the stock market. Reinsurance
had the effect of increasing income by approximately $9.4 million. Premiums and
annuity considerations increased by $8.2 million reflecting increased
annuitizations. Considerations from supplementary contracts increased by $1.2
million. Sales of group pension guaranteed investment contracts decreased by $53
million as this market remains highly competitive and sensitive to small changes
in guaranteed interest rates. Net investment income decreased by $9.1 million,
reflecting a decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended
December 31, 1996 as compared to December 31, 1995. Reinsurance had the effect
of decreasing benefits and expenses by $14.5 million. Deaths, annuity payments
and surrender benefits and other funds withdrawals increased by $438.9 million
as a result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million, reflecting increased
annuitizations and increased reserves for minimum death benefit guarantees. The
decrease in liability for premium and other deposit funds of $405.9 million
reflects lower interest rates and higher surrenders of contracts described
above. Commissions increased by $21.8 million, reflecting the increase in total
sales of combination fixed/variable annuities. General expenses increased by
$2.6 million reflecting an increase in salaries due to staff increases and
retainer fees. Transfers to separate accounts increased by $126.8 million,
reflecting increased exchange activity out of the general account into the
separate accounts.
1995 COMPARED TO 1994
Net income from operations after dividends and before federal income taxes
increased by $23.7 million for the year ending December 31, 1995 as compared to
December 31, 1994. Reinsurance agreements with the parent had the effect of
increasing net income by $40.9 million from a loss of $9.6 million in 1994 to a
gain of $31.3 million 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 new contracts were assumed by the Company
beginning in 1994. The remaining decrease in net income from operations of $17.2
million is attributable to the Company's retirement products and services line
of business, which markets combination fixed/variable annuities and group
pension guaranteed investment contracts. The declining interest rate environment
in 1995 resulted in unrealized gains on assets held in the separate accounts,
which generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision. The resultant reserve
increases were in excess of the unrealized gains causing strain on the 1995
earnings. The earnings on these market value adjusted products fluctuate as the
change in the market value of the assets do not move in tandem with the change
in the market value of the liabilities.
Total income decreased by $119.2 million for the year ended December 31,
1995 as compared to December 31, 1994. Reinsurance had the effect of decreasing
income by approximately $4.3 million. Premiums and annuity considerations
decreased by $5.5 million, reflecting decreased group pension lottery sales of
$22.1 million partially offset by increased annuitizations. Considerations from
supplementary contracts decreased by $1.8 million. Sales of combination
fixed/variable (net of annuitizations) decreased by $151.3 million, reflecting
the decline in the interest rate environment during 1995. Sales of group pension
guaranteed investment contracts increased by $49.2 million reflecting the
transfer of the parents' agent's pension fund from the parent to the Company.
Net investment income and amortization of the interest maintenance reserve
decreased by $5.6 million, primarily due to capital losses incurred late in
1994, which were then amortized through the interest maintenance reserve during
1995.
37
<PAGE>
Benefits and expenses decreased by $143 million for the year ended December
31, 1994. Reinsurance had the effect of decreasing benefits and expenses by
$45.2 million. Deaths, annuity payments and surrender benefits and other fund
withdrawals increased by $106.5 million as a result of increased surrenders of
fixed annuities for which interest rate guarantee periods have expired, as well
as withdrawals from the separate accounts. Policy reserves decreased by $16.7
million primarily resulting from increased reserves for minimum death benefit
guarantees. The increase in liability for premium and other deposit funds of
$83.1 million reflects fewer maturities of contracts for which the guarantee
periods have expired, and increased sales of group pension guaranteed investment
contracts described above. Commissions decreased by $5.5 million, reflecting the
decrease in total sales of combination fixed/variable annuities. General
expenses increased by $3.3 million, reflecting increased expenses allocated from
the parent and increased salaries due to staffing. Transfers to separate
accounts decreased by $268.8 million, reflecting less exchange activity out of
the separate accounts into the general account and fewer variable annuity sales
transferred to the separate accounts.
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 previously 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 1996 had the effect of decreasing net income from operations
by $1,603,000.
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. These agreements had the effect of
increasing income from operations by approximately $35,161,000 for the year
ended December 31, 1996.
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
38
<PAGE>
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.
INVESTMENTS
Of the Company's total assets of $13.8 billion at December 31, 1996, 65.6%
consisted of unitized and non-unitized separate account assets, 16.4% were
invested in bonds and similar securities, 6.8% in mortgages, 1.0% in
subsidiaries, 0.7% in real estate, and the remaining 9.5% in cash and other
assets.
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. According to the most recent Best's Review,
Life-Health Edition, as of December 31, 1995 the Company ranked 39th among all
life insurance companies in the United States based upon total assets. Its
parent company, Sun Life Assurance Company of Canada, ranked 18th. Best's
Insurance Reports, Life-Health Edition, 1996, assigned the Company and the
parent company its highest classification, A++, as of December 31, 1995.
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, 1996 the Company had 269 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and its Retirement Products & Services Division 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, 63, 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; 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.
- ------------------------
* Year Elected Director
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<PAGE>
DONALD A. STEWART, 50, President and Director (1996*)
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.
DAVID D. HORN, 55, 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; 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. and 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, 65, 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, 62, 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, 70, 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, 61, 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.
- ------------------------
* Year Elected Director
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<PAGE>
M. COLYER CRUM, 64, Director (1986*)
104 West Cliff Street
Weston, MA 02193
He is Professor Emeritus of 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 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. Prior to July, 1996, he was a
Professor at the Harvard Business School.
S. CAESAR RABOY, 60, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President of Sun Life
Insurance and Annuity Company of New York; and Vice President and a Director of
Sun Life Financial Services Limited.
ROBERT A. BONNER, 52, Vice President, Pensions (1986)
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.
C. JAMES PRIEUR, 46, 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, Massachusetts Casualty Insurance 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.
L. BROCK THOMSON, 55, 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.
ROBERT P. VROLYK, 44, 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.
- ------------------------
* Year Elected Director
41
<PAGE>
MARGARET SEARS MEAD, 47, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Vice President and Counsel for the United States of Sun
Life Assurance Company of Canada; and Assistant Vice President and Secretary of
Sun Life Insurance and Annuity Company of New York.
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 1996
totalled $936,945.
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. Bailey, 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.
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.
42
<PAGE>
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.
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, 1996 and the financial statements of the Company for the years ended
December 31, 1996, 1995 and 1994 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 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.
-------------------
43
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- December 31, 1996
<TABLE>
<CAPTION>
Assets:
Investments in MFS/Sun Life Series Trust: Shares Cost Value
----------- -------------- --------------
<S> <C> <C> <C>
Capital Appreciation Series ("CAS").............................................. 25,132,284 $ 766,909,799 $ 900,536,472
Conservative Growth Series ("CGS")............................................... 19,770,779 401,011,161 523,882,326
Emerging Growth Series ("EGS")................................................... 16,666,213 230,812,345 247,167,495
MFS/Foreign & Colonial Emerging Markets Equity Series ("FCE").................... 327,100 3,224,047 3,271,436
MFS/Foreign & Colonial International Growth Series ("FCI")....................... 562,577 5,592,414 5,528,287
MFS/Foreign & Colonial International Growth and Income Series ("FCG")............ 3,306,816 34,327,842 35,129,529
Government Securities Series ("GSS")............................................. 24,278,758 306,999,943 312,399,099
High Yield Series ("HYS")........................................................ 17,514,023 154,164,774 161,352,366
Managed Sectors Series ("MSS")................................................... 9,317,147 215,659,135 244,571,670
Money Market Series ("MMS")...................................................... 361,990,229 361,990,229 361,990,229
Research Series ("RES").......................................................... 19,366,153 278,182,415 320,982,471
Total Return Series ("TRS")...................................................... 64,136,813 1,023,618,937 1,246,814,708
Utilities Series ("UTS")......................................................... 4,863,242 54,423,213 68,022,646
Value Series ("VAL")............................................................. 1,517,402 15,964,246 16,708,887
World Asset Allocation Series ("WAA")............................................ 5,558,878 69,593,015 76,595,693
World Governments Series ("WGS")................................................. 11,343,137 133,129,911 127,697,954
World Growth Series ("WGR")...................................................... 14,821,543 177,938,986 193,180,439
World Total Return Series ("WTR")................................................ 2,817,773 33,508,607 37,379,327
-------------- --------------
$4,267,051,019 $4,883,211,034
--------------
--------------
Liability:
Payable to sponsor.............................................................................................. 193,982
--------------
Net assets................................................................................................ $4,883,017,052
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
Applicable to Owners of Reserve
Deferred Variable Annuity Contracts for
--------------------------------------- Variable
NET ASSETS APPLICABLE TO CONTRACT OWNERS: Units Unit Value Value Annuities Total
---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
MFS Regatta Contracts:
CAS -- Level 1......................... 6,316,305 $24.7064 $ 156,017,899 $ 312,018 $ 156,329,917
CAS -- Level 2......................... 58,968 9.9433 586,262 -- 586,262
GSS -- Level 1......................... 3,362,650 15.5644 52,333,731 105,552 52,439,283
GSS -- Level 2......................... 55,891 9.9641 557,001 -- 557,001
HYS -- Level 1......................... 1,204,380 19.7545 23,789,006 6,482 23,795,488
MSS -- Level 1......................... 2,202,213 22.0312 48,508,121 154,423 48,662,544
MSS -- Level 2......................... 14,270 9.8974 141,231 -- 141,231
MMS -- Level 1......................... 3,859,738 12.7175 49,130,387 70,057 49,200,444
MMS -- Level 2......................... 59,562 10.0240 597,029 -- 597,029
TRS -- Level 1......................... 12,461,003 20.0405 249,689,122 1,231,911 250,921,033
TRS -- Level 2......................... 32,548 10.0182 325,990 -- 325,990
WGS -- Level 1......................... 1,460,289 16.7734 24,491,432 70,682 24,562,114
WGS -- Level 2......................... 3,325 10.0242 33,342 -- 33,342
-------------- ---------- --------------
$ 606,200,553 $1,951,125 $ 608,151,678
-------------- ---------- --------------
(continued)
</TABLE>
See notes to financial statements
44
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENT OF CONDITION -- continued
<TABLE>
<CAPTION>
Applicable to Owners of Reserve
NET ASSETS APPLICABLE TO CONTRACT OWNERS Deferred Variable Annuity Contracts for
(CONTINUED): --------------------------------------- Variable
MFS Regatta Gold Contracts: Units Unit Value Value Annuities Total
---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
CAS.................................... 32,796,793 $22.5700 $ 740,124,719 $3,625,224 $ 743,749,943
CGS.................................... 26,199,975 19.9527 522,718,845 1,066,236 523,785,081
EGS.................................... 16,998,044 14.5136 246,685,538 353,268 247,038,806
FCE.................................... 329,630 9,9199 3,269,984 -- 3,269,984
FCI.................................... 564,742 9.7480 5,505,724 -- 5,505,724
FCG.................................... 3,360,596 10.4404 35,086,469 44,540 35,131,009
GSS.................................... 19,714,114 13.1252 258,776,682 585,330 259,362,012
HYS.................................... 8,424,289 16.2674 137,014,091 379,983 137,394,074
MSS.................................... 10,541,726 18.5452 195,501,650 249,088 195,750,738
MMS.................................... 27,275,583 11.3932 310,768,495 1,123,193 311,891,688
RES.................................... 19,577,745 16.3209 319,523,687 1,325,790 320,849,477
TRS.................................... 59,508,016 16.6932 993,286,276 1,708,347 994,994,623
UTS.................................... 4,671,192 14.5260 67,842,478 94,818 67,937,296
VAL.................................... 1,520,787 10.9234 16,612,132 -- 16,612,132
WAA.................................... 5,539,010 13.7702 76,273,571 279,123 76,552,694
WGS.................................... 7,510,766 13.6780 102,745,888 402,541 103,148,429
WGR.................................... 13,989,946 13.7523 192,388,258 837,846 193,226,104
WTR.................................... 2,836,079 13.1290 37,233,242 151,430 37,384,672
-------------- ---------- --------------
$4,261,357,729 $12,226,757 $4,273,584,486
-------------- ---------- --------------
MFS Regatta Classic Contracts:
CAS.................................... 1,892 $ 9.8765 $ 18,695 $ -- $ 18,695
CGS.................................... 3,545 9.8549 34,931 -- 34,931
EGS.................................... 9,744 9.5644 93,182 -- 93,182
FCE.................................... 140 10.4127 1,452 -- 1,452
FCI.................................... 2,249 10.0270 22,563 -- 22,563
GSS.................................... 6,514 9.9631 64,981 -- 64,981
HYS.................................... 8,219 10.0910 82,946 -- 82,946
MMS.................................... 13,813 10.0239 138,477 3,211 141,688
RES.................................... 25,665 9.8296 253,132 -- 253,132
TRS.................................... 40,575 9.9034 401,899 3,152 405,051
VAL.................................... 9,578 10.1034 96,755 -- 96,755
WAA.................................... 6,448 10.0430 64,803 -- 64,803
WGR.................................... 71 10.0000 709 -- 709
-------------- ---------- --------------
$ 1,274,525 $ 6,363 $ 1,280,888
-------------- ---------- --------------
Net assets................................................. $4,868,832,807 $14,184,245 $4,883,017,052
-------------- ---------- --------------
-------------- ---------- --------------
</TABLE>
See notes to financial statements
45
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- Year Ended December 31, 1996
<TABLE>
<CAPTION>
CAS CGS EGS FCE FCI
Sub-Account Sub-Account Sub-Account Sub-Account* Sub-Account*
------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.......... $ 63,903,295 $ 14,154,274 $ 223,676 $ -- $ --
Mortality and expense risk
charges......................... 9,787,529 4,790,582 1,957,296 11,630 19,294
Distribution expense charges..... 220,157 -- -- -- --
Administrative expense charges... 954,346 574,870 234,876 1,396 2,315
------------- ------------- ------------ ----------- -----------
Net investment income
(expense)................... $ 52,941,263 $ 8,788,822 $ (1,968,496) $(13,026) $ (21,609)
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES):
Realized gains (losses) on
investment transactions:
Proceeds from sales............ $ 267,285,199 $ 12,067,114 $ 29,861,505 $513,892 $1,726,076
Cost of investments sold....... 205,115,450 7,554,344 25,584,337 519,604 1,727,754
------------- ------------- ------------ ----------- -----------
Net realized gains
(losses).................... $ 62,169,749 $ 4,512,770 $ 4,277,168 $ (5,712) $ (1,678)
------------- ------------- ------------ ----------- -----------
Net unrealized appreciation
(depreciation) on investments:
End of year.................... $ 133,626,673 $ 122,871,165 $ 16,355,150 $ 47,389 $ (64,127)
Beginning of year.............. 106,570,446 52,910,544 3,552,956 -- --
------------- ------------- ------------ ----------- -----------
Change in unrealized
appreciation
(depreciation).............. $ 27,056,227 $ 69,960,621 $ 12,802,194 $ 47,389 $ (64,127)
------------- ------------- ------------ ----------- -----------
Realized and unrealized gains
(losses)...................... $ 89,225,976 $ 74,473,391 $ 17,079,362 $ 41,677 $ (65,805)
------------- ------------- ------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS................. $ 142,167,239 $ 83,262,213 $ 15,110,866 $ 28,651 $ (87,414)
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
<CAPTION>
FCG GSS HYS
Sub-Account Sub-Account Sub-Account
----------- ------------- ------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received.......... $ -- $ 18,191,771 $ 9,492,026
Mortality and expense risk
charges......................... 293,242 3,900,496 1,670,108
Distribution expense charges..... -- 81,209 29,566
Administrative expense charges... 35,189 386,851 170,847
----------- ------------- ------------
Net investment income
(expense)................... $ (328,431) $ 13,823,215 $ 7,621,505
----------- ------------- ------------
----------- ------------- ------------
REALIZED AND UNREALIZED GAINS
(LOSSES):
Realized gains (losses) on
investment transactions:
Proceeds from sales............ $6,264,957 $ 80,691,084 $ 89,548,001
Cost of investments sold....... 6,013,559 83,195,407 83,844,433
----------- ------------- ------------
Net realized gains
(losses).................... $ 251,398 $ (2,504,323) $ 5,703,568
----------- ------------- ------------
Net unrealized appreciation
(depreciation) on investments:
End of year.................... $ 801,687 $ 5,399,156 $ 7,187,592
Beginning of year.............. 111,437 15,950,791 6,347,251
----------- ------------- ------------
Change in unrealized
appreciation
(depreciation).............. $ 690,250 $ (10,551,635) $ 840,341
----------- ------------- ------------
Realized and unrealized gains
(losses)...................... $ 941,648 $ (13,055,958) $ 6,543,909
----------- ------------- ------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS................. $ 613,217 $ 767,257 $ 14,165,414
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
*For the period July 1, 1996 (commencement of operations) to December 31, 1996.
See notes to financial statements
46
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
MSS MMS RES TRS UTS
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 27,063,786 $ 13,803,397 $ 2,171,374 $ 80,430,595 $ 2,685,506
Mortality and expense risk charges.... 2,649,730 3,584,245 2,320,870 14,086,166 677,251
Distribution expense charges.......... 66,547 68,418 -- 359,085 --
Administrative expense charges........ 251,421 361,691 278,504 1,331,255 81,270
------------ ------------- ------------ ------------- ------------
Net investment income (expense)... $ 24,096,088 $ 9,789,043 $ (428,000) $ 64,654,089 $ 1,926,985
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $ 31,986,225 $ 601,132,062 $ 5,303,758 $ 76,812,211 $ 6,901,492
Cost of investments sold............ 29,087,317 601,132,062 3,452,995 56,301,150 5,283,786
------------ ------------- ------------ ------------- ------------
Net realized gains (losses)....... $ 2,898,908 $ -- $ 1,850,763 $ 20,511,061 $ 1,617,706
------------ ------------- ------------ ------------- ------------
Net unrealized appreciation
(depreciation) on investments:
End of year......................... $ 28,912,535 $ -- $ 42,800,056 $ 223,195,771 $ 13,599,433
Beginning of year................... 24,275,006 -- 8,623,371 172,733,800 7,026,868
------------ ------------- ------------ ------------- ------------
Change in unrealized appreciation
(depreciation)................... $ 4,637,529 $ -- $ 34,176,685 $ 50,461,971 $ 6,572,565
------------ ------------- ------------ ------------- ------------
Realized and unrealized gains
(losses)........................... $ 7,536,437 $ -- $ 36,027,448 $ 70,973,032 $ 8,190,271
------------ ------------- ------------ ------------- ------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................... $ 31,632,525 $ 9,789,043 $ 35,599,448 $ 135,627,121 $ 10,117,256
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
<CAPTION>
VAL WAA WGS
Sub-Account* Sub-Account Sub-Account
---------- ----------- -------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ -- $1,323,112 $ 18,375,771
Mortality and expense risk charges.... 47,876 649,587 1,642,776
Distribution expense charges.......... -- -- 38,491
Administrative expense charges........ 5,745 77,950 158,642
---------- ----------- -------------
Net investment income (expense)... $(53,621) $ 595,575 $ 16,535,862
---------- ----------- -------------
---------- ----------- -------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Realized gains (losses) on investment
transactions:
Proceeds from sales................. $458,854 $7,401,713 $ 27,818,987
Cost of investments sold............ 435,556 5,772,117 30,531,078
---------- ----------- -------------
Net realized gains (losses)....... $ 23,298 $1,629,596 $ (2,712,091)
---------- ----------- -------------
Net unrealized appreciation
(depreciation) on investments:
End of year......................... $744,641 $7,002,678 $ (5,431,957)
Beginning of year................... -- 2,577,570 4,376,710
---------- ----------- -------------
Change in unrealized appreciation
(depreciation)................... $744,641 $4,425,108 $ (9,808,667)
---------- ----------- -------------
Realized and unrealized gains
(losses)........................... $767,939 $6,054,704 $ (12,520,758)
---------- ----------- -------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................... $714,318 $6,650,279 $ 4,015,104
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
*For the period June 3, 1996 (commencement of operations) to December 31, 1996.
See notes to financial statements
47
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF OPERATIONS -- continued
<TABLE>
<CAPTION>
WGR WTR
Sub-Account Sub-Account Total
------------ ----------- ---------------
<S> <C> <C> <C>
INCOME AND EXPENSES:
Dividend income and capital gain
distributions received............... $ 12,008,681 $ 432,723 $ 264,259,987
Mortality and expense risk charges.... 2,171,808 322,479 50,582,965
Distribution expense charges.......... -- -- 863,473
Administrative expense charges........ 260,617 38,697 5,206,482
------------ ----------- ---------------
Net investment income............. $ 9,576,256 $ 71,547 $ 207,607,067
------------ ----------- ---------------
------------ ----------- ---------------
REALIZED AND UNREALIZED GAINS:
Realized gains on investment
transactions:
Proceeds from sales................. $ 43,985,963 $3,013,874 $ 1,292,772,967
Cost of investments sold............ 37,967,798 2,468,484 1,185,987,231
------------ ----------- ---------------
Net realized gains................ $ 6,018,165 $ 545,390 $ 106,785,736
------------ ----------- ---------------
Net unrealized appreciation on
investments:
End of year......................... $ 15,241,453 $3,870,720 $ 616,160,015
Beginning of year................... 13,826,397 1,024,871 419,908,018
------------ ----------- ---------------
Change in unrealized
appreciation...................... $ 1,415,056 $2,845,849 $ 196,251,997
------------ ----------- ---------------
Realized and unrealized gains....... $ 7,433,221 $3,391,239 $ 303,037,733
------------ ----------- ---------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................... $ 17,009,477 $3,462,786 $ 510,644,800
------------ ----------- ---------------
------------ ----------- ---------------
</TABLE>
See notes to financial statements
48
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
CAS CGS EGS
Sub-Account Sub-Account Sub-Account
----------------------------- ----------------------------- -----------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
----------------------------- ----------------------------- -----------------------------
1996 1995 1996 1995 1996 1995*
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(expense).................. $ 52,941,263 $ 4,868,051 $ 8,788,822 $ 1,641,149 $ (1,968,496) $ (274,556)
Net realized gains.......... 62,169,749 8,669,752 4,512,770 1,559,779 4,277,168 2,216,787
Net unrealized gains........ 27,056,227 131,023,503 69,960,621 52,785,863 12,802,194 3,552,956
------------- ------------- ------------- ------------- ------------- -------------
Increase in net assets
from operations.......... $ 142,167,239 $ 144,561,306 $ 83,262,213 $ 55,986,791 $ 15,110,866 $ 5,495,187
------------- ------------- ------------- ------------- ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments
received................. $ 148,876,483 $ 120,979,478 $ 153,852,554 $ 74,122,408 $ 122,215,402 $ 34,471,454
Net transfers between
Sub-Accounts and Fixed
Account.................. (5,608,366) 51,189,081 36,048,717 19,980,665 50,369,380 27,751,346
Withdrawals, surrenders,
annuitizations and
contract charges......... (47,835,347) (35,672,499) (19,835,752) (11,060,939) (8,085,001) (532,429)
------------- ------------- ------------- ------------- ------------- -------------
Net accumulation
activity............... $ 95,432,770 $ 136,496,060 $ 170,065,519 $ 83,042,134 $ 164,499,781 $ 61,690,371
------------- ------------- ------------- ------------- ------------- -------------
Annuitization Activity:
Annuitizations............ $ 1,193,495 $ 1,153,294 $ 437,102 $ 201,542 $ 286,409 $ 50,528
Annuity payments and
contract charges......... (347,090) (216,005) (129,806) (58,715) (13,624) (593)
Net transfers between
Sub-Accounts............. 119,425 531,083 116,806 2,298 44,347 4,223
Adjustments to annuity
reserves................. (50,462) 131,042 (87,515) 30,462 21,044 (56,551)
------------- ------------- ------------- ------------- ------------- -------------
Net annuitization
activity............... $ 915,368 $ 1,599,414 $ 336,587 $ 175,587 $ 338,176 $ (2,393)
------------- ------------- ------------- ------------- ------------- -------------
Increase in net assets from
participant transactions... $ 96,348,138 $ 138,095,474 $ 170,402,106 $ 83,217,721 $ 164,837,957 $ 61,687,978
------------- ------------- ------------- ------------- ------------- -------------
Increase in net assets.... $ 238,515,377 $ 282,656,780 $ 253,664,319 $ 139,204,512 $ 179,948,823 $ 67,183,165
NET ASSETS:
Beginning of year........... 662,169,440 379,512,660 270,155,693 130,951,181 67,183,165 --
------------- ------------- ------------- ------------- ------------- -------------
End of year................. $ 900,684,817 $ 662,169,440 $ 523,820,012 $ 270,155,693 $ 247,131,988 $ 67,183,165
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
* For the period May 1, 1995 (commencement of operations) to December 31, 1995.
See notes to financial statements
49
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
FCE FCI FCG GSS
Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- -------------------------- -----------------------------
Year Ended Year Ended
December December Year Ended Year Ended
31, 31, December 31, December 31,
-------------------------- -----------------------------
1996* 1996* 1996 1995** 1996 1995
----------- ----------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(expense).................... $ (13,026) $ (21,609) $ (328,431) $ (10,744) $ 13,823,215 $ 11,426,494
Net realized gains (losses)... (5,712) (1,678) 251,398 (243) (2,504,323) (1,546,621)
Net unrealized gains
(losses)..................... 47,389 (64,127) 690,250 111,437 (10,551,635) 29,605,147
----------- ----------- ------------ ----------- ------------- -------------
Increase (decrease) in net
assets from operations... $ 28,651 $ (87,414) $ 613,217 $ 100,450 $ 767,257 $ 39,485,020
----------- ----------- ------------ ----------- ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments
received................... $1,048,658 $2,460,672 $ 19,437,825 $ 4,120,619 $ 54,669,405 $ 47,266,837
Net transfers between
Sub-Accounts and Fixed
Account.................... 2,213,104 3,215,694 8,809,224 3,003,996 (14,448,899) (42,381,252)
Withdrawals, surrenders,
annuitizations and contract
charges.................... (18,977) (60,665) (951,163) (46,320) (21,010,408) (21,245,942)
----------- ----------- ------------ ----------- ------------- -------------
Net accumulation
activity................. $3,242,785 $5,615,701 $ 27,295,886 $ 7,078,295 $ 19,210,098 $ (16,360,357)
----------- ----------- ------------ ----------- ------------- -------------
Annuitization Activity:
Annuitizations.............. $ -- $ -- $ 43,066 $ -- $ 268,329 $ 354,393
Annuity payments and
contract charges........... -- -- (1,385) -- (240,819) (168,285)
Net transfers between
Sub-Accounts............... -- -- -- -- (309,558) (53,070)
Adjustments to annuity
reserves................... -- -- 1,480 -- (40,665) 33,716
----------- ----------- ------------ ----------- ------------- -------------
Net annuitization
activity................. $ -- $ -- $ 43,161 $ -- $ (322,713) $ 166,754
----------- ----------- ------------ ----------- ------------- -------------
Increase (decrease) in net
assets from participant
transactions................. $3,242,785 $5,615,701 $ 27,339,047 $ 7,078,295 $ 18,887,385 $ (16,193,603)
----------- ----------- ------------ ----------- ------------- -------------
Increase in net assets...... $3,271,436 $5,528,287 $ 27,952,264 $ 7,178,745 $ 19,654,642 $ 23,291,417
NET ASSETS:
Beginning of year............. -- -- 7,178,745 -- 292,768,635 269,477,218
----------- ----------- ------------ ----------- ------------- -------------
End of year................... $3,271,436 $5,528,287 $ 35,131,009 $ 7,178,745 $ 312,423,277 $ 292,768,635
----------- ----------- ------------ ----------- ------------- -------------
----------- ----------- ------------ ----------- ------------- -------------
</TABLE>
* For the period July 1, 1996 (commencement of operations) to December 31,
1996.
** For the period October 4, 1995 (commencement of operations) to December 31,
1995.
See notes to financial statements
50
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
HYS MSS
Sub-Account Sub-Account
----------------------------- -----------------------------
Year Ended Year Ended
December 31, December 31,
----------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 7,621,505 $ 5,123,994 $ 24,096,088 $ 2,070,924
Net realized gains.................... 5,703,568 1,889,832 2,898,908 2,778,352
Net unrealized gains.................. 840,341 6,838,912 4,637,529 30,322,483
------------- ------------- ------------- -------------
Increase in net assets from
operations....................... $ 14,165,414 $ 13,852,738 $ 31,632,525 $ 35,171,759
------------- ------------- ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 33,898,269 $ 20,152,853 $ 40,598,625 $ 34,586,296
Net transfers between Sub-Accounts
and Fixed Account.................. 4,326,619 22,611,563 7,831,933 9,193,092
Withdrawals, surrenders,
annuitizations and contract
charges............................ (11,758,613) (7,980,818) (13,315,281) (9,392,233)
------------- ------------- ------------- -------------
Net accumulation activity......... $ 26,466,275 $ 34,783,598 $ 35,115,277 $ 34,387,155
------------- ------------- ------------- -------------
Annuitization Activity:
Annuitizations...................... $ 137,217 $ 16,894 $ 82,609 $ 92,920
Annuity payments and contract
charges............................ (79,990) (68,402) (76,110) (56,337)
Net transfers between
Sub-Accounts....................... 14,805 8,428 41,877 94,161
Adjustments to annuity reserves..... (42,595) (25,024) (12,576) (2,133)
------------- ------------- ------------- -------------
Net annuitization activity........ $ 29,437 $ (68,104) $ 35,800 $ 128,611
------------- ------------- ------------- -------------
Increase in net assets from
participant transactions............. $ 26,495,712 $ 34,715,494 $ 35,151,077 $ 34,515,766
------------- ------------- ------------- -------------
Increase in net assets.............. $ 40,661,126 $ 48,568,232 $ 66,783,602 $ 69,687,525
NET ASSETS:
Beginning of year..................... 120,611,382 72,043,150 177,770,911 108,083,386
------------- ------------- ------------- -------------
End of year........................... $ 161,272,508 $ 120,611,382 $ 244,554,513 $ 177,770,911
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
MMS
Sub-Account
-----------------------------
Year Ended
December 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income................. $ 9,789,043 $ 7,468,244
Net realized gains.................... -- --
Net unrealized gains.................. -- --
------------- -------------
Increase in net assets from
operations....................... $ 9,789,043 $ 7,468,244
------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 208,990,259 $ 172,273,093
Net transfers between Sub-Accounts
and Fixed Account.................. (43,233,439) (115,663,895)
Withdrawals, surrenders,
annuitizations and contract
charges............................ (46,733,186) (34,523,223)
------------- -------------
Net accumulation activity......... $ 119,023,634 $ 22,085,975
------------- -------------
Annuitization Activity:
Annuitizations...................... $ 1,121,927 $ 583,368
Annuity payments and contract
charges............................ (206,726) (185,934)
Net transfers between
Sub-Accounts....................... (190,340) (656,607)
Adjustments to annuity reserves..... (23,831) (33,157)
------------- -------------
Net annuitization activity........ $ 701,030 $ (292,330)
------------- -------------
Increase in net assets from
participant transactions............. $ 119,724,664 $ 21,793,645
------------- -------------
Increase in net assets.............. $ 129,513,707 $ 29,261,889
NET ASSETS:
Beginning of year..................... 232,317,142 203,055,253
------------- -------------
End of year........................... $ 361,830,849 $ 232,317,142
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
RES TRS
Sub-Account Sub-Account
---------------------------- ---------------------------------
Year Ended Year Ended
December 31, December 31,
---------------------------- ---------------------------------
1996 1995 1996 1995
------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (expense)....... $ (428,000) $ (383,608) $ 64,654,089 $ 20,227,983
Net realized gains.................... 1,850,763 380,832 20,511,061 16,423,720
Net unrealized gains.................. 34,176,685 8,612,162 50,461,971 159,794,143
------------- ------------ --------------- ---------------
Increase in net assets from
operations......................... $ 35,599,448 $ 8,609,386 $ 135,627,121 $ 196,445,846
------------- ------------ --------------- ---------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 156,881,700 $ 44,406,655 $ 158,550,497 $ 114,688,434
Net transfers between Sub-Accounts
and Fixed Account.................. 64,021,188 15,859,913 7,794,293 (1,317,333)
Withdrawals, surrenders,
annuitizations and contract
charges............................ (7,956,041) (1,251,158) (79,238,642) (63,409,172)
------------- ------------ --------------- ---------------
Net accumulation activity......... $ 212,946,847 $ 59,015,410 $ 87,106,148 $ 49,961,929
------------- ------------ --------------- ---------------
Annuitization Activity:
Annuitizations...................... $ 557,791 $ 404,830 $ 505,447 $ 238,231
Annuity payments and contract
charges............................ (62,358) (20,548) (762,883) (656,053)
Net transfers between
Sub-Accounts....................... 118,346 (57,959) 56,990 17,486
Adjustments to annuity reserves..... 38,061 82,075 (87,530) (16,966)
------------- ------------ --------------- ---------------
Net annuitization activity........ $ 651,840 $ 408,398 $ (287,976) $ (417,302)
------------- ------------ --------------- ---------------
Increase in net assets from
participant transactions............. $ 213,598,687 $ 59,423,808 $ 86,818,172 $ 49,544,627
------------- ------------ --------------- ---------------
Increase in net assets.............. $ 249,198,135 $ 68,033,194 $ 222,445,293 $ 245,990,473
NET ASSETS:
Beginning of year..................... 71,904,474 3,871,280 1,024,201,404 778,210,931
------------- ------------ --------------- ---------------
End of year........................... $ 321,102,609 $ 71,904,474 $ 1,246,646,697 $ 1,024,201,404
------------- ------------ --------------- ---------------
------------- ------------ --------------- ---------------
<CAPTION>
UTS VAL
Sub-Account Sub-Account
--------------------------- ------------
Year Ended Year Ended
December 31, December 31,
---------------------------
1996 1995 1996*
------------ ------------ ------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (expense)....... $ 1,926,985 $ 270,357 $ (53,621)
Net realized gains.................... 1,617,706 265,908 23,298
Net unrealized gains.................. 6,572,565 7,447,367 744,641
------------ ------------ ------------
Increase in net assets from
operations......................... $ 10,117,256 $ 7,983,632 714,318
------------ ------------ ------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received.......... $ 18,235,404 $ 12,426,034 $ 10,936,155
Net transfers between Sub-Accounts
and Fixed Account.................. 835,305 2,364,291 5,122,274
Withdrawals, surrenders,
annuitizations and contract
charges............................ (3,059,763) (2,335,754) (63,860)
------------ ------------ ------------
Net accumulation activity......... $ 16,010,946 $ 12,454,571 $ 15,994,569
------------ ------------ ------------
Annuitization Activity:
Annuitizations...................... $ 116,582 $ 16,672 $ --
Annuity payments and contract
charges............................ (18,434) (7,291) --
Net transfers between
Sub-Accounts....................... -- 9,915 --
Adjustments to annuity reserves..... (82,561) (2,791) --
------------ ------------ ------------
Net annuitization activity........ $ 15,587 $ 16,505 --
------------ ------------ ------------
Increase in net assets from
participant transactions............. $ 16,026,533 $ 12,471,076 $ 15,994,569
------------ ------------ ------------
Increase in net assets.............. $ 26,143,789 $ 20,454,708 $ 16,708,887
NET ASSETS:
Beginning of year..................... 41,793,507 21,338,799 --
------------ ------------ ------------
End of year........................... $ 67,937,296 $ 41,793,507 $ 16,708,887
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
*For the period June 3, 1996 (commencement of operations) to December 31, 1996.
See notes to financial statements
52
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WAA WGS WGR
Sub-Account Sub-Account Sub-Account
--------------------------- ----------------------------- -----------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
--------------------------- ----------------------------- -----------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(expense)....................... $ 595,575 $ (175,907) $ 16,535,862 $ 5,279,650 $ 9,576,256 $ 1,467,987
Net realized gains (losses)...... 1,629,596 120,590 (2,712,091) 21,142 6,018,165 871,201
Net unrealized gains (losses).... 4,425,108 2,559,790 (9,808,667) 12,299,610 1,415,056 14,693,578
------------ ------------ ------------- ------------- ------------- -------------
Increase in net assets from
operations.................... $ 6,650,279 $ 2,504,473 $ 4,015,104 $ 17,600,402 $ 17,009,477 $ 17,032,766
------------ ------------ ------------- ------------- ------------- -------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received..... $ 33,549,719 $ 14,182,774 $ 10,730,732 $ 12,226,329 $ 40,398,624 $ 27,109,744
Net transfers between
Sub-Accounts and Fixed
Account....................... 13,363,954 6,506,983 (13,803,477) (8,347,691) 3,588,236 5,024,725
Withdrawals, surrenders,
annuitizations and contract
charges....................... (2,987,226) (403,056) (11,401,973) (8,464,694) (9,375,496) (7,221,767)
------------ ------------ ------------- ------------- ------------- -------------
Net accumulation activity.... $ 43,926,447 $ 20,286,701 $ (14,474,718) $ (4,586,056) $ 34,611,364 $ 24,912,702
------------ ------------ ------------- ------------- ------------- -------------
Annuitization Activity:
Annuitizations................. $ 174,043 $ -- $ 55,515 $ 9,873 $ 157,641 $ 398,205
Annuity payments and contract
charges....................... (17,132) (10,989) (171,649) (159,462) (71,968) (48,306)
Net transfers between
Sub-Accounts.................. -- 78,757 (25,947) -- 13,731 6,845
Adjustments to annuity
reserves...................... 16,443 5,357 (4,679) 49,038 8,938 42,104
------------ ------------ ------------- ------------- ------------- -------------
Net annuitization activity... $ 173,354 $ 73,125 $ (146,760) $ (100,551) $ 108,342 $ 398,848
------------ ------------ ------------- ------------- ------------- -------------
Increase (decrease) in net assets
from participant transactions... $ 44,099,801 $ 20,359,826 $ (14,621,478) $ (4,686,607) $ 34,719,706 $ 25,311,550
------------ ------------ ------------- ------------- ------------- -------------
Increase (decrease) in net
assets........................ $ 50,750,080 $ 22,864,299 $ (10,606,374) $ 12,913,795 $ 51,729,183 $ 42,344,316
NET ASSETS:
Beginning of year................ 25,867,417 3,003,118 138,350,259 125,436,464 141,497,630 99,153,314
------------ ------------ ------------- ------------- ------------- -------------
End of year...................... $ 76,617,497 $ 25,867,417 $ 127,743,885 $ 138,350,259 $ 193,226,813 $ 141,497,630
------------ ------------ ------------- ------------- ------------- -------------
------------ ------------ ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements
53
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
STATEMENTS OF CHANGES IN NET ASSETS -- continued
<TABLE>
<CAPTION>
WTR
Sub-Account Total
--------------------------- ---------------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(expense)....................... $ 71,547 $ (87,058) $ 207,607,067 $ 58,912,960
Net realized gains............... 545,390 62,601 106,785,736 33,713,632
Net unrealized gains............. 2,845,849 1,020,693 196,251,997 460,667,644
------------ ------------ --------------- ---------------
Increase in net assets from
operations.................... $ 3,462,786 $ 996,236 $ 510,644,800 $ 553,294,236
------------ ------------ --------------- ---------------
PARTICIPANT TRANSACTIONS:
Accumulation Activity:
Purchase payments received..... $ 16,294,987 $ 10,064,130 $ 1,231,625,970 $ 743,077,138
Net transfers between
Sub-Accounts and Fixed
Account....................... 5,434,372 1,710,064 135,880,112 (2,514,452)
Withdrawals, surrenders,
annuitizations and contract
charges....................... (1,579,132) (505,397) (285,266,526) (204,045,401)
------------ ------------ --------------- ---------------
Net accumulation activity.... $ 20,150,227 $ 11,268,797 $ 1,082,239,556 $ 536,517,285
------------ ------------ --------------- ---------------
Annuitization Activity:
Annuitizations................. $ -- $ 141,543 $ 5,137,173 $ 3,662,293
Annuity payments and contract
charges....................... (17,146) (6,755) (2,217,120) (1,663,675)
Net transfers between
Sub-Accounts.................. -- (394) 482 (14,834)
Adjustments to annuity
reserves...................... (10,126) 15,473 (356,574) 252,645
------------ ------------ --------------- ---------------
Net annuitization activity... $ (27,272) $ 149,867 $ 2,563,961 $ 2,236,429
------------ ------------ --------------- ---------------
Increase in net assets from
participant transactions........ $ 20,122,955 $ 11,418,664 $ 1,084,803,517 $ 538,753,714
------------ ------------ --------------- ---------------
Increase in net assets......... $ 23,585,741 $ 12,414,900 $ 1,595,448,317 $ 1,092,047,950
NET ASSETS:
Beginning of year................ 13,798,931 1,384,031 3,287,568,735 2,195,520,785
------------ ------------ --------------- ---------------
End of year...................... $ 37,384,672 $ 13,798,931 $ 4,883,017,052 $ 3,287,568,735
------------ ------------ --------------- ---------------
------------ ------------ --------------- ---------------
</TABLE>
See notes to financial statements
54
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account"), a
separate account of Sun Life Assurance Company of Canada (U.S.), the Sponsor,
was established on July 13, 1989 as a funding vehicle for the variable portion
of certain group combination fixed/variable annuity contracts. 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 series of MFS/Sun Life Series
Trust (the "Series Trust"), an open-end management investment company registered
under the Investment Company Act of 1940. Massachusetts Financial Services
Company, a subsidiary of the Sponsor, is investment adviser to the Series Trust.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVESTMENT VALUATIONS
Investments in shares of the Series Trust are recorded at their net asset value.
Realized gains and losses on sales of shares of the Series Trust are determined
on the identified cost basis. Dividend income and capital gain distributions
received by the Sub-Accounts are reinvested in additional Series Trust shares
and are recognized on the ex-dividend date.
Exchanges between Sub-Accounts requested by participants 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 based on the value of the Variable Account
is deducted from the Variable Account at the end of each valuation period for
the mortality and expense risks assumed by the Sponsor. The deductions are
transferred periodically to the Sponsor. Currently, the deduction is at an
effective annual rate of 1.25% for Regatta and Regatta Gold contracts and 1.00%
for Regatta Classic contracts.
55
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
Each year on the account anniversary, an account administration fee ("Account
Fee") equal to the lesser of $30 or 2% of the participant's account value in the
case of Regatta and Regatta Gold and $50 for Regatta Classic is deducted from
the participant's account to reimburse the Sponsor for certain administrative
expenses. After the annuity commencement date the Account Fee will be deducted
pro rata from each variable annuity payment made during the year.
The Sponsor does not deduct a sales charge from purchase payments. However, in
the case of Regatta and Regatta Gold, a withdrawal charge (contingent deferred
sales charge) of up to 6% of certain amounts withdrawn, when applicable, may be
deducted to cover certain expenses relating to the sale of the contracts and
certificates. In the case of Regatta Classic, a withdrawal charge of 1% is
applied to purchase payments withdrawn which have been credited to a
participant's account for less than one year.
For assuming the risk that withdrawal charges may be insufficient to compensate
it for the costs of distributing the Regatta contracts, the Sponsor makes a
deduction from the Variable Account at the end of each valuation period for the
first seven account years at an effective annual rate of 0.15% of the net assets
attributable to such contracts. Accounts are transferred from MFS Regatta --
Level 1 to MFS Regatta -- Level 2 in the month following the seventh account
anniversary. No deduction for the distribution expense charge is made after the
seventh account anniversary.
As reimbursement for administrative expenses attributable to Regatta Gold and
Regatta Classic contracts which exceed the revenues received from the Account
Fees described above derived from such contracts, the Sponsor makes a deduction
from the Variable Account at the end of each valuation period at an effective
annual rate of 0.15% of the net assets attributable to such contracts.
(4) ANNUITY RESERVES
Annuity reserves are calculated using the 1983 Individual Annuitant Mortality
Table and an assumed interest rate of 4% or 3%, as stated in each participant's
certificate. Required adjustments to the reserves are accomplished by transfers
to or from the Sponsor.
56
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS
<TABLE>
<CAPTION>
Units Transferred
Between Sub-Accounts and
Units Outstanding
Beginning of Year Units Purchased Fixed Account
---------------------- ---------------------- ---------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
---------------------- ---------------------- ---------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
MFS REGATTA CONTRACTS
------------------------------
CAS Sub-Account -- Level 1.... 6,615,207 6,184,731 3,487 8,683 267,320 1,002,774
CAS Sub-Account -- Level 2*... -- -- 62,873 -- 142 --
GSS Sub-Account -- Level 1.... 3,535,152 4,235,203 1,574 48 206,595 (289,212)
GSS Sub-Account -- Level 2*... -- -- 59,729 -- 3,442 --
HYS Sub-Account -- Level 1.... 1,068,412 839,825 -- -- 271,328 332,946
MSS Sub-Account -- Level 1.... 2,150,361 2,066,642 -- 12,503 253,891 206,072
MSS Sub-Account -- Level 2*... -- -- 18,662 -- -- --
MMS Sub-Account -- Level 1.... 3,453,907 3,873,044 7,940 6,171 1,420,458 315,466
MMS Sub-Account -- Level 2*... -- -- 74,316 -- (3,576) --
TRS Sub-Account -- Level 1.... 13,106,997 14,225,539 2,594 4,093 580,878 117,384
TRS Sub-Account -- Level 2*... -- -- 61,666 -- -- --
WGS Sub-Account -- Level 1.... 1,730,002 1,967,375 -- -- (4,348) (87,581)
WGS Sub-Account -- Level 2*... -- -- 4,988 -- -- --
<CAPTION>
Units Withdrawn,
Surrendered and Units Outstanding
Annuitized End of Year
------------------------- ----------------------
Year Ended Year Ended
December 31, December 31,
------------------------- ----------------------
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
MFS REGATTA CONTRACTS
------------------------------
CAS Sub-Account -- Level 1.... (569,709) (580,981) 6,316,305 6,615,207
CAS Sub-Account -- Level 2*... (4,047) -- 58,968 --
GSS Sub-Account -- Level 1.... (380,671) (410,887) 3,362,650 3,535,152
GSS Sub-Account -- Level 2*... (7,280) -- 55,891 --
HYS Sub-Account -- Level 1.... (135,360) (104,359) 1,204,380 1,068,412
MSS Sub-Account -- Level 1.... (202,039) (134,856) 2,202,213 2,150,361
MSS Sub-Account -- Level 2*... (4,392) -- 14,270 --
MMS Sub-Account -- Level 1.... (1,022,567) (740,774) 3,859,738 3,453,907
MMS Sub-Account -- Level 2*... (11,178) -- 59,562 --
TRS Sub-Account -- Level 1.... (1,229,466) (1,240,019) 12,461,003 13,106,997
TRS Sub-Account -- Level 2*... (29,118) -- 32,548 --
WGS Sub-Account -- Level 1.... (265,365) (149,792) 1,460,289 1,730,002
WGS Sub-Account -- Level 2*... (1,663) -- 3,325 --
</TABLE>
*For the period December 9, 1996 (commencement of operations) to December 31,
1996.
57
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Units Transferred
Between Sub-Accounts and
Units Outstanding
Beginning of Year Units Purchased Fixed Account
---------------------- ---------------------- ---------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
---------------------- ---------------------- ---------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
MFS REGATTA GOLD CONTRACTS
------------------------------
CAS Sub-Account............... 27,782,739 19,909,649 7,263,696 7,106,728 (496,244) 2,287,026
CGS Sub-Account............... 16,712,586 10,979,711 8,644,701 5,181,021 2,000,284 1,359,507
EGS Sub-Account*.............. 5,346,104 -- 8,728,028 2,978,021 3,530,938 2,420,603
FCG Sub-Account**............. 711,179 -- 1,891,793 414,060 856,286 301,717
FCI Sub-Account***............ -- -- 250,279 -- 323,501 --
FCE Sub-Account***............ -- -- 107,088 -- 224,483 --
GSS Sub-Account............... 18,082,586 18,784,262 4,278,441 3,836,496 (1,392,606) (3,241,260)
HYS Sub-Account............... 6,880,080 4,605,818 2,241,058 1,439,990 (53,191) 1,286,018
MSS Sub-Account............... 8,542,869 6,351,641 2,422,482 2,269,426 147,148 411,655
MMS Sub-Account............... 17,186,041 14,774,386 18,886,918 16,108,059 (5,479,056) (11,138,037)
RES Sub-Account............... 5,341,160 392,528 10,525,524 3,726,811 4,302,978 1,346,160
TRS Sub-Account............... 53,091,748 48,270,556 10,291,268 8,512,923 (170,571) (391,980)
UTS Sub-Account............... 3,410,047 2,273,439 1,448,517 1,164,148 68,243 204,917
VAL Sub-Account****........... -- -- 1,039,259 -- 492,924 --
WAA Sub-Account............... 2,141,041 299,210 2,590,553 1,294,348 1,048,013 590,509
WGS Sub-Account............... 8,272,858 8,334,019 818,386 981,591 (1,036,800) (532,375)
WGR Sub-Account............... 11,421,691 9,182,555 3,069,026 2,422,350 227,986 475,925
WTR Sub-Account............... 1,170,586 138,126 1,353,637 922,160 448,221 159,909
<CAPTION>
Units Withdrawn,
Surrendered and Units Outstanding
Annuitized End of Year
------------------------- ----------------------
Year Ended Year Ended
December 31, December 31,
------------------------- ----------------------
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
MFS REGATTA GOLD CONTRACTS
------------------------------
CAS Sub-Account............... (1,753,398) (1,520,664) 32,796,793 27,782,739
CGS Sub-Account............... (1,157,596) (807,653) 26,199,975 16,712,586
EGS Sub-Account*.............. (607,026) (52,520) 16,998,044 5,346,104
FCG Sub-Account**............. (98,662) (4,598) 3,360,596 711,179
FCI Sub-Account***............ (9,038) -- 564,742 --
FCE Sub-Account***............ (1,941) -- 329,630 --
GSS Sub-Account............... (1,254,307) (1,296,912) 19,714,114 18,082,586
HYS Sub-Account............... (643,658) (451,746) 8,424,289 6,880,080
MSS Sub-Account............... (570,773) (489,853) 10,541,726 8,542,869
MMS Sub-Account............... (3,318,320) (2,558,367) 27,275,583 17,186,041
RES Sub-Account............... (591,917) (124,339) 19,577,745 5,341,160
TRS Sub-Account............... (3,704,429) (3,299,751) 59,508,016 53,091,748
UTS Sub-Account............... (255,615) (232,457) 4,671,192 3,410,047
VAL Sub-Account****........... (11,396) -- 1,520,787 --
WAA Sub-Account............... (240,597) (43,026) 5,539,010 2,141,041
WGS Sub-Account............... (543,678) (510,377) 7,510,766 8,272,858
WGR Sub-Account............... (728,757) (659,139) 13,989,946 11,421,691
WTR Sub-Account............... (136,365) (49,609) 2,836,079 1,170,586
</TABLE>
*1995 activity is for the period May 1, 1995 (commencement of operations) to
December 31, 1995.
**1995 activity is for the period October 4, 1995 (commencement of operations)
to December 31, 1995.
***For the period July 1, 1996 (commencement of operations) to December 31,
1996.
****For the period June 3, 1996 (commencement of operations) to December 31,
1996.
58
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
NOTES TO FINANCIAL STATEMENTS -- continued
(5) UNIT ACTIVITY FROM PARTICIPANT TRANSACTIONS -- continued
<TABLE>
<CAPTION>
Units
Transferred Units
Units Between Sub- Withdrawn, Units
Outstanding Accounts and Surrendered Outstanding
Beginning Units Fixed and End of
of Period Purchased Account Annuitized Period
---------- ---------- ------------ ----------- ----------
MFS REGATTA CLASSIC CONTRACTS
------------------------------
<S> <C> <C> <C> <C> <C>
CAS Sub-Account*.............. -- 1,892 -- -- 1,892
CGS Sub-Account*.............. -- 8,005 (4,460) -- 3,545
EGS Sub-Account*.............. -- 11,935 (2,191) -- 9,744
FCI Sub-Account**............. -- 2,249 -- -- 2,249
FCE Sub-Account**............. -- 352 (212) -- 140
GSS Sub-Account**............. -- 6,514 -- -- 6,514
HYS Sub-Account*.............. -- 7,097 1,122 -- 8,219
MMS Sub-Account**............. -- 13,813 -- -- 13,813
RES Sub-Account***............ -- 25,659 6 -- 25,665
TRS Sub-Account***............ -- 33,797 6,778 -- 40,575
VAL Sub-Account*.............. -- 8,416 1,162 -- 9,578
WAA Sub-Account*.............. -- 7,086 (638) -- 6,448
WGR Sub-Account****........... -- -- 71 -- 71
</TABLE>
*For the period December 2, 1996 (commencement of operations) to December 31,
1996.
**For the period December 9, 1996 (commencement of operations) to December 31,
1996.
***For the period November 27, 1996 (commencement of operations) to December
31, 1996.
****Operations commenced on December 31, 1996.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Participants in Sun Life of Canada (U.S.) Variable Account F
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 F (the "Variable Account") as of December 31, 1996, the
related statement of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1996 and 1995. 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 of securities held at December 31, 1996 by correspondence with the
custodian. 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,
1996, 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 7, 1997
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
(IN 000'S)
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 2,258,858 $ 2,706,067
Preferred stock 0 1,149
Mortgage loans 938,932 1,066,911
Investments in subsidiaries 144,043 138,282
Real estate 100,385 95,574
Other invested assets 51,378 38,387
Policy loans 40,554 38,355
Cash 1,305 (20,280)
Investment income due and accrued 68,190 62,719
Funds withheld on reinsurance assumed 878,798 741,091
Due from separate accounts 220,999 148,675
Other assets 27,509 26,349
-------------- --------------
General account assets 4,730,951 5,043,279
Unitized separate account assets 6,919,219 5,275,808
Non-unitized separate account assets 2,108,835 2,040,596
-------------- --------------
Total Assets $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves $ 2,099,980 $ 1,937,302
Annuity and other deposits 1,898,309 2,290,656
Policy benefits in process of payment 2,677 5,884
Accrued expenses and taxes 57,719 44,114
Other liabilities 63,987 36,080
Due to (from) parent and affiliates--net (41,326) (130,502)
Interest maintenance reserve 28,676 25,218
Asset valuation reserve 53,911 42,099
-------------- --------------
General account liabilities 4,163,933 4,250,851
Unitized separate account liabilities 6,919,094 5,275,784
Non-unitized separate account liabilities 2,108,835 2,040,596
-------------- --------------
13,191,862 11,567,231
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital Stock Par value $1,000:
Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
Surplus 561,243 786,552
-------------- --------------
Total capital stock and surplus 567,143 792,452
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 13,759,005 $ 12,359,683
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
Premiums and annuity considerations $ 282,466 $ 279,407 $ 316,008
Deposit-type funds 1,775,230 1,545,542 1,647,623
Considerations for supplementary
contracts without life contingencies
and dividend accumulations 2,340 1,088 2,906
Net investment income 303,753 312,872 315,433
Amortization of interest maintenance
reserve 1,557 1,025 4,128
Miscellaneous income 71,903 57,864 30,988
---------- ---------- ----------
Total 2,437,249 2,197,798 2,317,086
---------- ---------- ----------
Death benefits 12,394 15,317 4,836
Annuity benefits 146,654 140,497 135,256
Surrender benefits and other fund
withdrawals 1,507,263 1,074,396 965,186
Interest on policy or contract funds 2,205 739 572
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 2,120 1,888 2,334
Increase in aggregate reserves for life
and accident and health policies and
contracts 162,678 171,975 219,334
Increase in liability for premium and
other deposit funds (392,348) 13,553 (69,541)
Increase in reserve for supplementary
contracts without life contingencies
and for dividend and coupon
accumulations 327 (663) 714
---------- ---------- ----------
Total 1,441,293 1,417,702 1,258,691
Commissions on premiums and annuity
considerations (direct business only) 109,894 88,037 93,576
Commissions and expense allowances on
reinsurance assumed 18,910 22,012 59,085
General insurance expenses 37,206 34,580 31,243
Insurance taxes, licenses and fees,
excluding federal income taxes 8,431 7,685 5,638
Increase in loading on and cost of
collection in excess of loading on
deferred and uncollected premiums 901 (1,377) (2,650)
Net transfers to Separate Account 678,663 551,784 820,671
---------- ---------- ----------
Total 2,295,298 2,120,423 2,266,254
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and federal
income tax 141,951 77,375 50,832
Dividends to policyholders 29,189 25,722 22,928
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and before federal
income tax 112,762 51,653 27,904
Federal income taxes incurred (excluding
tax on capital gains) (2,702) 17,807 19,469
---------- ---------- ----------
Net gain from operations after dividends
to policyholders and federal income tax
and before realized capital gains or
(losses) 115,464 33,846 8,435
Net realized capital gains or (losses)
less capital gains tax and transferred
to the interest maintenance reserve 7,560 2,069 (6,978)
---------- ---------- ----------
NET INCOME $ 123,024 $ 35,915 $ 1,457
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN 000'S)
CAPITAL AND SURPLUS, BEGINNING OF YEAR $ 792,452 $ 455,489 $ 483,188
---------- ---------- ----------
Net income 123,024 35,915 1,457
Change in net unrealized capital gains or (losses) (1,715) 2,009 (671)
Change in non-admitted assets and related items 67 (2,270) (1,485)
Change in asset valuation reserve (11,812) (13,690) (8,376)
Other changes in surplus in Separate Accounts Statement 100 (4,038) (227)
Increase (decrease) in surplus notes (335,000) 315,000 0
Miscellaneous gains and losses in surplus 27 4,037 (18,397)
---------- ---------- ----------
Net change in capital and surplus for the year (225,309) 336,963 (27,699)
---------- ---------- ----------
Capital and surplus, end of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
STATUTORY STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(IN 000'S)
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,059,577 $ 1,826,456 $ 2,287,695
Considerations for supplementary
contracts and dividend accumulations
received 2,340 1,088 2,906
Net investment income received 324,914 374,398 351,058
Other income received 88,295 25,348 30,989
----------- ----------- -----------
Total receipts 2,475,126 2,227,290 2,672,648
----------- ----------- -----------
Benefits paid (other than dividends) 1,671,483 1,231,936 1,326,223
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 172,015 150,463 187,699
Net cash transfers to Separate Accounts 755,605 568,188 963,127
Dividends paid to policyholders 22,689 17,722 13,303
Federal income tax (recoveries)
payments (excluding tax on capital
gains) (15,363) (20,655) 2,976
Other--net 2,205 739 572
----------- ----------- -----------
Total payments 2,608,634 1,948,393 2,493,900
----------- ----------- -----------
Net cash from operations (133,508) 278,897 178,748
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$1,554,873 for 1996, $8,610,951 for
1995 and $19,271,876 for 1994) 1,768,147 1,658,655 1,508,156
Issuance (repayment) of surplus notes (335,000) 315,000
Other cash provided 147,956 419,446 26,512
----------- ----------- -----------
Total cash provided 1,581,103 2,393,101 1,534,668
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 1,318,880 1,749,714 1,442,155
Other cash applied 235,982 796,207 264,233
----------- ----------- -----------
Total cash applied 1,554,862 2,545,921 1,706,388
----------- ----------- -----------
Net change in cash and short-term
investments (107,267) 126,077 7,028
Cash and short-term investments:
Beginning of year 197,326 71,249 64,221
----------- ----------- -----------
End of year $ 90,059 $ 197,326 $ 71,249
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual fixed
and variable annuities, group fixed and variable annuities and group pension
contracts. The Company also underwrites a block of individual life insurance
business through a reinsurance contract with its parent. Sun Life Assurance
Company of Canada (the "parent company") is a mutual life insurance company.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, that has changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position and results of operations
and capital in conformity with generally accepted accounting principles. (See
Note 19 for further discussion relative to the Company's basis of financial
statement presentation.) The effects on the financial statements of the
variances between the statutory basis of accounting and GAAP, although not
reasonably determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans at the amounts of the unpaid balances.
Real estate investments are carried at the lower of cost adjusted for
accumulated depreciation or appraised value, less encumbrances. Short-term
investments are carried at amortized cost, which approximates fair value.
Depreciation of buildings and improvements is calculated using the straight-line
method over the estimated useful life of the property, generally 40 to 50 years.
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market values.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience, not
applicable to contract owners, are transferred to (from) the general account.
Accumulated gains (losses) that have not been transferred are recorded as a
payable (receivable) to (from) the general account. Amounts payable to the
general account of the Company were $220,999,000 in 1996 and $148,675,000 in
1995.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
During 1996, the Company changed its method of accounting and reporting for
deposits, withdrawals, and benefits with respect to unitized separate accounts.
Previously, deposits were recorded as direct increases in liabilities of the
separate accounts while withdrawals and benefits were recorded as direct
decreases in that liability. Effective for 1996, the Company recorded: deposits
as revenue in the general account; withdrawals and benefits as expenses in the
general account; and the transfer of those funds between the general account and
the separate account are reflected as an expense (income) item. Amounts
presented for the years ended December 31, 1995 and 1994 have been restated to
conform to this presentation. The effect of this change was to increase revenues
and expenses by $1.4 billion in 1996, $878 million in 1995, and $988 million in
1994; there is no impact on net income of the general account. This new method
of reporting is consistent with the accounting treatment for deposits and
withdrawals and benefits of the non-unitized separate account of the Company,
and is consistent with prescribed statutory accounting practices.
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995 and $1.4 million
greater than the Annual Statement in 1994. Effective for 1996, the Company
changed its method of accounting for investments in subsidiaries to conform with
the prescribed statutory accounting practices used in the preparation of its
Annual Statement. As a result of the change, $5.7 million in undistributed
losses of subsidiaries are reported directly as a separate component of
unassigned surplus rather than being included in net income for the year ended
December 31, 1996. The amounts as reported in prior years have not been
restated.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
The Company has also revised the form of its statutory statements of operations,
changes in capital stock and surplus, and cash flow in order to match more
exactly the presentation used in the preparation of its Annual Statement. As a
result, reclassifications have been made in the amounts reported in 1995 and
1994 audited financial statements to conform to the presentation used for the
1996 amounts. Other than as described in the preceding paragraph, none of the
changes have impacted net income or statutory surplus as reported in the 1995
and 1994 audited financial statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York (Sun Life (N.Y.)), Massachusetts Casualty Insurance Company
(MCIC), Sun Investment Services Company (Sunesco), New London Trust, F.S.B.
(NLT), Sun Life Financial Services Limited, Inc. (SLFSL), Sun Benefit Services
Company, Inc. (Sunbesco), Sun Capital Advisers, Inc. (Sun Capital), and Sun Life
Finance Corporation (Sunfinco).
The Company owns 94.8% of the outstanding shares of Massachusetts Financial
Services Company (MFS). The Company previously owned 100% of the shares. During
1996, MFS issued additional shares to officers of MFS, thereby reducing the
Company's ownership to 94.8%.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC is a life insurance company which issues only individual disability
income policies. Sunesco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank. SLFSL serves as the marketing
administrator for the distribution of the Parent company's offshore products.
Sun Capital, a registered investment adviser, Sunfinco, and Sunbesco are
currently inactive.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds and certain mutual funds and separate accounts
established by the Company, and, through a subsidiary, provides investment
advice to substantial private clients.
In 1994, the Company reduced its carrying value of MCIC by $18,397,000, the
unamortized amount of goodwill. The reduction was accounted for as a direct
charge to surplus.
On December 31, 1996, the Company issued to the parent a $58,000,000 note which
is scheduled for repayment on February 15, 1997 at an interest rate of 5.70%.
Also on December 31, 1996, the Company was issued a $58,000,000 note by MFS at
an interest rate of 5.76% due on demand on or after March 1, 1997. On December
31, 1996 and 1995 the Company had an additional $20,000,000 in notes issued by
MFS, scheduled to mature in 2000. All of these notes are reported as due from
parent and affiliates.
During 1996, 1995 and 1994, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
MCIC $ 10,000,000 $ 6,000,000 $ 6,000,000
SLFSL 1,500,000 0 0
</TABLE>
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1996, 1995 and 1994 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 9,646 $ 12,174 $ 13,485
Other assets 1,376,014 1,233,372 1,165,595
Liabilities (1,241,617) (1,107,264) (1,044,273)
------------ ------------ ------------
Total net assets $ 144,043 $ 138,282 $ 134,807
------------ ------------ ------------
------------ ------------ ------------
Total revenues $ 717,280 $ 570,794 $ 495,097
Operating expenses (624,199) (504,070) (425,891)
Income tax expense (42,820) (31,193) (29,374)
------------ ------------ ------------
Net income $ 50,261 $ 35,531 $ 39,832
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
3. BONDS:
The amortized cost and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 (0) 2,273
Foreign governments 18,812 1,351 (0) 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,025 7,912 (472) 297,465
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,104 102,728 (27,361) 2,245,471
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 0 0 88,754
------------ ----------- ----------- ------------
$ 2,258,858 $ 102,728 $ (27,361) $ 2,334,225
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term Bonds:
United States government and government agencies and
authorities $ 467,597 $ 22,783 $ (443) $ 489,937
States, provinces and political subdivisions 2,252 81 (0) 2,333
Foreign governments 38,303 4,551 (6) 42,848
Public utilities 513,704 45,466 (203) 558,967
Transportation 215,786 22,794 (2,221) 236,359
Finance 225,074 13,846 (84) 238,836
All other corporate bonds 1,025,745 67,371 (7,415) 1,085,701
------------ ----------- ------------ ------------
Total long-term bonds 2,488,461 176,892 (10,372) 2,654,981
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 217,606 0 0 217,606
------------ ----------- ------------ ------------
$ 2,706,067 $ 176,892 $ (10,372) $ 2,872,587
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1996 and
1995 are shown below by contractual maturity. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 314,130 $ 315,507
Due after one year through five years 743,215 751,858
Due after five years through ten years 268,376 280,153
Due after ten years 714,504 775,051
------------ ------------
$ 2,040,225 $ 2,122,569
Mortgage-backed securities 218,633 211,656
------------ ------------
$ 2,258,858 $ 2,334,225
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 558,775 $ 561,119
Due after one year through five years 824,446 846,230
Due after five years through ten years 256,552 269,549
Due after ten years 884,187 1,000,908
------------ ------------
2,523,960 2,677,806
Mortgage-backed securities 182,107 194,781
$ 2,706,067 $ 2,872,587
------------ ------------
------------ ------------
</TABLE>
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. BONDS (CONTINUED):
Proceeds from sales and maturities of investments in debt securities during
1996, 1995, and 1994 were $1,554,016,000, $1,510,553,000, and $1,390,974,000,
gross gains were $16,975,000, $24,757,000, and $15,025,000 and gross losses were
$10,885,000, $5,742,000, and $30,041,000 , respectively.
Bonds included above with an amortized cost of approximately $2,060,000 and
$2,059,000 at December 31, 1996 and 1995, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this program. The total par
value of securities out on loan was $51,537,000 and $250,729,000 and the income
resulting from this program was $137,000, $2,000 and $26,000 at December 31,
1996, 1995 and 1994, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
provisions have been made. In those cases where, in management's judgement, the
mortgage loans' values are impaired, appropriate losses are recorded.
The following table shows the geographical distribution of the mortgage
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ------------
(IN 000'S)
<S> <C> <C>
California $ 154,272 $ 153,811
Massachusetts 79,929 83,999
Michigan 57,119 69,125
New York 67,742 81,480
Ohio 75,405 83,915
Pennsylvania 115,584 141,468
Washington 75,819 91,900
All other 313,062 361,213
---------- ------------
$ 938,932 $ 1,066,911
---------- ------------
---------- ------------
</TABLE>
The Company has restructured mortgage loans totalling $29,261,000, and
$49,846,000 at December 31, 1996 and 1995, respectively, against which there are
provisions of $5,893,000 and $8,799,000 at December 31, 1996 and 1995,
respectively.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $9,800,000 and
$13,100,000 at December 31, 1996 and 1995, respectively.
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INVESTMENTS GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 5,631 $ 3,935 $ (858)
Mortgage loans 763 292 (5,689)
Real estate 599 391 (334)
Other assets 567 (2,549) (97)
--------- --------- ---------
$ 7,560 $ 2,069 $ (6,978)
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (5,739) $ 0 $ 0
Mortgage loans (600) (1,574) 0
Real estate 4,624 3,583 (671)
--------- --------- ---------
$ (1,715) $ 2,009 $ (671)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve (IMR) and amortized into income over the remaining contractual life of
the security sold. The gross realized capital gains and losses credited or
charged to the interest maintenance reserve were a credit of $7,710,000 in 1996,
a credit of $12,714,000 in 1995, and a charge of $14,070,000 in 1994. All gains
and losses are transferred net of applicable taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 178,695 $ 205,445 $ 200,338
Income from investment in common stock of affiliates 50,408 35,403 39,577
Interest income from mortgage loans 92,591 99,766 106,404
Real estate investment income 16,249 14,979 12,950
Interest income from policy loans 2,790 2,777 2,669
Other 1,710 2,672 1,212
---------- ---------- ----------
Gross investment income 342,443 361,042 363,150
Interest on surplus notes (23,061) (31,813) (31,150)
Investment expenses (15,629) (16,357) (16,567)
---------- ---------- ----------
$ 303,753 $ 312,872 $ 315,433
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocates gains (losses) to specific hedged
assets or liabilities, gains ( losses) are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1996 and December 31,
1995 there were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1995
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 367,000 $ 3,275
Foreign currency swap 2,745 290
Forward spread lock swaps 50,000 112
</TABLE>
The market value is the estimated amount that the Company would receive or pay
on termination or sale, taking into account current interest rates and the
current creditworthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 101,244 $ 111,611
Less non-recourse debt 101,227 (111,594)
---------- ----------
17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (11,501) (13,132)
---------- ----------
Investment in leveraged leases 29,666 28,035
Less fees (188) (213)
---------- ----------
Net investment in leveraged leases $ 29,478 $ 27,822
---------- ----------
---------- ----------
</TABLE>
The net investment is classified as other invested assets in the accompanying
statements of admitted assets, liabilities, capital stock and surplus.
10. REINSURANCE:
The Company has agreements with the parent company which provide that the parent
company will reinsure the mortality risks of the individual life insurance
contracts sold by the Company. Under these agreements basic death benefits and
supplementary benefits are reinsured on a yearly renewable term basis and
coinsurance basis, respectively. Reinsurance transactions under these agreements
had the effect of decreasing income from operations by approximately $1,603,000,
$2,184,000, and $2,138,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Effective January 1, 1991, the Company entered into an agreement with the parent
company under which certain individual life insurance contracts issued by the
parent company were reinsured by the Company on a 90% coinsurance basis. Also,
effective January 1, 1991, the Company entered into an agreement with the parent
company which provides that the parent company will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. These agreements had
the effect of increasing income from operations by approximately $35,161,000 and
$11,821,000 for the years ended December 31, 1996 and 1995, respectively, and
decreasing income by approximately $29,188,000 for the year ended December 31,
1994. The life reinsurance assumed agreement requires the reinsurer to withhold
funds in amounts equal to the reserves assumed.
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1996, 1995 and 1994 before the effect of
reinsurance transactions with the parent company.
<TABLE>
<CAPTION>
PRO-FORMA RESULTS PRE-REINSURANCE
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 1,858,145 $ 1,619,337 $ 2,053,408
Net investment income and realized gains 312,870 315,967 312,582
------------ ------------ ------------
Subtotal 2,171,015 1,935,304 2,365,990
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 1,928,720 1,760,917 2,183,282
Other expenses 155,531 130,302 130,456
------------ ------------ ------------
Subtotal 2,084,251 1,891,219 2,313,738
------------ ------------ ------------
Income from operations $ 86,764 $ 44,085 $ 52,252
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $46,000 in 1996, and by
$1,599,000 in 1995, and increasing income from operations by $1,854,404 in 1994.
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
Withdrawal characteristics of general account and separate account annuity
reserves and deposits:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AMOUNT % OF TOTAL
------------ ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with
adjustment
--with market value adjustment $ 3,547,683 30.44%
--at book value less surrender charges
(surrender charge >5%) 5,626,117 48.27
--at book value (minimal or no charge or
adjustment) 1,264,586 10.85
Not subject to discretionary withdrawal provision 1,218,157 10.44
------------ ----------
Total annuity actuarial reserves and deposit
liabilities $ 11,656,543 100.00%
------------ ----------
------------ ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
AMOUNT % OF TOTAL
----------- ----------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with
adjustment
--with market value adjustment $ 3,796,596 36.36%
--at book value less surrender charges
(surrender charge >5%) 4,066,126 38.94
--at book value (minimal or no charge or
adjustment) 1,278,215 12.24
Not subject to discretionary withdrawal provision 1,301,259 12.46
----------- ----------
Total annuity actuarial reserves and deposit
liabilities $10,442,196 100.00%
----------- ----------
----------- ----------
</TABLE>
12. RETIREMENT PLANS:
The Company participates with its parent company in a non-contributory defined
benefit pension plan covering essentially all employees. The benefits are based
on years of service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA. The Company is charged for
its share of the pension cost based upon its covered participants. Pension plan
assets consist principally of separate accounts of the parent company.
The Company's share of the group's accrued pension cost at December 31, 1996,
1995 and 1994 was $446,000, $420,000, and $417,000, respectively. The Company's
share of net periodic pension cost was $27,000, $3,000, and $417,000, for 1996,
1995 and 1994, respectively.
The Company also participates with its parent and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $233,000, $185,000 and $152,000 for the years ended December
31, 1996, 1995, and 1994, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS:
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. RETIREMENT PLANS (CONTINUED):
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Post-retirement Benefits
Other than Pensions.' SFAS No. 106 requires the Company to accrue the estimated
cost of retiree benefit payments during the years the employee provides
services. SFAS No. 106 allows recognition of the cumulative effect of the
liability in the year of adoption or the amortization of the obligation over a
period of up to 20 years. The Company has elected to recognize this obligation
of approximately $400,000 over a period of ten years. The Company's cash flows
are not affected by implementation of this standard, but implementation
decreased net income by $209,000, $142,000, and $114,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Effective June 5, 1996, the
Company made certain changes regarding eligibility and benefits to its post-
retirement health benefits plans for retirees on or after that date. The impact
of these changes is a decrease of 1996 post-retirement benefit costs of
$599,000. The Company's post-retirement health care plans currently are not
funded.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $ 2,258,858 $ 2,339,126
Mortgages 938,932 958,909
LIABILITIES
Insurance reserves 122,606 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS
Bonds $ 2,706,067 $ 2,872,586
Mortgages 1,066,911 1,111,895
LIABILITIES
Insurance reserves 124,066 124,066
Individual annuities 434,261 431,263
Pension products 2,227,882 2,265,386
Derivatives -- 3,387
</TABLE>
76
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The 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
taking into account prices for publicly traded bonds of similar credit risk and
maturity and repayment and liquidity characteristics.
The fair values of the Company's general account reserves and liabilities under
investment-type contracts (insurance, annuity and pension contracts that do not
involve mortality or morbidity risks) are estimated using discounted cash flow
analyses or surrender values. Those contracts that are deemed to have short-term
guarantees have a carrying amount equal to the estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note #8.
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 42,099 $ 25,218 $ 28,409 $ 18,140
Realized investment gains (losses), net of tax 3,160 5,011 (1,524) 7,977
Amortization of investment (gains) losses 0 (1,557) 0 (899)
Unrealized investment gains (losses) 1,502 0 3,650 0
Required by formula 7,150 4 11,564 0
--------- --------- --------- ---------
Balance, end of year $ 53,911 $ 28,676 $ 42,099 $ 25,218
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $19,264,000, $12,429,000 and
$43,200,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
77
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
16. SURPLUS NOTES AND NOTE RECEIVABLE:
The Company had issued and outstanding surplus notes to its parent with an
aggregate carrying value of $335,000,000 during the period 1982 through January
16, 1996 at interest rates between 7.25% and 10%. The Company repaid all
principal and interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totalling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007, and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes; and, in the case
of principal repayments, with the consent of the Delaware Insurance
Commissioner. In addition, with regard to surplus notes outstanding through
January 16, 1996, subsequent to December 31, 1994 interest payments required the
consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 also requires the consents of the Delaware
Insurance Commissioner and Canadian Office of the Superintendent of Financial
Institutions.
During 1996, 1995 and 1994, the Company obtained the required consents, and
expensed $23,061,000, $31,813,000 and $31,150,000 in respect of interest on
surplus notes for the years 1996, 1995 and 1994, respectively.
On December 19, 1995, the parent borrowed $120,000,000 at 5.6% through a
short-term note from the Company maturing on January 16, 1996. The note, which
is included in due from parent and affiliates at December 31, 1995, was repaid
in full by the parent at maturity.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with its parent company which provides that the
parent company will furnish, as requested, personnel as well as certain services
and facilities on a cost-reimbursement basis. Expenses under this agreement
amounted to approximately $20,192,000 in 1996, $20,293,000 in 1995, and
$18,452,000 in 1994.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1996
and 1995.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices, which prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the
78
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life Assurance Company of Canada)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Company's surplus. Changes in the net equity value of the common stock of all
other subsidiaries are directly reflected in the Company's Investment Valuation
Reserves. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: Statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP-- deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices than under GAAP. Actuarial assumptions and reserving
methods differ under statutory accounting practices and GAAP. Premiums for
universal life and investment type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of the Company has determined that the cost
of complying with Statement No. 120 would exceed the benefits that the Company,
or the users of its financial statements would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
79
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) as of December 31, 1996 and 1995, and the related statutory
statements of operations, changes in capital stock and surplus, and cash flow
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and signficant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 19 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory basis
of accounting and generally accepted accounting principles, although not
reasonably determinable, are presumed to be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Sun Life Assurance Company of Canada (U.S.) as of Dcember 31, 1996
and 1995, and the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1996 on the basis of accountng
described in Notes 1 and 19.
However, because of the effects of the matter discussed in the second preceding
paragraph, in our opinion, the financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1996 and 1995 or the results of its operations or its cash flow for each of
the three years in the period ended Decemeber 31, 1996.
In our previous report dated February 7, 1996, we expressed an opinion that the
1995 and 1994 financial statements, prepared using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
presented fairly, in all material respects, the financial position of Sun Life
Assurance Company of Canada (U.S.) as of December 31, 1995, and the results of
its operations, and its cash flow for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles. As described in
Notes 1 and 19 to the financial statements, pursuant to the provisions of
Statement of Financial Accounting Standards No. 120, ACCOUNTING AND REPORTING BY
MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN
LONG-DURATION PARTICIPATING CONTRACTS, financial statements of mutual life
insurance enterprises (and stock life insurance companies that are wholly owned
subsidiaries of mutual life insurance companies) for periods ending on or before
December 15, 1996, prepared using accounting practices prescribed or permitted
by insurance regulators, are not considered presentations in conformity with
generally accepted accounting principles when presented for comparative purposes
with the enterprise's financial statements for periods subsequent to the
effective date of Statement No. 120. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
As management as stated in Note 19, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120 would exceed the benefits that the Company, or
the users of its financial statements, would experience. Consequently, the
Company has elected not to apply such standards in the preparation of these
financial statements.
DELOITTE & TOUCHE LLP
February 3, 1997
80
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Series 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; and no dividends or
distributions caused Series 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 and the distribution expense
charge of .00003809 (the daily equivalent of the current maximum charge of 1.40%
on an annual basis) gives a net investment factor of 1.00323702. 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
14.6117130 (14.5645672 X 1.00323702).
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 12.3843113 (12.3456789 X 1.00323702
(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 12.3843113. 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 12.3843113).
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, 1997 premium
taxes will be imposed with respect to Contracts offered by this Prospectus only
by the jurisdictions listed below at the rates indicated. For information
subsequent to April 30, 1997 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
-----------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ------------------------------ ---------- --------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kansas -- 2.00%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Nevada -- 3.50%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
</TABLE>
81
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
These examples assume the following:
1) The Purchase Payment was $10,000
2) The date of full surrender or partial withdrawal occurs during the
3rd Account Year and
a) the Participant's Account Value is $12,000 and is attributable to
the value of Variable Accumulation Units of one Sub-Account,
b) no previous partial withdrawals have been made.
EXAMPLE A--FULL SURRENDER:
1) 10% or .10 of the Purchase Payment is available without imposition
of a withdrawal charge: (.10 X $10,000 = $1,000).
2) The balance of the full surrender ($12,000 - $1,000 = $11,000) is
subject to the withdrawal charge applicable during the 3rd Account Year (5%
or .05).
3) The amount of the withdrawal charge is .05 X $11,000 = $550.
4) The amount of the full surrender is $12,000 - $550 = $11,450.
EXAMPLE B--PARTIAL WITHDRAWAL (IN THE AMOUNT OF $2,000):
1) 10% or .10 of the Purchase Payment is available without imposition
of a withdrawal charge: (.10 X $10,000 = $1,000).
2) The balance of the partial withdrawal ($2,000 - $1,000 = $1,000) is
subject to the withdrawal charge applicable during the 3rd Account Year (5%
or .05).
3) The amount of the withdrawal charge is equal to the amount required
to complete the partial withdrawal ($2,000 - $1,000 = $1,000) divided by 1 -
.05 or .95 less the amount required to complete the balance of the partial
withdrawal.
Withdrawal Charge = $1,000 - $1,000
---------
.95
= $52.63
In this example, in order for the Participant to receive the amount
requested ($2,000), a gross withdrawal of $2052.63 must be processed with $52.63
representing the withdrawal charge calculated above.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
N/12
( 1 + I
-------------
1 + J + .005 ) -1
These examples assume the following:
1) the Guarantee Amount was allocated to a four year Guarantee Period
with a Guaranteed Interest Rate of 5% or .05 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,025 and,
4) no transfers or partial withdrawals affecting this Guarantee Amount
have been made
5) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
82
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 7% or .07.
N/12
The MVA factor = ( 1 + l
--------------
1 + J + .005 ) -1
24/12
= ( 1 + .05
--------------
1 + .07 + .005 ) -1
= (.977)(2) -1
= .954 -1
= - .046
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA
$11,025 X (-.046) = -$507.15
-$507.15 represents the MVA that will be deducted from the value of the
Guarantee Amount before the application of any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 4% or .04.
N/12
The MVA factor = ( 1 + l
--------------
1 + J + .005 ) -1
24/12
= ( 1 + .05
--------------
1 + .04 + .005 ) -1
= (1.005)(2) -1
= 1.010 -1
= .010
The value of the Guarantee Amount is multiplied by the MVA factor to
determine the MVA
$11,025 X .010 = $110.25
$110.25 represents the MVA that would be added to the value of the
Guarantee Amount before the application of any withdrawal charge.
If the above examples had been for partial withdrawals, the MVA's would be
reduced proportionally. For example, if only 25% of the value of the Guarantee
Amount were being surrendered, the MVA would be -$126.79 and $27.56 for the
negative MVA and positive MVA, respectively.
83
<PAGE>
APPENDIX D
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN:
The table below shows, for various Sub-Accounts of the Variable Account, the
Average Annual Total Return for the stated periods, based upon a hypothetical
initial Purchase Payment of $1,000, calculated in accordance with the formula
set out below the table.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEAR
PERIOD PERIOD LIFE* DATE OF INCEPTION
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Capital Appreciation Series........ 12.85% 13.36% 13.14% November 2, 1989
Government Securities Series....... (5.39%) 3.88% 6.21% November 8, 1989
High Yield Series.................. 4.45% 9.25% 10.06% December 6, 1989
Managed Sectors Series............. 9.44% 8.55% 11.51% November 2, 1989
Money Market Series................ (2.46%) 1.48% 3.07% November 6, 1989
Total Return Series................ 5.81% 8.84% 9.70% November 2, 1989
World Governments Series........... (2.51%) 4.29% 7.45% November 24, 1989
</TABLE>
- ------------------------
*From Date of Inception of the Sub-Account investing in the Series.
The Average Annual Total Return for each period in the table above was
determined by finding the average annual compounded rate of return over each
period that would equate the initial amount invested to the ending redeemable
value for that period, in accordance with the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical Purchase Payment of $1,000
T = average annual total return for the period
n = number of years
ERV = redeemable value (as of the end of the period) of a
hypothetical $1,000 Purchase Payment made at the beginning
of the period.
The formula assumes that: 1) all recurring fees have been deducted from the
Participant's Account; 2) all applicable non-recurring Contract charges are
deducted at the end of the period; and 3) there will be a full surrender at
the end of the period.
The $30 annual Account Fee will be allocated among the Sub-Accounts so that
each Sub-Account's allocated portion of the Account Fee is proportional to the
percentage of the number of Certificates that have amounts allocated to that
Sub-Account. Because the impact of Account Fees on a particular Certificate may
differ from those assumed in the computation due to differences between actual
allocations and the assumed ones, the total return that would have been
experienced by an actual Certificate over these same time periods may have been
different from that shown above.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
84
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE:
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1996*
REGATTA CONTRACT
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
CAPITAL APPRECIATION SERIES GOVERNMENT SECURITIES SERIES HIGH YIELD SERIES
--------------------------------- --------------------------------- ---------------------------------
NUMBER CUMULATIVE COMPOUND CUMULATIVE COMPOUND CUMULATIVE COMPOUND
OF GROWTH GROWTH GROWTH GROWTH GROWTH GROWTH
YEARS PERIODS AMOUNT RATE RATE AMOUNT RATE RATE AMOUNT RATE RATE
- -------- ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,980.32 19.80% 19.80% $10,020.66 0.21% 0.21% $11,055.92 10.56% 10.56%
2 12/31/94-12/31/96 $15,887.20 58.87% 26.04% $11,626.38 16.26% 7.83% $12,761.19 27.61% 12.97%
3 12/31/93-12/31/96 $15,104.16 51.04% 14.74% $11,218.55 12.19% 3.91% $12,304.30 23.04% 7.16%
4 12/31/92-12/31/96 $17,577.25 75.77% 15.14% $12,027.41 20.27% 4.72% $14,284.43 42.84% 9.32%
5 12/31/91-12/31/96 $19,718.39 97.18% 14.54% $12,669.58 26.70% 4.85% $16,202.27 62.02% 10.13%
Life 11/2/89-12/31/96 $24,706.45 147.06% 13.45% $15,564.44 55.64% 6.38% $19,754.50 97.55% 10.10%
</TABLE>
<TABLE>
<CAPTION>
MANAGED SECTORS SERIES TOTAL RETURN SERIES WORLD GOVERNMENTS SERIES
--------------------------------- --------------------------------- ---------------------------------
CUMULATIVE COMPOUND CUMULATIVE COMPOUND CUMULATIVE COMPOUND
GROWTH GROWTH GROWTH GROWTH GROWTH GROWTH
AMOUNT RATE RATE AMOUNT RATE RATE AMOUNT RATE RATE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,596.20 15.96% 15.96% $11,248.28 12.48% 12.48% $10,321.21 3.21% 3.21%
2 12/31/94-12/31/96 $15,125.84 51.26% 22.99% $14,064.02 40.64% 18.59% $11,776.08 17.76% 8.52%
3 12/31/93-12/31/96 $14,630.21 46.30% 13.52% $13,556.06 35.56% 10.67% $11,092.43 10.92% 3.52%
4 12/31/92-12/31/96 $15,013.94 50.14% 10.69% $15,157.95 51.58% 10.96% $13,004.15 30.04% 6.79%
5 12/31/91-12/31/96 $15,767.57 57.68% 9.54% $16,231.21 62.31% 10.17% $12,884.08 28.84% 5.20%
Life 11/2/89-12/31/96 $22,031.21 120.31% 11.65% $20,040.46 100.40% 10.19% $16,773.44 67.73% 7.55%
</TABLE>
- ------------------------
* For purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date of inception of the Sub-Account investing in the Series. The charges
imposed under the Contract against the assets of the Variable Account for
mortality and expense risks and distribution expense risks have been deducted.
However, the annual Account Fee is not reflected and these examples do not
assume surrender at the end of the period.
**The life of each Series is as follows:
<TABLE>
<S> <C>
Capital Appreciation Series 11/2/89 - 12/31/96
Government Securities Series 11/8/89 - 12/31/96
High Yield Series 12/26/89 - 12/31/96
Managed Sectors Series 11/2/89 - 12/31/96
Total Return Series 11/2/89 - 12/31/96
World Governments Series 11/24/89 - 12/31/96
</TABLE>
85
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable contracts.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the Variable Account
and the Series Fund, the Company intends to illustrate the advantages of the
Contracts in a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a Participant makes regular deposits to his or her
Account.
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted under Code Section 72 in the
case of Non-Qualified Contracts, by way of a series of partial withdrawals.
Withdrawals under this program may be fully or partially includible in income
and may be subject to a 10% penalty tax. Consult your tax adviser.
THE COMPANY'S OR MFS'S CUSTOMERS. Sales literature for the Variable Account
and the Series Fund may refer to the number of clients which they serve. As of
the date of this Prospectus, MFS was serving over 1.9 million investor accounts.
THE COMPANY'S OR MFS'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1995 the Company was the 39th
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the 18th largest.
86
<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
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
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
REGUS-1 5/97
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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.
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(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."
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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 con-
nection 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 Pre-effective Amendment No. 1 to the
Registration Statement of the Registrant on Form S-2, File No. 33-29851.
*** Incorporated by reference from Post-effective Amendment No. 3 to the
Registration Statement of the Registrant on Form S-2, File No. 33-41858.
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;
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(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.
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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. 6 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, 1997.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By:* /s/ JOHN D. McNEIL
-------------------------
John D. McNeil
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 6 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
* /s/ JOHN D. McNEIL Chairman and Director
- -------------------------- (Principal Executive Officer) April 30, 1997
John D. McNeil
* /s/ ROBERT P. VROLYK Vice President and Actuary
- ---------------------------- (Principal Financial
Robert P. Vrolyk & Accounting Officer) April 30, 1997
* /s/ RICHARD B. BAILEY Director April 30, 1997
- ----------------------------
Richard B. Bailey
- --------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-Effective
Amendment No. 3 to the Registration Statement of the Registrant on Form
S-2, File No. 33-41858.
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SIGNATURE TITLE DATE
* /s/ A. KEITH BRODKIN Director April 30, 1997
- ------------------------------
A. Keith Brodkin
* /s/ M. COLYER CRUM
- ------------------------------- Director April 30, 1997
M. Colyer Crum
President and Director
- -------------------------------
Donald A. Stewart
* /s/ DAVID D. HORN Senior Vice President
- -------------------------------- and General Manager April 30, 1997
David D. Horn Director
* /s/ JOHN S. LANE Director April 30, 1997
- --------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director April 30, 1997
- ---------------------------------
Angus A. MacNaughton
Senior Vice President
- -------------------------------- and Deputy General
S. Caesar Raboy Manager and Director
- -----------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with the
Post-Effective Amendment No. 3 to the Registration Statement of the
Registrant on Form S-2, File No. 33-41858.
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EXHIBIT INDEX
Exhibit
Number Page
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 Pre-effective Amendment No. 1 to the Registration Statement
of the Registrant on Form S-2, File No. 33-29851.
*** Filed with Post-effective Amendment No. 3 to the Registration Statement
of the Registrant on Form S-2, File No. 33-41858.
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Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 6 to the
Registration Statement on Form S-2 of Sun Life Assurance Company of
Canada (U.S.) (Reg. No. 33-41858) of our report dated February 7, 1997
accompanying the financial statements of Sun Life of Canada (U.S.) Variable
Account F and to the use of our report dated February 3, 1997 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 3, 1997
appearing in the Annual Report on Form 10-K of Sun Life Assurance Company of
Canada (U.S.) for the year ended December 31, 1996.
We also consent to the reference to us under the heading "Condensed
Financial Information - Accumulation Unit Values" in such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 30, 1997
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Exhibit 23(b)
CONSENT OF COUNSEL
I hereby consent to the reference to me in Post-Effective Amendment
No. 6 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, 1997
